The War on Savers is Over. Savers Lost

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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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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