My original working title for this blog post was “The war on savers, renewed.” But as I pondered the topic, I realized this was wrong, and I threw it away.
The war on savers is over. Savers lost.
News of the armistice came last week from Federal Reserve Chairman Jerome Powell. At an online conference – a pandemic-year substitute for the Fed’s annual summer shindig at Jackson Hole, Wyoming – Powell announced that the central bank will no longer raise interest rates preemptively to head off rising inflation.
In other words, you put your hard-earned, diligently saved capital in the bank for the pittance currently offered under Fed policy, and the central bank will virtually guarantee that your money will lose purchasing power over time. You do get to keep your principal in nominal terms, much as Japan got to keep its emperor as a figurehead at the end of World War II. Otherwise it was an unconditional surrender to the Allied forces under Gen. Douglas MacArthur. Powell is offering savers the same deal to conclude hostilities.
If savers are the losers in this war, who are the winners? The intuitive answer is “borrowers,” and that is basically correct. The world’s biggest borrowers, by and large, are governments. Uncle Sam stands at the top of the list in nominal terms, although far from it per capita or as a share of gross domestic product. “Lower for longer” interest rates are a boon to governments in this country, at all levels, that have taken on obligations that future generations must shoulder. Higher future inflation, which the Fed’s new policy encourages, further reduces that burden.
It is a pure subsidy to public sector borrowers in the United States. Results will vary in other places, because while U.S. rates both reflect and encourage lower rates abroad, currency movements could change the effective cost of debt for borrowers whose cash flows are not based on our dollars.
Looking past the subsidy to governments, the Fed’s stifling of interest rates also benefits private enterprises that take advantage of cheap money to expand, or just to pay bills. That, of course, is the idea – to encourage economic growth through business expansion and, not incidentally, to keep more businesses and their payrolls afloat during straitened times. The pandemic has certainly produced straitened times. The pressure has been alleviated largely by debt-fueled government borrowing.
In this sense, we certainly can’t accuse the Fed of fighting the last war. Inflation, which was the scourge of the baby boomers’ youth, has been quiescent for decades. Low productivity growth, international competition, a capital-hungry shift to new and more expensive energy sources, and unfunded government and private sector obligations are the hallmarks of this era. It will take a lot of capital, both bought and rented, to meet those obligations. The Fed is imposing rent control on a lot of that capital.
Of course, like any form of rent control, this approach means investment will go someplace else, where it can be better rewarded. The primary “someplace else” is the stock market. The major U.S. indexes all hit record highs this week, in spite of pandemic, civic unrest and political uncertainty. It isn’t a coincidence.
And finally, since Labor Day is almost upon us, we should consider the implications for labor as well. An inflationary world is not intrinsically good for wage earners, as anyone in Venezuela can readily attest. But it isn’t necessarily bad, either, if a government has more or less unfettered ability to top up diminished incomes via transfer payments. Case in point: A federal bonus of $600 per week in unemployment benefits, which actually boosted the real wages of most of those who received it through July.
An inflationary policy that diminishes the value of savings will mainly hurt savers. Yes, the Fed can still raise rates after inflation sets in, assuming it ever does. But don’t expect the central bank to act to protect the value of a dollar that is sitting nearly frozen in the bank. Wars, like elections, have consequences. Savers have lost this one.
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