Punish the Prudent: Fed v. Savers

“Coupon clippers” is not a description Americans aspire to fit. In the French, they are rentiers, those who live off the regular payments of others. The words have the whiff of an idle, leisure class–parasitical in many eyes.

But what they are (or their forebears were) are savers, a rather more virtuous-seeming lot. Yet even by that name, they no longer smell so sweet. The Federal Reserve in its latest bent toward loose money this past week has all but condemned the financially chaste to meager droppings, by adopting a “framework” that effectively ensures super-low interest rates into the horizon.

The double whammy for savers is that this policy is part of an ongoing effort to boost the inflation rate, which if successful will further erode the yields of those bond coupons (or more likely, money-market funds and CDs). And in perhaps a triple threat, the Fed’s action appears likely to drive a further fall-off in the value of dollar, the store of savings value.

Super-low interest rates–seen by political economists as necessary oxygen for a depressed global economy in the Covid-19 pandemic–have the further effect of promoting borrowing and speculation, the very antithesis of cautious wealth management. Already, most asset prices are near historical highs, making the notion of “diversification” in place of pure savings a non-starter for those with little running room in life. And, even a future of low longer-term rates (often keyed to mortgages) cannot be assured–the fixed-income market was already driving them higher this week.

Not coincidentally, another short-run beneficiary of the Fed’s moves (known technically as financial repression) are the hugely-indebted public borrowers. Governments can try to manage their gaping deficits by getting a free pass on repayment.

It’s politically expedient, even in normal economic times, for a sovereign to want to monetize its debt. What office holder would prefer to cut spending on popular or palliative programs or raise taxes to pay for them? Better to let private financial holdings leak. (A potential political cross-current exists in middle-class retirees, including those on fixed pensions that rely on bond income–but they are still far from being a voting majority.)

So it is now official U.S policy–likely to be widely followed abroad–to punish the prudent and reward the reckless in order to try to help a third group, the struggling. It’s a devil’s bargain, and not likely to work out well in the end for any of the three.

Published by timwferguson

Longtime writer-editor, focusing on topics of business and policy, global and local.

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