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I don't understand how higher interest rates on savings accounts would meaningfully impact the middle class. The median savings account balance is just $5,300[

I don't understand how higher interest rates on savings accounts would meaningfully impact the middle class. The median savings account balance is just $5,300[1]. And the thing about savings accounts is that they generally do get spent down periodically - they typically aren't used to continuously squirrel away cash for decades, so you're not compounding interest over the long term. You might save for 5 years and then do a big spend-down to purchase a car, a house, home repair, medical emergency, etc. So, if the savings interest rate is a paltry 1%, that's just $35. But if it were 5%, it's $265 -- Except now you're paying 1-2 points more on a mortgage, student, and/or car loan. The median household debt is something like $59,000: roughly 10x the amount in savings. So, you make $230 more in savings interest at the cost of thousands of additional interest payments. Reducing QE and making debt more expensive seems to benefit a very narrow group of individuals who have the means to store large amounts of cash in safe liquid assets and don't carry significant debts relative to their income. Everyone else is worse off. [1]https://advisorsmith.com/data/average-savings-account-balance/ https://advisorsmith.com/data/average-savings-account-balanc...

Clubber 5y ago
You get what you incentivize. We are currently incentivizing debt over savings, so that's what we get. When I was in college, the bank would give something like 6-7% on savings. If I had a million dollars in the bank I could comfortably live off that interest for life. Now if I put a million dollars in the bank, I lose wealth due to inflation, so I'm incentivized to put it in a fund or something now, which is a lot riskier than bank interest.
- whimsicalism 5y ago
  > Now if I put a million dollars in the bank, I lose wealth due to inflation, so I'm incentivized to put it in a fund or something now, which is a lot riskier than bank interest. Yes, people investing in productive enterprise is actually better for real output, prices, and generally overall welfare.
  - cies 5y ago
    Consumers buying is what drives production. Not investment. > better [...] prices, and generally overall welfare. How does investment do that? Plenty examples of the opposite can be found. I find those claims baseless.
    - whimsicalism 5y ago
      Investment and low rates drives wages which drives consumption. Investment also shifts aggregate supply to the right, which causes more output.
      - RussianCow 5y ago
        > Investment and low rates drives wages which drives consumption. I know this is Economics 101, but is there any evidence that this actually happens in practice?
  - Clubber 5y ago
    It's certainly good for the shareholders to have more money in the market, I'm not sure about the others. I know I'd much rather have a solid 6-7% interest return than a flaky market return.
    - whimsicalism 5y ago
      > I know I'd much rather have a solid 6-7% interest return than a flaky market return. And college debt holders, mortgage holders, generally impoverished people would rather have lower rates on the debt that they have. They'd also rather have jobs, which again comes with more investment. They'd also like to have a higher quality of life, again which comes with more investment in capital/production/real output.
      - Clubber 5y ago
        >generally impoverished people would rather have lower rates on the debt that they have. Generally impoverished people aren't granted lower rates because of the credit system. They typically pay usury rates. Only people with existing assets / collateral get low rates. >They'd also rather have jobs, which again comes with more investment. Generally impoverished people have shit jobs, that's why they are generally impoverished. Also, investment leads to automation and offshoring which actually lowers jobs. >They'd also like to have a higher quality of life, again which comes with more investment in capital/production/real output. If investment in capital/production/real output helps impoverished people, it's very little. It generally helps already wealthy people. You're looking at stuff from a textbook macroeconomic position. In the realistic / microeconomic world, things aren't as you are portraying them.
- sokoloff 5y ago
  Was there ever a time where a savings account of $1M both provided a livable income over many decades and didn’t lose value to inflation? What were inflation rates while savings rates were 6-7%?
  - Clubber 5y ago
    Sure, say I had $1M in the bank in 1996, it would yield ~$70K which would provide a comfortable living situation both then and today. Inflation was around 2-3%, which is generally the target. >lose value to inflation Inflation always erodes money of course, so there was never a time when that didn't happen when there was inflation.
    - deleted 5y ago
      [deleted]
    - lkbm 5y ago
      The question is whether the inflation exceeds interest. With index funds it generally doesn't, but I'm not sure about a savings account. Right now inflation easily beats a high interest savings account, but I'm not sure about 1996.
    - sokoloff 5y ago
      If you took $70K to pay taxes and spend every year, your million would slowly dwindle (CD rates were in the 5-6% range) At 3% inflation, that $70K/yr would lose half its purchasing value in the span of 24 years of your retirement. (It also would cease yielding $50-70K per year over that time as well, but that’s with the benefit of hindsight and you could lock in the rate with a longer term CD at retirement. That still leaves you with half the purchasing power though.) I don’t think savings accounts have ever been a reasonable way to invest the bulk of your money for future retirement.
      - MisterMower 5y ago
        You’re double counting that $70k. That’s interest on the $1M. Assuming rates stay at 7%, you’d get that $70k every year. You are correct that $70k wouldn’t go as far today due to inflation. But $70k per year was great money in 1996. Related, my dad and a buddy invested $10k in a CD that yielded 21% back in 1984 I think. If the rates are high enough CDs can be an excellent investment. They’re basically risk free. My bank is offering 0.6% currently. Real rates are very negative right now.
- criddell 5y ago
  The Treasury sells savings bonds that are at 7.12% right now. It's not the same thing as a savings account and you can't put a million dollars in, but you can still get a good interest rate on smaller amounts.
  - gruez 5y ago
    >The Treasury sells savings bonds that are at 7.12% right now. source? yields top out at 2.05% right now. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...
    - criddell 5y ago
      https://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm https://treasurydirect.gov/indiv/research/indepth/ibonds/res...
      - hackingforfun 5y ago
        This is good to know. I wasn't aware of this website. However, you can't live off of 7.12% on a limit of $10k electronic bonds. I do wish savings accounts still had high interest rates and there wasn't so much incentive to invest in riskier assets like stocks.
    - deleted 5y ago
      [deleted]
  - bigwavedave 5y ago
    "For the first six months you own it, the Series I bond we sell from November 2021 through April 2022 earns interest at an annual rate of 7.12 percent. A new rate will be set every six months based on this bond's fixed rate (0.00 percent) and on inflation." As someone who's never bought bonds before, how do I know the 7.12% won't change after the 6 months of the locked rate to the 0.00% and whatever pittance they decide to toss my way in an attempt to account for inflation? Sincere question, I don't know anything about anything.
- spamizbad 5y ago
  Okay, but now you're talking about using monetary policy to change American culture away from consumption and more towards saving. I'm not sure such change is politically sustainable.
  - MisterMower 5y ago
    And what we have today (steeply negative real rates) is?
RussianCow 5y ago
> Except now you're paying 1-2 points more on a mortgage, student, and/or car loan. When interest rates go down, house prices tend to climb proportionately as more people take advantage of the lower mortgage rates. The same goes for cars to a lesser degree. So unless you buy a house at the very beginning of an interest rate transition (before the market has settled), the rate won't have as drastic an effect on your monthly payment as you're making it seem. You can also refinance later if you buy when rates are high, but you can't lower your principal. Also, interest rates affect other types of investments that people carry, such as retirement accounts. I don't know what the cumulative effect of all of this is, though, so I won't claim that your overall point is incorrect.
- notahacker 5y ago
  The house price rise adversely affects only the people buying their first home over the period interest rates are unusually low, which is obviously a small proportion of homeowners. If you've already paid your principal, it's unchanged, but the value of your asset has increased and monthly payments have gone down for those on variable rate mortgages. Even if you're a first time buyer affected by the price rise, you're better off with a high monthly payment to own a higher value house than a high monthly payment to transfer more interest to people who are wealthier than you.
- imtringued 5y ago
  >When interest rates go down, house prices tend to climb proportionately as more people take advantage of the lower mortgage rates. The real estate market is inefficient by design (look at Californian zoning). If you made it just as efficient as other consumer goods the problem would be gone. The problem isn't interest rates. It's the inability of the market to respond to them. In theory lower interest would just mean bigger and more dense construction as taller buildings become easier to finance. In practice people figured out that if they do "sound zoning" the increased amount of money will flow in a handful of pockets. The same is true with "sound money" where the value the economy produces grows as the population grows and becomes more productive while the amount of money stays the same and therefore benefits hoarders. The boring answer is a land value tax.
deleted 5y ago
[deleted]
Ericson2314 5y ago
I rarely see this spelled out, but in the more modern thinking, the working class are "creatures of flows", and the capitalist class are "creatures of stocks": i.e. the latter has meaningful assets, but the former subsists on wages. Obviously this is just an approximation, but "class is calculus" is a very useful mental model. By that ones, yes, the vast majority of people have negligible liquid savings. So the interest rate doesn't directly matter. Yet, the rich also "own the means of production" --- i.e. real assets, which also doesn't get inflated away. So it doesn't obviously matter for them. So what does it effect? The essential original Keynesian insight (what most of the factions since might agree on), is that since the point of owning things in Capitalism as money, even if you aren't holding cash, the interest rate effects how easy it is to invest, but also what investments are productive w.r.t doing nothing. This spooky shit is what is supposed to give monetary policy it's power. The differences in opinion in those factions come down to whether there is always enough to invest in, and access to credit is the limiting factor, or not. The Post-Keysnians would say relying on monetary policy alone is stupid, because (to distill in a parable) if no one can buy your stuff, it doesn't matter how cheap the factor is it's not worth it. That's when directly employing people (jobs guarantee) or handing out helicopter money can make a difference --- it's "root" demand, not some spooky shit effecting supply. Back to the calculus stuff, an interesting idea is https://en.wikipedia.org/wiki/Demurrage https://en.wikipedia.org/wiki/Demurrage. This is "inflation for stocks not flows". In short, we want money at rest to go bad, so rich people and instutions are forced to spend and we don't grind to a halt via the paradox of thrift. But we don't want people's wages to inflate away, because they certainly cannot bargain hard enough to get enough raise to keep up. Demurrage is wonderfully hamfisted in trying to do the former but not the latter --- money at rest becomes less money, money flows retain their purchasing power.
- CuriousSkeptic 5y ago
  So a monthly redistribution of, say, 10% of the money supply as public dividend would take care of that no?
  - Ericson2314 5y ago
    > money supply Be careful this is a dangerous notion: with today's form of fiat concurrency there is net 0 money! > redistribution Likewise the "re" is sketchy. The state can pull money in, and take it out. Keeping those balanced because metal bullion skeuomorphisms is confusing. Our insistence that all money is debt is "double entry accounting fetishism" and also needlessly confusing. Distribution is good. "re" implies some sort of 0 sum, when the fact that the nominal need not be zero sum, and the future us uncertain and full of possibilities, and this is the true beauty of Capitalism we should embrace even as we are sanguine about all the terrible parts. The methodology in https://www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/lerner-function-finance.pdf https://www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/ler... is much better. The state can print money. The state can destroy money. The state can issue securities. The state should not subscribe to any theory a priori, but simply do the simplest thing the achieve agreed-upon goals, and avoid agreed-upon bad things. Theory can be developed afresh, and with far better empiricism, by basing it on actual experiments of the state trying out different levers and seeing what happens. Only a wealth of practical experience will overcome the highly politicized disputes. We will never achieve consensus while tiny gamut of the policy space is explored. ------- That is my long-winded way of saying I (think I agree) agree, but please find a different way to say it :).

Clubber 5y ago

You get what you incentivize. We are currently incentivizing debt over savings, so that's what we get. When I was in college, the bank would give something like 6-7% on savings. If I had a million dollars in the bank I could comfortably live off that interest for life. Now if I put a million dollars in the bank, I lose wealth due to inflation, so I'm incentivized to put it in a fund or something now, which is a lot riskier than bank interest.

whimsicalism 5y ago
> Now if I put a million dollars in the bank, I lose wealth due to inflation, so I'm incentivized to put it in a fund or something now, which is a lot riskier than bank interest. Yes, people investing in productive enterprise is actually better for real output, prices, and generally overall welfare.
- cies 5y ago
  Consumers buying is what drives production. Not investment. > better [...] prices, and generally overall welfare. How does investment do that? Plenty examples of the opposite can be found. I find those claims baseless.
  - whimsicalism 5y ago
    Investment and low rates drives wages which drives consumption. Investment also shifts aggregate supply to the right, which causes more output.
    - RussianCow 5y ago
      > Investment and low rates drives wages which drives consumption. I know this is Economics 101, but is there any evidence that this actually happens in practice?
- Clubber 5y ago
  It's certainly good for the shareholders to have more money in the market, I'm not sure about the others. I know I'd much rather have a solid 6-7% interest return than a flaky market return.
  - whimsicalism 5y ago
    > I know I'd much rather have a solid 6-7% interest return than a flaky market return. And college debt holders, mortgage holders, generally impoverished people would rather have lower rates on the debt that they have. They'd also rather have jobs, which again comes with more investment. They'd also like to have a higher quality of life, again which comes with more investment in capital/production/real output.
    - Clubber 5y ago
      >generally impoverished people would rather have lower rates on the debt that they have. Generally impoverished people aren't granted lower rates because of the credit system. They typically pay usury rates. Only people with existing assets / collateral get low rates. >They'd also rather have jobs, which again comes with more investment. Generally impoverished people have shit jobs, that's why they are generally impoverished. Also, investment leads to automation and offshoring which actually lowers jobs. >They'd also like to have a higher quality of life, again which comes with more investment in capital/production/real output. If investment in capital/production/real output helps impoverished people, it's very little. It generally helps already wealthy people. You're looking at stuff from a textbook macroeconomic position. In the realistic / microeconomic world, things aren't as you are portraying them.
sokoloff 5y ago
Was there ever a time where a savings account of $1M both provided a livable income over many decades and didn’t lose value to inflation? What were inflation rates while savings rates were 6-7%?
- Clubber 5y ago
  Sure, say I had $1M in the bank in 1996, it would yield ~$70K which would provide a comfortable living situation both then and today. Inflation was around 2-3%, which is generally the target. >lose value to inflation Inflation always erodes money of course, so there was never a time when that didn't happen when there was inflation.
  - deleted 5y ago
    [deleted]
  - lkbm 5y ago
    The question is whether the inflation exceeds interest. With index funds it generally doesn't, but I'm not sure about a savings account. Right now inflation easily beats a high interest savings account, but I'm not sure about 1996.
  - sokoloff 5y ago
    If you took $70K to pay taxes and spend every year, your million would slowly dwindle (CD rates were in the 5-6% range) At 3% inflation, that $70K/yr would lose half its purchasing value in the span of 24 years of your retirement. (It also would cease yielding $50-70K per year over that time as well, but that’s with the benefit of hindsight and you could lock in the rate with a longer term CD at retirement. That still leaves you with half the purchasing power though.) I don’t think savings accounts have ever been a reasonable way to invest the bulk of your money for future retirement.
    - MisterMower 5y ago
      You’re double counting that $70k. That’s interest on the $1M. Assuming rates stay at 7%, you’d get that $70k every year. You are correct that $70k wouldn’t go as far today due to inflation. But $70k per year was great money in 1996. Related, my dad and a buddy invested $10k in a CD that yielded 21% back in 1984 I think. If the rates are high enough CDs can be an excellent investment. They’re basically risk free. My bank is offering 0.6% currently. Real rates are very negative right now.
criddell 5y ago
The Treasury sells savings bonds that are at 7.12% right now. It's not the same thing as a savings account and you can't put a million dollars in, but you can still get a good interest rate on smaller amounts.
- gruez 5y ago
  >The Treasury sells savings bonds that are at 7.12% right now. source? yields top out at 2.05% right now. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...
  - criddell 5y ago
    https://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm https://treasurydirect.gov/indiv/research/indepth/ibonds/res...
    - hackingforfun 5y ago
      This is good to know. I wasn't aware of this website. However, you can't live off of 7.12% on a limit of $10k electronic bonds. I do wish savings accounts still had high interest rates and there wasn't so much incentive to invest in riskier assets like stocks.
  - deleted 5y ago
    [deleted]
- bigwavedave 5y ago
  "For the first six months you own it, the Series I bond we sell from November 2021 through April 2022 earns interest at an annual rate of 7.12 percent. A new rate will be set every six months based on this bond's fixed rate (0.00 percent) and on inflation." As someone who's never bought bonds before, how do I know the 7.12% won't change after the 6 months of the locked rate to the 0.00% and whatever pittance they decide to toss my way in an attempt to account for inflation? Sincere question, I don't know anything about anything.
spamizbad 5y ago
Okay, but now you're talking about using monetary policy to change American culture away from consumption and more towards saving. I'm not sure such change is politically sustainable.
- MisterMower 5y ago
  And what we have today (steeply negative real rates) is?

RussianCow 5y ago

> Except now you're paying 1-2 points more on a mortgage, student, and/or car loan. When interest rates go down, house prices tend to climb proportionately as more people take advantage of the lower mortgage rates. The same goes for cars to a lesser degree. So unless you buy a house at the very beginning of an interest rate transition (before the market has settled), the rate won't have as drastic an effect on your monthly payment as you're making it seem. You can also refinance later if you buy when rates are high, but you can't lower your principal. Also, interest rates affect other types of investments that people carry, such as retirement accounts. I don't know what the cumulative effect of all of this is, though, so I won't claim that your overall point is incorrect.

notahacker 5y ago
The house price rise adversely affects only the people buying their first home over the period interest rates are unusually low, which is obviously a small proportion of homeowners. If you've already paid your principal, it's unchanged, but the value of your asset has increased and monthly payments have gone down for those on variable rate mortgages. Even if you're a first time buyer affected by the price rise, you're better off with a high monthly payment to own a higher value house than a high monthly payment to transfer more interest to people who are wealthier than you.
imtringued 5y ago
>When interest rates go down, house prices tend to climb proportionately as more people take advantage of the lower mortgage rates. The real estate market is inefficient by design (look at Californian zoning). If you made it just as efficient as other consumer goods the problem would be gone. The problem isn't interest rates. It's the inability of the market to respond to them. In theory lower interest would just mean bigger and more dense construction as taller buildings become easier to finance. In practice people figured out that if they do "sound zoning" the increased amount of money will flow in a handful of pockets. The same is true with "sound money" where the value the economy produces grows as the population grows and becomes more productive while the amount of money stays the same and therefore benefits hoarders. The boring answer is a land value tax.

deleted 5y ago

[deleted]

Ericson2314 5y ago

I rarely see this spelled out, but in the more modern thinking, the working class are "creatures of flows", and the capitalist class are "creatures of stocks": i.e. the latter has meaningful assets, but the former subsists on wages. Obviously this is just an approximation, but "class is calculus" is a very useful mental model. By that ones, yes, the vast majority of people have negligible liquid savings. So the interest rate doesn't directly matter. Yet, the rich also "own the means of production" --- i.e. real assets, which also doesn't get inflated away. So it doesn't obviously matter for them. So what does it effect? The essential original Keynesian insight (what most of the factions since might agree on), is that since the point of owning things in Capitalism as money, even if you aren't holding cash, the interest rate effects how easy it is to invest, but also what investments are productive w.r.t doing nothing. This spooky shit is what is supposed to give monetary policy it's power. The differences in opinion in those factions come down to whether there is always enough to invest in, and access to credit is the limiting factor, or not. The Post-Keysnians would say relying on monetary policy alone is stupid, because (to distill in a parable) if no one can buy your stuff, it doesn't matter how cheap the factor is it's not worth it. That's when directly employing people (jobs guarantee) or handing out helicopter money can make a difference --- it's "root" demand, not some spooky shit effecting supply. Back to the calculus stuff, an interesting idea is https://en.wikipedia.org/wiki/Demurrage https://en.wikipedia.org/wiki/Demurrage. This is "inflation for stocks not flows". In short, we want money at rest to go bad, so rich people and instutions are forced to spend and we don't grind to a halt via the paradox of thrift. But we don't want people's wages to inflate away, because they certainly cannot bargain hard enough to get enough raise to keep up. Demurrage is wonderfully hamfisted in trying to do the former but not the latter --- money at rest becomes less money, money flows retain their purchasing power.

CuriousSkeptic 5y ago
So a monthly redistribution of, say, 10% of the money supply as public dividend would take care of that no?
- Ericson2314 5y ago
  > money supply Be careful this is a dangerous notion: with today's form of fiat concurrency there is net 0 money! > redistribution Likewise the "re" is sketchy. The state can pull money in, and take it out. Keeping those balanced because metal bullion skeuomorphisms is confusing. Our insistence that all money is debt is "double entry accounting fetishism" and also needlessly confusing. Distribution is good. "re" implies some sort of 0 sum, when the fact that the nominal need not be zero sum, and the future us uncertain and full of possibilities, and this is the true beauty of Capitalism we should embrace even as we are sanguine about all the terrible parts. The methodology in https://www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/lerner-function-finance.pdf https://www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/ler... is much better. The state can print money. The state can destroy money. The state can issue securities. The state should not subscribe to any theory a priori, but simply do the simplest thing the achieve agreed-upon goals, and avoid agreed-upon bad things. Theory can be developed afresh, and with far better empiricism, by basing it on actual experiments of the state trying out different levers and seeing what happens. Only a wealth of practical experience will overcome the highly politicized disputes. We will never achieve consensus while tiny gamut of the policy space is explored. ------- That is my long-winded way of saying I (think I agree) agree, but please find a different way to say it :).