Savers And The 'Real' $10.8 Trillion Cost Of ZIRP
Via Chris Turner,
As a reprisal, let’s revisit the financial impact from Zero Interest Rate Policy (ZIRP) as it applies to responsible savers. From the previous post, we just need to make a couple adjustments. To assist in charting and calculations, the following data sets provided ample information:
- Total Savings – FRED
- Average interest rates on savings deposits – FRED (M2OWN)
- Interest Income – IRS tax stats, NIPA tables
- Effective Federal Funds Rate (FRED)
The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them. Consult the chart below to see a historical relationship between total savings and amount of interest income earned on the savings.
Note that prior to 2001, as savings increased (blue line), interest income received increased (red line) proportionally. However, after 2001, the interest earned stopped increasing. The green line shows the effective interest paid on interest bearing accounts.
Scaling into the shaded area representing 1986 to present, the following chart depicts the actual Fed Funds rate determined by FOMC.
As savings increased when Fed Funds rate remained around 5%, interest income continued to rise. However, post 2001, the interest income received stopped growing at the same rate. With the exception of 2005 to 2008 when rates went back to “normal” in the 5% range – the interest income earned has remained stable at just under 1 trillion (Ben Bernanke is so smart).
Let’s apply some thought experiments and make a couple calculations – what would happen if the FOMC were removed and the Fed Funds rate “floated?” Using average historical rates from the 1920’s for the 10 year note– the mean rate would sit around 5.82%. With a floating Fed Funds rate, banks would be competing for money and providing responsible savers with some interest income. Voila, a calculation is borne:
By calculating the estimated interest income from historical ratios (orange shaded area), we can see that as of July 2013, approximate interest income would be just over 3 trillion (1/5th of GDP) on savings of 6.8 trillion (using the left scale). Whereas the actual interest income reported by NIPA remained at 1.1 Trillion, the difference in interest received and lost interest equals roughly 2 Trillion. Remember, this is interest income to SAVERS forever lost since 2001. By aggregating the entire shaded orange area, SAVERS have missed out on a whopping 10.8 Trillion in earned interest usage. The final chart above makes a loud and clear statement toward the beneficiaries of the low interest rate environment.