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Bank Interest Rates and Inflation

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    Are the feds for real?  They say inflation is at a moderate 2-3%.  I don't think they have gone grocery shopping or pulled into a gas station to fill up their tank. Maybe they can explain why my grocery bill has gone up 40%.  If the manufacturer's aren't raising their prices they are putting less product into the same size package.  That equates to a price increase that doesn't show up anywhere.  Have you noticed your paper products are getting thinner? Even my Hotdog vender raised his prices from $1.50 to $2.00.  But the Feds say there is no inflation.

    People like my Parents who rely on their FDIC insured CD's have lost 80% of their interest income that is used to pay bills and a host of other things.  They say we need consumer spending to create jobs so what did they do?  Put a strangle hold on 15MM seniors who would probably spend most of their interest earned.  Wall Street loves it when the interest rates are low.  But when the Dow was at 16M it didn't stop the buying and selling that makes Wall Street rich.  The Feds are being unreasonable.  There should be a balance so one segment alone is not carrying the burden.If intrest go any lower the banks will soon charge us for keeping our money in their banks.  Wouldn't that be a kick in the head.
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    Okay, I'm not an economist and when I get into this discussion, I will happily acknowledge that there are a lot of people much smarter on the topic than me. However, when I do a Google search looking for "experts" I don't find agreement there either. So I'll share my amateur views and provide some links.

    First, in NORMAL times with GLOBAL economic stability, the Fed's ideal interest rate is targeted at around 2-3 percent, with the actual rate determined more by the demand for US treasury bonds. However, despite the economic improvement in the last 23 months, these are still not normal times as we will be digging ourselves out of the Great Recession for a couple more years yet with low interest rates in the forecast to 2014. In particular in parts of Europe (i.e. Spain, Greece, Italy) the economic uncertainty has led to a "flight to the safety of dollars."  That means that with high demand, the Fed can comfortably set interest rates extremely low, and there will still be a demand to buy our treasury bonds. Another way of putting it is that our borrowing costs to support our debt are much lower.

    One positive of that outcome is in the interest we pay on our national debt. While many of the Tea Party Republicans have been screaming bloody murder about our rising debt and raising the debt ceiling, the actual interest that we taxpayers pay on that debt has remained fairly flat in the last three years. In fiscal year 2008 (Oct 2007-Sep 2008), we paid $451 billion in interest on our gross debt of $10.0 trillion. For fiscal year 2011, our debt had increased to $14.8 trillion but the interest we paid on that debt was only slightly more at $454 trillion.  In effect while our debt has increased by $4.8 trillion in three years, the borrowing cost of that total debt has increased only $3 billion as old higher yielding bonds are exchanged for lower yielding bonds.

    On the other hand, while some economists would say that low interest rates will stimulate the economy because people will by nature choose to spend their money on new cars and such rather than leave their money in low yielding CDs, if, as you pointed out, the CDs are not yielding much interest, then people don't have much to spend anyway. I suppose that's one reason why the economic recovery is taking so long.

    Regarding inflation, the Bureau of Labor Statistics monitors a basket of consumer goods to determine the change in the Consumer Price Index (CPI) from year to year.  I won't go into the details as that is a sore point as well with many consumers. But the change in the CPI from year to year is a measure of that year's inflation rate, and is also used to set inflationary increases to Social Security benefits and Medicare insurance premiums. After two years of zero increases in Social Security benefits, starting January 1, 2012 retired seniors finally got a 3.6 percent increase. That increase will likely be eaten up by increased Medicare insurance payments next year, as well as the inflation on the consumer products that seniors buy.

    A couple of more points, interest rates and inflation rates do not necessarily track each other closely...one lags the other. Furthermore, while inflation is supposedly controlled by the amount of money that the Fed injects into the economy, other factors like high energy prices can also have an inflationary effect as higher energy costs are passed along up the chain to the consumer. That's what largely caused the double digit inflation of the 1970s and early 1980s when oil prices quadrupled. Some economists would say also that the Fed policies in response to the inflationary effects of higher gasoline prices at that time were wrong, but I'll leave that for economists to argue.

    The bottom line though is that people are feeling the effects of inflation, partly driven by higher energy prices, but at the same time the income that they would receive from interest on CDs or bonds has been going down because of the Feds actions on interest rates.  This especially hurts income as higher yielding CDs and bonds mature and are renewed at the much lower interest rates of today.

    What we really need is a big stimulative effect of spending by government on infrastructure, education, and other activities that can accelerate our slow climb out of the recession.  But that's not going to happen in a big way until we get past the November election, and maybe not then if the Republicans win and implement an austerity spending program.

    Okay maybe CBB can share his MMT perspective...

       

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    Few things:

    Typically, CD's are designed to be held to term with a fixed rate of interest, with penalties for early withdrawal. So I'm not sure how it can be said that a CD's earned interest has dropped by 80%?

    Now, lower base interest rates hurt savers. It's like a tax when compared with rate of return of previous issue.

    The FED targets the cost/price of money. It does not target the quantity of money aggregates.

    Notice, that the complaint is a lack of spending power. How then can lower interest rates be the source of said inflation? 

    I like to say the dollar is backed by oil. Everything you buy is energy and transportation dependent.

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    Thanks for weighing in.  I came up with 80% loss of income by comparing the rates not too long ago when they were 5%.  Most if not all the CD's have probably come to term by now.  Now you'll be lucky to get 1% for a two year CD, the big banks wont't even offer that rate.  I didn't mean lower interest is the source of inflation, but that it's not keeping pace.  I'm no rocket scientist on this stuff.  All I see is how it is effecting people around me.  They are hurting.  The poor and the rich never have to be concerned over such a trivial matter, but the middle class always has to pony up. It's not fair that the burden falls on their backs. Oh, lets not forget the IRS is losing all that revenue.  Not that I care about them.
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    Lower interest rates reduce savers' interest incomes.

    That's why, properly understood, QE is a tax, because it removed interest incomes from the economy.

    The FED thinks all this will stimulate lending; it's more like a 1% handout.

    Problem is you still need credit worthy borrowers.

    We just went through a hell of a recession that diminished and destroyed people's creditworthiness. A lot of them still don't have jobs.

    We need to boost aggregate demand directly with a combo of FICA tax cuts, revenue sharing, and a job guarantee program. 

    Argentina experienced roaring levels of growth following implementation of the "Jefes de Hogar" program. Pavlina-T and Randy Wray (here).

    We also have a 2.5 trillion dollar infrastructure deficit, which is a mix of federal, state, and local responsibility. 

    Basically, I don't know how to say this: most of our elected/executive appointee officials are "fucking retarded." 
    .........
    We have all kinds of commodities manipulation and fraud.

    Saudi Arabia is a monopoly price-setter hiding behind all the ambiguity in futures markets.
    .........

    There is no fiscal crisis for the USG. What matters is employment and GDP growth.

    Occupy Everything.