Savers? What are we? Germans?
“What about the savers?” a plaintive cry goes out every time the Fed lowers interest rates or reassures anxious markets that rates will rise neither soon nor by much. But for all the anguish, the right answer to that question is a swift dose of reality that goes “What savers? We’re Americans, not Germans.”
Germany is known for its citizens’ love of plain vanilla bank accounts, their low rates of homeownership, and their limited interest in equity markets. But Americans have a much more varied palette of investments. The mythical American saver hurt badly by low interest rates is, by construction, someone with little debt and just enough money in savings accounts to live solely on interest income if only interest rates were high enough. However, this is an even less representative economic creature than the NYC cab driver who owns his own medallion, when the truth is that 75% of all cabbies make about 120 $ a day after renting the right to drive from a syndicate.
Americans don’t save. We spend and we borrow money to spend. And compared to other countries, more Americans also own a lot of stuff, and not just things like savings accounts, CDs, or safe deposit boxes. We own stuff like houses or stocks that tend to go up in value when interest rates go down. And we borrow a lot of money to own that house, with the unique privilege of locking-in rates on long-dated mortgages and refinancing that mortgage at will when interest rates go down. While low interest rates might mean less income from bank deposits or bonds, lower mortgage rates mean lower cash outflows, an effect that boosts the value of homes because prospective buyers face lower monthly carrying costs.
It is true that this does not apply to people that don’t own houses or stocks, but people like that don’t have the opportunity to save very much anyway, certainly not enough to make a difference if rates were to go up. Meanwhile, people who do have substantial sums in their savings accounts have a lot more money in other assets that benefit from a combination of strong growth and low interest rates.
In the bottom quintile of Americans as defined by annual household incomes, 47% have savings accounts with the median amount at 600 USD. Within the top quintile of US households, 94% have savings accounts, with the median amount at 16K USD. And while the bottom quintile has a median of 15K in stock ownership, 80K in home equity and 20K in retirement accounts, the top quintile has a median of 70K in stocks, 180K in home equity and 180K in retirement accounts.
The wealthy also get better financial advice at all points of the rate cycle, making them more likely to benefit from refinancing into something like a Jumbo Interest Only mortgage. Poorer Americans’ vehicles to do something similar are usually limited to something like transferring credit card balances to another bank for a six-month teaser rate.
Low levels of plain-vanilla savings also have a cultural component. Simply living on interest income does not command respect in modern America (and probably always has commanded less respect than in Europe). It marks one as old and over the hill. Work commands respect even if that work is nothing more than professional or amateur financial speculation. One of the most common questions directed to people in finance by their friends and relatives is “Should I refinance now or wait?” Single-stock 401K/IRA allocation advice is a close second. There may once have been a time when simply having a substantial income from bonds or dividend stocks made one as desirable as Mr. Darcy. But now it just means one is home watching Matlock reruns before heading out for the Early Bird Special.
This is the truth about America and that’s how it’s been for just about 40 years now. Clipping coupons or collecting interest income mostly went out of style around the same time that those booklets of green stamps did. It is not an accident that the percentage of US household income that was saved started falling exactly when interest rates peaked in the early 1980s, rather than going up to keep interest income constant. That decade saw policy shifts in housing markets and retirement policies that led to a much bigger role for housing and defined contribution pension plans as vehicles for asset growth. And once that happened, interest rates went from being a coupon to being a discount rate — the rate that determines the valuation of any asset that produces actual or imputed income flows. And asset prices typically rise as discount rates fall.
This argument might give some heft to the argument that low interest rates are leading to increased wealth inequality by boosting asset values, but the conclusion drawn from this argument is usually a perverse one. Hiking interest rates for no other reason than to reduce the inequality that results from different exposures to asset valuations would lead to increased income inequality because any resulting slowdown will put truly vulnerable people out of work.
Meanwhile, we do have mechanisms to reduce wealth inequality that don’t involve monetary policy — they’re called asset taxation and increased retirement spending. But that doesn’t seem to be a conversation those raising the standard for the beleaguered saver are ready to have right now.
