If you earn less on your savings, you have to save more to reach your financial goals. It sounds like common sense, right? But Ivory Tower economists are only slowly figuring this out, according to the Wall Street Journal.
Market Roundup
The Journal notes today that rock-bottom and negative interest rates worldwide are encouraging citizens to save – rather than spend – more. Savings rates are rising fast in Germany, Japan, Denmark, Switzerland, and Sweden, all countries with negative interest-rate policies and negative-yielding government bonds. In three of those five nations, citizens are now saving a greater percentage of their income than at any point since the Organization for Economic Cooperation began tracking in 1995.
It’s not just individuals, either. Companies in Japan, Europe, and elsewhere are boosting their cash holdings even as yields on cash and cash-like investments are plunging. Cash and bank deposits held by Japanese corporations jumped more than 8% earlier this year, the fastest rise since the 1990s.
Even here in the U.S., the personal-savings rate has remained elevated throughout the entire post-2009 environment. Take a look at this chart, and you’ll see that it has been hovering in the 5% to 6% range for years, despite some of the lowest yields in history on U.S. bonds and bank accounts. (Note: The spike in late 2012 stems from a change in tax policy, which resulted in a temporary surge in dividend payouts.)
This wasn’t “supposed” to happen. Many of the world’s central banks cut short-term rates to zero, then below zero, because they predicted that this would encourage companies and individuals to borrow and spend more. That this would boost economic growth.
But it appears many individuals are just hoarding funds. Companies that are raising money are mostly doing so for financial engineering purposes (i.e. stock buybacks), rather than to invest in their businesses.
Why? It goes back to the simple point I made at the outset, and which the Journal puts this way:
“Interest payments on savings accounts in the eurozone are at the lowest levels since 2000, according to ECB data. In the early 1990s, it took nine years for a German saver to double his or her capital as interest income piled up, according to Hans Joachim Reinke, chief executive of Frankfurt-based Union Investment. Now, savers … would have to wait 500 years for that to happen.”
The economist crowd will respond by saying “So what?” They’ll tell you the benefit of lower borrowing costs outweighs the drawback of lower interest earnings. But three straight quarters of lackluster GDP, lousy business investment, tame retail sales – and now, incontrovertible evidence of higher savings rates – suggest that central banks aren’t getting much bang for their NIRP/ZIRP buck.
So what do you think, and what are you doing in your own life? Are you increasing your 401k, IRA, or savings account contributions because yields are so low? Or are you borrowing more thanks to rock-bottom interest rates? Are low/negative rates helping your financial situation more than hurting it? Or is it the other way around? Use the comment section as your outlet on this important topic.
Until next time,
Mike
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Yesterday’s column on the lack of infrastructure spending – and the reasons behind it – really struck a nerve. Dozens of you weighed in, blaming everything from political incompetence to failing pensions to the inability to shoulder a higher tax burden for the current state of affairs.
Reader Bob said: “This is a real problem. We need to spend on infrastructure but the states can’t afford it because taxpayers won’t pay for it. My flip answer would be to have the federal government print more money and give grants to the states, or issue 30/50-year Treasury bonds to finance the improvements.
“Some projects lend themselves to private sponsorship and/or public/private partnerships where entities issue long-term debt, make the improvements, and get repaid from tolls for usage of the infrastructure like bridges and roads or fees from rail, sewer, water airport, etc. utilization.”
Reader Carl said the problem is that governments already have so much debt, they can’t afford to take on more – even at rock-bottom interest rates: “Taken as a whole, the government is already spending much more than it receives. The growing debt has to be paid by future citizens. What we borrow, even at 0%, also has to be paid by future citizens. There may be sophisticated economic theories that justify low-cost borrowing, but the average voter senses that the enormous debt is a world-wrecking bomb that needs to be defused.
“Personally, I won’t vote for a dollar to save ‘starving orphans’ – politicians need to prioritize our society’s needs and make tough decisions on where to spend the trillions they already have. We’ve been suckered into funding ‘vital’ initiatives before, only to find that money is fungible. That new debt or tax only freed up money for some other stupid vote-buying program.”
Reader BW blamed the pension-funding problems I recently wrote about for lackluster infrastructure spending: “You are discussing the symptom and not the problem(s). Government employee union activities have driven compensation and retirement costs through the roof by organizing against the taxpaying citizens.
“The investment returns on retirement system endowments do not meet projections. So governments are funneling any additional tax revenues into covering pension-funding shortfalls, leaving infrastructure needs unmet because the taxpayers are rejecting bond issues.”
Reader Dave W. also cited the pension issue, saying: “Spending continues to increase in cities and states, it just all goes to pensions and healthcare. And no, I don’t want my taxes raised to pay for more bureaucracy, pensions, and healthcare costs.”
Reader Lucy H. blamed regulation, and particularly environmental regulations, for part of the reduction in spending. Her comments: “Unfortunately, immense amounts of public money are wasted on the rigorous environmental permitting process needed to start new infrastructure projects, even for existing structures. There has to be rational compromise in terms of saving the environment versus allowing infrastructure projects to move forward economically.
“It took a couple of years for us and our associates to justify the building of a small pier for emergency boats. Why? Issues such as the potential effect of the shadow of the boat on the small patch of coral present and the effects of construction noise on the scant marine life, even though this was in a working harbor with ocean liners docking nearby.”
As for misallocation of funds, Reader F151 brought up the post-recession stimulus debacle: “In 2009, President Obama approved the expenditure of almost $1 trillion for ‘shovel-ready’ infrastructure projects. It was later reported that approximately only 3% of that huge sum was funneled to such projects.
“Most of the rest of the loot was distributed to unions, unemployment funds, government agencies, political friends and other black holes that resulted in little to show … except increased bureaucracy, corruption and more debt. THAT is why the citizenry are leery of new bonds costing billions of dollars.”
Thank you for sharing your views on this important topic. Clearly, the bad experience of the Obama stimulus program has left a bad taste in people’s mouths … and the pension struggles are making it much tougher for states and cities to find money to spend on needed infrastructure. I don’t know what could change this depressing state of affairs. But low rates certainly don’t seem to be helping.
Anything else you want to add? Then hit up the comment section and fire away.
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The IPO market has decelerated sharply in the last year and a half as part of the turn in the credit cycle I’ve been harping on. Just one example: Only nine U.S. tech companies have gone public so far this year. That compares to 16 last year, and a multi-year high of 32 in 2014.
As a result, many development-stage firms decide to sell out at lower valuations to deep-pocketed corporations. The latest example came this week, when Amazon (AMZN) competitor Jet.com sold itself to Wal-Mart Stores (WMT). It needed to because it was burning through tens of millions of dollars per month and the public markets wouldn’t reward the firm with a rich enough valuation and a never-ending supply of cash.
In the latest sign that credit-quality concerns don’t matter at all anymore as long as central banks are buying yields on debt issued by troubled peripheral European nations that are falling below notable benchmark levels. Ten-year notes issued by “PIIGS” nation Spain are now trading below 1% for the first time ever, while Irish yields are down to just 37 basis points.
Lingering computer problems at Delta Air Lines (DAL) caused another 250 flight cancellations today, following 1,000 cancellations on Monday. The company offered $200 travel vouchers and waived change fees for stranded passengers, and it blamed the problems on an issue with power supply at its Atlanta home base.
Now you know the burrito/Tex-Mex food craze is getting serious – Burger King (owned by Restaurant Brands International (QSR)) is introducing the “Whopperito”. It will take the same ingredients found in the traditional Whopper and wrap them up in a burrito, replacing mayonnaise with queso sauce. Yum!
What does the IPO slump mean for the overall stock market? Can you believe these “PIIGS” countries are borrowing for peanuts again? Any thoughts on Delta’s ongoing computer problems? And is your mouth watering at the thought of this strange burger/burrito hybrid? Let me know in the comment section.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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I’m having to spend principal instead of being able to live off the interest of savings. As such, I am doing a considerable amount of ‘belt tightening.’ Stock and bond valuations are so elevated, it is not ‘safe’ to establish long-term positions. Historically, when such lofty elevations were achieved, symmetric corrections followed. The only reason that valuations remain elevated is because of prolonged central bank activism.
The problem is that these economic distortions induced by central bank activism have gone on for so long, that they have become the new-normal.
The question I’m asking, and I’m sure I’m not alone, is how many economic distortions must accumulate until the central banks reverse course? Is inflation the only menace that could change their minds? Are they capable of postulating that ultra-low interest rates might actually be the cause of lackluster economic activity?
Hello!
I live in Canada and I and my family members just save more, outside the stock market. As a senior nurse, if these are my golden years, kill me now! I thought I had my retirement well on the way. Not so. Thanks to the USA’s greed, dishonest bankers and moral not to mention financial bankruptcy, savers like me and my family have been robbed. So we buy nothing…no dinners out, no vacations, no vehicles, no clothes…we even cut back on prescriptions. Tough to have an economic turnaround if no one spends. I have to laugh when politicians are scared of ISIS. They should be scared of everyone…the USA is the most hated country on earth! So the bankers paid a fine into the US coffers. That did not help anyone whose life was wrecked in 2008. Obama promised that the malefactors would be dealt with. Some deal! Too bad assassination is out of vogue.
Of course these rates are hurting me. I have complained about it for years now. I am 84 years old trying to live on zero interest rates on retirement savings. This is of course impossible and has caused me to deplete assets as well as cut spending dramatically. I am part of the middle class that has disappeared.
Crazed , non elected , overpaid bureaucrats at the Federal Reserve, accountable to no one, who do not appear to have a clue and whose only objective appears to be enabling the out of control spending of Obama and the resultant massive debt build up that will ultimately destroy the country.. The elitist establishment Reps are not blameless in this debacle either
Because rates are so low on my savings I will not spend money.
May be the Government does know we are saving more and that is part of their plan so the Banks will have more money to steal by Bail In when the Crash comes.
Now there’s a thought!!
You’re right, Mike — the race to lower (and negative) interest rates have had unintended consequences. Hopefully those people who have been forced to save more have bought precious metal instruments, especially quality junior gold/silver stocks.
There are bubbles everywhere — be it car loans, student loans, mortgages, lines of credit, government debt and so on. I’m expecting everything to start blowing up before the U.S. election in November. We’ll see what happens.
I would be careful about tanking up on gold/silver mining stocks. Larry and others are predicting a soon-to-come significant correction for that asset…and I cannot disagree.
Larry’s AI forecasting has had its’ share of miscues. It happens to the best of us. To his credit, Larry has owned missed calls and updated his AI models.
In 2006, my wife and I determined that we would eliminate debt and save/invest money. We have all we need and the children are all grown. So we have done exactly that. We have bought two new vehicles, for which we paid 50% down and paid off prematurely, usually in 18-24 months, while concurrently saving more money for early loan payoff if we needed it. House is paid for and we have no other debt. Put a new roof on the house last year with some energy saving improvements from which we are seeing benefits. We are uneasy about the financial future and are continuing to save and invest, as well as shelter income. Silver and Gold have our attention.
Thats the ticket Brad. Gold and silver have ALL my attention. Why would I want to buy stocks of cheesy companies that have their fingers in the till (they all do) and when they are caught the stock gets pummeled and you and I lose if we hold it. The CEO gets a golden parachute innocent workers get laid off and on and on it goes. Banks are among the worst. Every day in the news some large corporation is being investigated or charged and it only takes a small whiff of scandal or rule breaking (not many left to break any more for these crooks) to tank the stock and bury you.
I have paid down to where I have no debt and I’m accumulating funds in my retirement and brokerage accounts. I expect there to be a market correction at which time I will invest a larger percentage of my funds in the market again. With people like me doing this why would a business borrow to expand if people aren’t willing to buy.
They are borrowing only to buy back their own stock shrink the stock base and make earnings look good. The CEO laughs all the way to the bank and front line workers get the paring down axe.
I appreciate your daily insight, Mike.
I am retired and don’t want to risk my savings in all time high stock markets. Therefore 80% of my savings are in CDs and savings accounts even though rates only run from 0.90% to 1.50%. I am waiting for the inevitable bursting of bubbles to redeploy some savings in the stock market. If the inevitable never happens, I haven’t lost any money.
Isn’t this just the permanent income principle at work? Interest rates go down, people want a constant income, so they have to save more — at least for certain kinds of saving.
Rebuilding infrastructure — what are we talking about? It means security and expansion for trade unions and rationalization for the excessive salaries for union leadership. Unions now have money to contribute to politicians who are inclined to vote more spending. This is as corrupt as you can get.
Dear Jim don’t be a fool it’s not the unions…your giving them way to much credit…they are less than 10% of workers.
Mike
I can only respond to this personally by saying I no longer trust the system and feel safest, in a cash ready state to increase holdings in other assets. Normally I would invest, hire and borrow if I felt we had control of the financial economy, but we don’t. I don’t trust the Fed or governments any more, that have wrecked peoples interest rate savings plans and given us the instability that we can’t fix. This is what starts dissent, conflict and leads to revolutions. The corruption of government finances and the poverty amongst the people it creates. I wouldn’t vote for more of this no matter who it was.
I suspect people are saving more today out of fear with no reward for investmenting. Debt is negative, not a good thing. All debt comes at a price called interest and has an end date. It must be paid off and perhaps with a new debt. Personal debt is paid off with future production. Government debt is paid off with future tax revenue. But our federal tax code rewards debt and bad behavior. We need to move the tax base from production (income, savings and investment) to a tax base on consumption. Learn more and join the real/true tax reform cause for America’s Big Solution at bigsolution.org
I would think that the lack of opportunities to earn interest means the next best step in personal finance and home budgeting is to pay off debt. I have a 3.375% mortgage which is the lowest interest rate I pay which means paying off even that low a rate (not to mention credit card rates) is a better return than treasury bonds and other savings vehicles give. Another example of “collateral damage” caused by a clueless and trapped Fed.
spell check, change investmenting to investing
It’s all rigged
Executive Order 12631–Working Group on Financial Markets
Source: The provisions of Executive Order 12631 of Mar. 18, 1988, appear at 53 FR 9421, 3 CFR, 1988 Comp., p. 559, unless otherwise noted.
By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:
Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of: (1) the Secretary of the Treasury, or his designee; (2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee; (3) the Chairman of the Securities and Exchange Commission, or his designee; and (4) the Chairman of the Commodity Futures Trading Commission, or her designee. (b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence, the Working Group shall identify and consider: (1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and (2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations. (b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.(c) The Working Group shall report to the President initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes.
Sec. 3. Administration. (a) The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group such information as it may require for the purpose of carrying out this Order.
(b) Members of the Working Group shall serve without additional compensation for their work on the Working Group.
(c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.
I’ve moved a significant part of my investment portfolio over the past couple of years into S&P investment grade preferred stocks and into common stocks of healthy companies that pay solid dividends. With a little diligence I was able to get into a number of preferred stocks that at the time were trading below the issue/call price of $25 but are trading much higher today. While preferred stocks are not CDs or T-Bills, I have an investment that pays on average 7% yield and generate cash every quarter until I sell or the trailing stop kicks in to protect my profits.
Mike. I understand that under negative interest rates I will pay the bank a small percentage to hold my money. That seems straight forward to understand. However, since our government is 19 Trillion or so in debt, do the banks takes a percentage from our government. Seems like NIRP really helps the banks? Help me.
Politicians developed the current system, and they love it, because they can spend “Other People’s Money” to make themselves more popular with voters. Watch the current political shenanigans, if you are doubtful. They know it must finally collapse, and cause wars, disease, destruction and death for millions (perhaps billions), but they live for the moment of glory. Who cares about what is to come – beyond the next election, anyway.
Negative interest rates will do nothing for consumption. Spenders spend anyway and have no extra money to increase spending. And savers will compensate the lack of yield by saving more. Savers plan, set objectives and stick to them. It’s not a CB that’s going to change their mindset. And wait, if they can kick start inflation, it’s going to get even worse. Savers will save even more because inflation is going to put their objectives even farther away. Then, we’ll get real stagflation.
Because of lower interest rates, I’m not saving money in the bank – that pays nothing. I’m not putting my surplus into stocks or bonds – yield chasers have bid those up to the point that the reward doesn’t match the risk. Instead I’m stocking up on land, fuel oil, buildings – anything that doesn’t involve counterparty risk, anything I can take delivery of and use.
Just the habit of saving is far better than spending like a drunken fool. Even though the interest is very minimal, at least I can draw on the money when I need it, rather than scramble to find the money. There are way too many people living paycheck-to-paycheck, and one person in the household losing their job is a disaster. Being frugal has it’s advantages.
Yes Bob your money printing suggestion and looking at the stock market indexes to the right all reading black convince me now more than ever buy gold. I was up again last night and today looks like another winner. Prepare for the big ouchie.
The low rates are fixed for the foreseeable future. Our national debt (now at crisis levels) ensures low rates for a long time in order to (barely) service the debt load. The second aspect of this low rate condition is the objective of punishing the saver class (read retirees primarily). They are the last generation that can recall “true” better days in America, have considerable wealth, and could flex their serious political power. They must be reduced to simply surviving,and not be allowed to call out our government for their misguided monetary/fiscal actions. It’s that simple.
Think I’m wrong? See some of the other posts. Nothing this consequential happens by accident.
Americans will put up with anything provided it doesn’t block traffic so said Dan Rather. One of the most obvious side effects of the rapid growth of the economy has been the substantial worsening of traffic congestion in urban areas. Increases in car ownership are strongly related to increases in household income. In addition, more disposable income tends to result in an increase in trip frequency. If we take car ownership as a proxy for congestion, it has been shown that all of the environmental impacts of the boom the increase in congestion has been the most strongly related to economic growth.
If the Central Bankers are this flummoxed that people and corps are saving, then they truly are morons. The world’s economies have horrible fundamentals and Gov’ts are for all practical purposes, bankrupt. People are afraid for their jobs and a huge percent of the jobs that were created in the last 7 years are part time and or low paying. The cost of living is going up, regardless of what these gov’t boobs say. The simple facts are that people are saving because they’re hunkering down for the inevitable bust.
Interest rates will stay low because governments can’t afford to pay the interest on their debt.
When the countries who loan funds to the USA finally stop lending, and they will, this country will collapse.
The US govt don’t want to talk about that. Neither will Hillary or Donald.
Buy gold to be prepared.
If it was not obvious before, it should be obvious by now: Individuals, cities, states, nations, and global financial systems can not print or spend their way out of debt. Individuals see it and that is why they are saving money rather than spending it on things they simply do not need or want. What our government fails to see is that making money easily available to all has caused people to put away money for a rainy day. Why? Because we all know that a rainy day is imminent! One does not need to be a financial genius to see that the house of cards that the Fed has built will fall–soon. When it collapses, and it will collapse, wouldn’t it be better to have a store of wealth set aside rather than, say, a shiny new car or big screen TV? Yeah, of course, it would. People know this on an instinctual level. The Fed is working from a theory that is simply wrong. At some time, soon, that theory will be seen just like the Emperor’s new clothes. There is nothing there. And down will come the entire house of cards.
Mike, Right wing propaganda machines are spending millions to convince the public that our troubles are all the fault of unions and public servants and human service programs. The fact is that our problems are the result of big banks creating chaos in the world economy and our reckless, counterproductive military and political adventures in the Middle East and Eastern Europe. We have without question wasted trillions of dollars creating problems in those areas and have created an insane climate that has made the world hate us beyond all reason. Don’t take my word for it; look it up and face the truth.
Our Government here in Australia have sold islands surrounding Australia, I heard this on radio from Rio Olympics broadcast 3GB speaking to our Prime Minister Malcolm Turnball, I was shocked because the Australian people did not know, and don’t even know now, so you so we are in a precarious situation as well, maybe there will be a surge buying Gold soon?
Time for Maturity
Voters and consumers should grow-up. Maybe then we might get better alternatives to choose from. We need to accept that more is not necessarily better. In addition, the old adage of No Free Lunch is universally applicable. You can only save what you earn and you only earn more if you produce more. Until America returns to a economy based on production and wise investments instead of consumerism, we can not expect anything to really change. Voters need to educate themselves and get real. They need to become adults who vote like adults instead of children who want a Nanny.