Bacon's Rebellion

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Fed Theft Update: $749 Billion from Bank Depositors

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by

James A. Bacon
in ,

silent_theft

Federal Reserve Bank suppression of interest rates has cost bank depositors $749 billion in interest income on savings accounts, CDs, and money market accounts over the past six years, according to Richard Barrington with MoneyRates.com.

Quantitative Easing has made possible one of the greatest redistributions of wealth in United States history. Unlike with taxes, which tend to be highly visible, most people don’t understand how interest rate suppression affects them. Low interest rates have devastated not only bank account savings but public and private pension funds and savings vehicles such as insurance policies. Beneficiaries are borrowers, including house buyers, car owners, college students, credit card owners, corporations leveraging their balance sheets, and, of course, the U.S. government. Every percentage point in interest rate suppression across the yield curve benefits Uncle Sam to the tune of $180 billion a year.

So, how did Barrington calculate the cost to bank depositors?

MoneyRates.com starts with the total amount on deposit at U.S. banks as of March 31, per the FDIC. That total is then increased by average money market rates over the subsequent year … and then adjusted for the inflation rate over the same period. The difference between the resulting figure and the original amount on deposit at U.S. banks represents the hidden cost of the Federal Reserve’s low-rate policy.

The little guy knows the system is stacked against him. He just doesn’t know how. Pass this blog post around.

— JAB

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23 responses to “Fed Theft Update: $749 Billion from Bank Depositors”

  1. LarrytheG Avatar
    LarrytheG

    geeze.. this is a worldwide problem… investors no longer want to borrow money to risk for some venture.

    that’s led to entrepreneurs not wanting to borrow money and so anyone who has money they want to earn returns on – good luck – investors are not investing like they used to and a bunch of money is siting there with no one wanting it – and that money is what you and I have put aside for some future use. no one wants that money and has not wanted it for some time.

    The govt has traditionally tried to entice investors to borrow by lowering the interest rate but the economy has so fundamentally changed that investors no longer have confidence – with putting money towards some venture.

    The govt did not cause it.. they’ve just lost a tool that used to work in goosing a sluggish economy….

    and it’s worse than that – people don’t even know where to park their money “safely” so NOW they’re putting it in T-notes which are basically not paying interest at all but yet the demand for virtually zero-interest T-notes is almost insatiable.

    Again – it’s not a US-only deal..

    there is an excess of “labor” and that means a shrinking aggregate demand.

    investors don’t invest in plants when the demand for widgets is decreasing and everyone wants their money in a safe place.

    it’s got a name – liquidity trap. Not unique to the US nor the US FED.

    1. James A. Bacon Avatar
      James A. Bacon

      Earth to Larry… Earth to Larry….

      Here’s the Economist’s definition of Quantitative Easing (my emphasis):

      To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence “quantitative” easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment. Today, interest rates on everything from government bonds to mortgages to corporate debt are probably lower than they would have been without QE.

      Feel free to roam the Internet and find your own definition.

      Quantitative Easing (QE) boosts asset prices (thus creating bubbles) and lowers interest rates lower than they would be otherwise (thus robbing savers). Much of the newly created credit found its way into developing nations like the BRIC nations and into fracking. Those bubbles are now unwinding. Meanwhile, other central banks are exploring negative interest rates with their own QE.

  2. JOHN BR Avatar
    JOHN BR

    “Every percentage point in interest rate suppression across the yield curve benefits Uncle Sam to the tune of $180 billion a year.’
    That was and is the main reason for the suppression of rates. It allowed the government spending to continually increase because the cost is so low. Eventually the rates will go up and it will be impossible to cover the debt and we will all be left holding the bag. And some very wealthy people, and their political friends like our current president, will be secure in the fortunes they made by robbing so many others.

  3. LarrytheG Avatar
    LarrytheG

    Clearly you do not understand! They “creating money” with Quantitative Easing to ENCOURAGE – MORE borrowing at very low interest rates – lower than would exist with just an unfettered market – yes..

    BUT what happens when no one wants that money ?

    at that point it don’t really matter where that money came from – because no one wants it – and they don’t care how it became available.

    you’re so fixated on the “evil central govt messing with the market” narrative – you’re not even understanding the basic mechanics of the money itself.

    let me repeat:

    it does not matter how the money got “created” – no one wants it and when no one wants it – it don’t matter how cheap it is.

    there is no demand for money to borrow so making it “cheaper to borrow” is having no effect.

    there are no “bubbles” except in Austrian school economics … Mises…

    most major economies on earth have Central Banks that use Monetary Policy to influence the economy – something the Mises folks do not subscribe to because they believe the govt should not be doing that thing to start with.

    Jim’s perspective is basically that he does not believe the govt should be influencing interests rates – from the get go – right?

  4. James A. Bacon Avatar
    James A. Bacon

    Jim’s perspective is basically that he does not believe the govt should be influencing interests rates – from the get go – right?

    No, my point is that Federal Reserve Board actions have consequences.

    Apparently, your point is that Federal Reserve Board actions have no consequences, at least in this particular instance. Which raises the question, why did the Fed embark upon QE1 and then follow it up with QE2.

    Larry, your position on this is so absurd that I simply will not argue it anymore. You might as well argue that 2+2=5.

    1. DonR Avatar
      DonR

      Keynesian economic theory (and perhaps all economic theories) depend on an economy near stasis to be valid. These theories are what I’d call “tweaks” to a generally stable system. For example:

      1. A growing economy is increasing productivity and real median wages since there is a slight under-supply of labor relative to demand.
      2. A cyclical downturn (i.e. periodic recession) occurs, the demand for labor falls, unemployment rises.
      3. The central bank enters into a period of money creation whereby more money is in circulation, the cost of money (e.g. interest rates) fall, demand for money (i.e. investment) rises, the economy goes back to the stasis state where there is a slight under supply of labor, unemployment drops and real median wages start to rise again.

      Against that backdrop Keynesian economics works.

      That backdrop has not existed in the United States sine about 1973. Nobody seems to know why it happened but the linkage of productivity to rising real median wages ended – apparently permanently.

      Larry is sort of right that nobody wants the money. However, he is very wrong in absolving our inept government of blame. They pursued a Keynesian strategy that hasn’t worked in quite some time. They spent year after year pursuing that strategy, they are still pursuing that strategy and it doesn’t work. All strategies have consequences. Failed strategies have consequences of failure. The Obama Administration’s pursuit of a failed Keynesian economics theory has one consequence – hurting safety-conscious saves (often the elderly). It will no doubt have additional negative consequences as our political betters in Washington continue to doggedly pursue a failed strategy.

      Interestingly, the two presidential candidates who actually have new economic ideas are Sanders and Trump. Whether those ideas are right or wrong is a matter of conjecture. However, I have to give both of them credit for doing something other than following the same tired and faild policies of the past.

  5. LarrytheG Avatar
    LarrytheG

    Nope. I DO believe they have consequences.

    They did QE1 and QE2 for traditional reasons of influencing demand for money.

    They used QE when the conventional policies no longer worked.

    there’s a bigger picture here that you’re missing because you’re so intent on hammering the Feds for their monetary actions – which you do disagree with – so how about admitting it?

    I do NOT think 2+2 = 5 at all but I DO think you twist things to suit your ideology … then pretend you’re not biased

    why donj’t you admit that you DO subscribe to the Austrian School and admit how their positions contrast with the existence and purpose of the Fed Reserve?

    be up front about it Jim.

    I do not advocate – for or against what the Feds are doing – only that I am able to characterize it – functionally as to what they are doing and why they are doing it – as well as whether or not those things are generally accepted by other countries as legitimate policy.

    The Mises folks – violently disagree with the basic concept of Central Banks and the monetary policies they employ.

    correct?

    You say my position is absurd… My position is to accurately describe what the Fed is doing and why – not whether or not I agree or disagree with it.

    when you cannot and will not address what they are doing and why and instead just impugn their actions – never admitting your underlying philosophy … well geeze.. guy…

    come on Jim – tell us your fundamental philosophy here.. and then comment on the Fed policy.

  6. Cville Resident Avatar
    Cville Resident

    Investing in a basic Dow index fund in 2009 would have earned you a 300% return (literally) when dividends are factored in…..

    And if we had pursued a policy for “savers”, we are talking about 3 to 4% returns on your money per year rather than 1-1.25%.

    I don’t view that as “theft” from “savers”…..”savers” could have put some of their money in a $7.95 trade in the most simple investment of all. They simply made a poor financial allocation decision.

    You might have a point if QE hadn’t worked (if the market had gone down) that it was “theft” from savers. But, savers had the same opportunity that you and I had to allocate their resources. In another day and age, I would have had more sympathy for your premise. But with financial information so plentiful and transaction costs so low, it’s hard for me to really think of this as punishing savers. In the 80s, sure….99% of people had to do any financial transaction via a broker which took time and a lot of money. Now? Not so much. Talk to people under 40. For those with portfolios, it’s almost all online via Fidelity, TRowe, Schwab, etc. with a little advice from a CFA.

    Just saying…..

    1. LarrytheG Avatar
      LarrytheG

      and Cville has a good point also… but what options for good returns do people have now ? I don’t see too many folks piling up good returns these days.. myself , maybe CvilleR does.

      1. Cville Resident Avatar
        Cville Resident

        Emerging markets and commodities have been in a rout for quite a while. It may not be tomorrow or this year, but I’d expect a pretty large rally in one or both categories within the next 5 years. I’d also be bullish on virtual reality investments…..but that’s just me.

        1. LarrytheG Avatar
          LarrytheG

          let me also point out that the US govt (as opposed to all world govt) incentivizes ( mises would say “distorts”) by not taxing retirement savings (IRA) , not income nor FICA, which is effectively a 40% subsidy to flood the money market. Indeed, the more people save – the lower the rate of return..

          One might argue that the govt is ALSO influencing the money supply by encouraging tax-sheltered IRAs.

          1. LarrytheG Avatar
            LarrytheG

            misspoke on IRA – IRA still pays FICA..

    2. James A. Bacon Avatar
      James A. Bacon

      I invested in stocks pretty heavily in 2009 or thereabouts and have done just fine. But I was lucky. I had enough money to put into stocks. Half the population owns no stocks, and doesn’t have enough savings to warrant learning about how to invest them. The small savers, the little guys, are the ones who got hammered, not me. And I do have sympathy for them.

      1. LarrytheG Avatar
        LarrytheG

        re: ” The small savers, the little guys, are the ones who got hammered, not me. And I do have sympathy for them.”

        perhaps I’m “thick” . how do the little guys get “hammered” by QE?

        also.. little guys with no health insurance have bigger problems than no retirement savings… and, in turn , the “luckier” who will be paying for their health care as well as their retirement entitlements.

        Most folks if they did not have Social Security and Medicare -would be literally destitute – and the ones that have Medicare only and owe 20% co-pay are financially destroyed if they have a major illness and end up 10,20, 30K in debt.

        Conservatives talk about getting rid of SS and Medicare.. 30% of seniors would literally end up homeless – SS/Medicare is their ONLY retirement.

      2. Cville Resident Avatar
        Cville Resident

        I have zero sympathy for them.

        For a proponent of markets, which includes privatizing retirement, your only option is to support quantitative easing and policies geared towards favoring equity investments. The only way for something other than Social Security to serve as a realistic retirement vehicle is for explosive equity growth and to have every single citizen invested in the market. You don’t get that by a policy geared towards 3% on savings accounts.

        That’s what I don’t understand about conservatives criticizing quantitative easing. There’s simply no way for their policies (be it Roth IRAs or HSAs for health care) to work without enormous gains in equities. Basically, this vision calls for every public policy to be geared towards “max” equity returns.

        1. LarrytheG Avatar
          LarrytheG

          Beyond that there is the core issue of whether or not govt should have Central Banks and exercise activities that influence the economy.

          My problem with Jim here is that he attacks what he considers the flaws and failings of the Central Bank actions – when he fundamentally opposes the CONCEPT of the central bank to begin with.

          It’s the same type of argument with Social Security where people who are fundamentally opposed to the CONCEPT of Social Security do not argue on that basis but instead on what they say are flaws and failings of Social Security. For instance, pointing out that it will “go broke” when in fact that is not true at all – that as long as FICA tax is collected it will bring in about 3/4 of what income tax brings in and will continue to see so – forever if left alone. What needs to be done to preserve it is fairly minor adjustments – not gutting and killing it.

          words and phrases like “bankrupt the trust fund” and ” ponzi scheme” are the sensational phrases used in front of their narratives.

          but again – these folks who fundamentally oppose the CONCEPT of Central Bank or Social Security should argue honestly and up-front on that basis – AND propose an alternative approach and how it should work –

          as OPPOSED to attacking the “consequences” and “failures” as a way to argue that the CONCEPT … “does not work”.

          when you take a hard look at the folks who oppose Central Banks and Social Security – you find that their alternative would be a world where financial markets would experience wild swings and be so unpredictable as to encourage people to convert their assets to precious metals .. “something” that cannot have it’s value changed by govt actions (in theory).. and with SS – a world where – if you don’t voluntarily save – you end up on the streets or in “old folks homes” and become an example to show your kids as to why they should save.

          that’s the biggest problems today with opponents of what we have.

          they oppose the existing but they have no real alternatives – other than theories they believe in. They almost never can (or will) point to any place on earth that functions the way they say it should.

          so they stand by until some problem emerges – and then they argue in a non-direct , shadow way, that -that current problem is ‘proof’ that the concept behind it – is fatally flawed.

          this is where Bacon gets his ” the sky is falling and we’re all going to die” “vision” of the future…

  7. LarrytheG Avatar
    LarrytheG

    Here’s that bigger picture:

    ” Quantitative Easing vs. Currency Manipulation”

    and YES – there are HUGE consequences…

    because money moves across country borders at light speed and now via crypto currencies like Bitcoin… that are not tracked or trackable through govt regulated banking and finance.

    QE and other central bank policies when done at the individual country level probably now affect other countries – causing them to react with their own separate monetary changes that then boomerang back…

    if this is true – it means that all Central Bank policies – may be interfering with each other -rather than working only inside of each country.

    that would be far more serious and consequential than what we think we know about QE right now.

  8. Rowinguy Avatar
    Rowinguy

    Has MoneyRates calculated the billions SAVED by purchasers of homes, cars and other typically financed acquisitions owing to the really low cost of borrowing?

    Personally, I like my 4% mortgage a lot better than a 4% yield on my savings account. I don’t have hundreds of thousands tied up in it…..

    1. James A. Bacon Avatar
      James A. Bacon

      I don’t know if MoneyRates has made that calculation or not. Obviously, consumers have saved billions on their mortgages, and car loans, and credit cards and other types of debt.

      But that’s already known, even if no dollar signs have been put on it. The explicit purpose of the Fed action is to stimulate the economy by encouraging borrowing for houses, cars, appliances, etc. What is not properly recognized and not quantified is the hidden impact on savers.

      1. Rowinguy Avatar
        Rowinguy

        I guess I object to the characterization of this as theft–I certainly don’t feel like the recipient of stolen goods when I make a mortgage payment that might otherwise be tens or hundreds more were it not for lower borrowing costs.

        As someone noted up the thread, nothing obligates anyone to put their $ in an ordinary savings account.

  9. James A. Bacon Avatar
    James A. Bacon

    I like low mortgage rates, too. I don’t feel like a thief either when I remortgage my house.

    Just remember, though, that the U.S. government is saving some $150 to $350 billion a year in interest payments thanks to financial suppression. That money is coming out of somebody’s pocket — including yours. You just don’t see it.

  10. Rowinguy Avatar
    Rowinguy

    And one more thing, the FED has lowered the short term rates at which depository institutions lend to one another. It does not set the rates that these institutions choose to offer to their depositors.

  11. LarrytheG Avatar
    LarrytheG

    I still think that Jim should be saying “full disclosure – I am opposed to the concept of Central Banks” when he writes these article – if he truly is or he should at least make clear what his position is on the CONCEPT of Central Banks and their role.

    Second – our tax code incentivizes saving for retirement, employer-provided insurance, passing assets tax-free from parents to kids, and borrowing for mortgages.

    these have tremendous impacts on the economy.

    To give one quick example. Canada has no mortgage deduction and was untouched by the financial meltdown that severely damaged our economy.

    and Back to Central Banks – yes their actions DO have consequences – however – one has to ask why Central Banks came into existence to start with and no , it was not an evil scheme by libtards…to “control” the economy.

    what was the real historical reason why Central Banks got created?

    we should INCLUDE these things in our discussions especially when we talk about the “evils” of Quantitative Easing and make clear whether we are talking about QE itself as a legitimate technique of Central Bank policy OR if we are essentially arguing that not only QE but essentially ALL techniques of the Central Bank are illegitimate – BECAUSE the concept itself of the Central Bank is considered wrong.

    When QE “fails” – does that mean the Central Bank needs to find other techniques to continue to influence monetary policy – OR does it mean that the CONCEPT of Central Banks has failed and the solution is to disband Central Banks?

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