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Old 09-18-2015, 08:26 PM   #1
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Zero US Interest Rates

Official interest rates in Australia have been stuck at 2% for some time, it`s unclear where they will go, my guess is that`s bottom, maybe not. But, how does the zero interest rate in the USA work?
If you have $ in a bank a/c do you really get no interest? If you pay account keeping fees are you paying the bank to hold your money? At what approximate rate (s) do banks lend (I appreciate it will vary with the type of loan, security, etc). What effect has the removal of bank savings interest had on savings, and chasing other forms of investment, risky or otherwise?
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Old 09-18-2015, 10:01 PM   #2
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What zero interest rate are you talking about?

The central bank rate is 0.25, that is the rates banks can borrow at.

However they can charge higher on loans and pay higher on deposits.

Mortgages are around 3-4% with good credit.

CD return rates 1.5 - 2.0%.

Check your source. There are no zero rates?
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Old 09-18-2015, 10:19 PM   #3
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Menzies
Where are you getting 1.5-2.0% interest on CDs?
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Old 09-18-2015, 10:23 PM   #4
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Official interest rates in Australia have been stuck at 2% for some time, it`s unclear where they will go, my guess is that`s bottom, maybe not. But, how does the zero interest rate in the USA work?
If you have $ in a bank a/c do you really get no interest? If you pay account keeping fees are you paying the bank to hold your money? At what approximate rate (s) do banks lend (I appreciate it will vary with the type of loan, security, etc). What effect has the removal of bank savings interest had on savings, and chasing other forms of investment, risky or otherwise?
Although basic bank savings account are at nearly 0%, there are alternatives up to 1% and even as high as 1.5%. Checking accounts have traditionally not earned much interest.

Typically with certain amounts in the bank or direct deposits you don't pay bank fees unless special transactions. So basically the bank is covering their costs with what they can earn on your money.

While the interest rates on deposits are near 0%, the inflation rate has been under 1% for 2014 and 2015. You lose far less in value at 0% interest in 1% inflation than 5% interest in 9% inflation.

As to impact on other investments, the biggest impact is keeping people from moving out of other investments. It doesn't motivate small investors who wouldn't invest otherwise to suddenly do so, especially in this period of lack of confidence. As to large investors it shifts some investment but there are so many other factors at play, it's hard to tell the impact of the low interest rates. In theory it encourages investments in equities. But this is major and institutional investors, not the average individual. Middle class has less to invest than they did and are not comfortable at all gambling with what they have. That's one of the problems is that the impact on middle class vs. wealthy is very different and investing in savings accounts or money markets was never attractive to the wealthy.

Mortgage rates are climbing a bit now but are between 3 and 4%. I just checked Chase and their auto loan rates are between 2 and 3%. Bank of America is the same. This is an unusual situation where short term borrowing is less expensive than long term.
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Old 09-18-2015, 10:24 PM   #5
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What zero interest rate are you talking about?

The central bank rate is 0.25, that is the rates banks can borrow at.

However they can charge higher on loans and pay higher on deposits.

Mortgages are around 3-4% with good credit.

CD return rates 1.5 - 2.0%.

Check your source. There are no zero rates?
Lots of nearly zero rates on savings accounts. BOA Savings 0.01%, Money Market 0.03%.
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Old 09-18-2015, 10:30 PM   #6
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Menzies
Where are you getting 1.5-2.0% interest on CDs?
Capital One, Synchrony, First Internet Bank of Indiana, CIT at 2.25%. State Farm at 2.1%, Discover at 2%. Quite a few at 1.5% or higher on 3 to 5 year CD's. 1 Year max around 1.25%, two year from 1-1.5%.
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Old 09-18-2015, 10:35 PM   #7
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Menzies
Where are you getting 1.5-2.0% interest on CDs?

Check the rates on bankrate.com.

1 year CDs are around 1.3%, 5 year around 2.25%.
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Old 09-19-2015, 02:06 AM   #8
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Thanks guys!
Geez, Bank of America is like .25%
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Old 09-19-2015, 11:06 AM   #9
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Thanks guys!
Geez, Bank of America is like .25%
You may notice those on the high side don't make their primary income from home mortgages or bank accounts. They do it from credit cards and, in one case, insurance. When you're issuing credit cards with rates from 14% to 29% then 1.5-2% cd's are possible.
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Old 09-19-2015, 01:33 PM   #10
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"When you're issuing credit cards with rates from 14% to 29% then 1.5-2% cd's are possible.?|"

Especially if every dollar in a CD lets you lend 40-100 dollars at a good rate.

They dont call em BANKSTERS for nothing.
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Old 09-19-2015, 04:50 PM   #11
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The zero percent interest rate set by the U.S. Federal Reserve System is the overnight rate the Fed charges banks when they have to borrow money from the Fed on a short term basis for liquidity. It ends up being a benchmark banks use for setting all kinds of other interest rates. No one in the U.S. Gets a zero percent interest rate except banks.

Much more important than the Fed setting interest rates for banks, are its open market operations which controls the supply of money by buying and selling government bonds. When they buy bonds, they inject money into the money supply. When the supply of money is plentiful, interest rates fall. When the Fed sells bonds, they take money out of circulation and interest rates rise.

In short, there is plenty of money in the money supply and interest rates are low. That is what Quantitative Easing was all about.
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Old 09-25-2015, 10:18 AM   #12
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The elephant in this room is the nearly 20 trillion dollar US national debt. With the bloated national debt it behooves the government to keep interest rates at historical lows. Quite simply, if interest rates rise much it will have a devastating effect on our ability to finance the huge debt. On the other hand, the government will have to pay whatever interest it takes to sell our government bonds and T bills to keep the debt financed. As long as those instruments can be sold at low interest rates the interest rates will stay low.

Just think of what it would do to the US budget if interest rates went to 6 or even 10%. That is not out of the realm of possiblilty.

Also the low interest rates penalize savers. Older people who have saved all their lives through CDs and other similar instruments have depended on the interest on those savings for their retirement. The result of the low interest rates means they are living on mostly principle. This means that even their low interest income is dwindling. With inflation above their interest income they are hit with a double whammy.
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Old 09-25-2015, 01:13 PM   #13
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Don-good points on the interest rate effects, especially the effect on many der savers. However, the government does have some means of mitigating the effects of interest rate rises when issuing bonds. First, bonds already issued, i.e. the existing debt, generally carry a fixed rate that will not change as current interest rates change (there are some "Inflation protected" bonds but they are a very small portion of US Bonds outstanding). As the rate rises, the Treasury can mitigate the effects by adjusting the term of the bonds issued currently. The Treasury issues, 30 day, 60 day, 2 year, 5 year, 15 year and 30 year bonds. Not all issues actually become a component of the debt. They can choose the term based on their assessment of future interest rate movement thus mitigating the effects of interest rate fluctuations.

One note on "paying down" the debt. I think many do not understand just how it works. When the government does run a surplus, it does not just take the money and use it all to pay off bonds, thus paying down the debt. What happens is that the Treasury does not issue new bonds that are a debt component and it pays off the bond issues as they come due. The market would react very angrily if the US just started paying off bond issues before maturity. As a for instance, during the Clinton Administration when the US ran a surplus, the Treasury suspended sales of 30 year bonds for about three years only issuing 15 year bonds as the longest term. There was such a fuss from institutional investors that they had to start issuing the 30 year terms bonds again. The point being, paying down the debt will occur over an extended period of time.

As to small investors, state and local jurisdictions did start redeeming long term public bond issues early as interest rates fell. They issued new bonds at lower interest rates to pay off the older, higher rate bonds. This hurt many small investors. For example, my mother in law had an account with about 50% state and local road and education bonds, most with 20 year terms and with a good mix of maturities. Most carried interest rates over 7%. Over half the issues in her portfolio ended up being redeemed and it cut her cash yield by over 50%. That definitely did have an effect on her
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Old 09-25-2015, 06:15 PM   #14
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And here I thought only crazy Paul Krugman and a few other loonies (and I don't mean Canadians) thought that restraining or paying off massive, staggering, astronomical debt was a bad thing. All I know is that the bank spent more on postage to mail me my last interest earnings statement than the interest was worth. I don't swallow the near zero inflation estimates lately either -- there again, there's massive pressure to keep those estimates low for all kinds of reasons, from indexed pension and Social Security benefits to indexed contract payments to public assistance rates. I'll resist the temptation to buy a tinfoil hat but it seems to me we'll turn into Greece eventually, it's just taking us (US) much longer. We just have a much longer glide path to ultimate disaster. Hmm, maybe I'll buy that Doomsday survival sailboat covered with solar panels after all. I do so prefer my big gas guzzling 454's though and my fiberglass condo on the water.
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Old 09-25-2015, 10:13 PM   #15
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I see it as a numbers ponzi scheme set up by the current Fed. Keep the interest low while the debt soars. The chickens won't come home to roost until after we're out of office. Then we blame it on the new, current administration. Nothing bad is ever our fault!
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Old 09-26-2015, 02:47 AM   #16
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KT-you may think that inflation numbers are "fudged" or that pressure is ut on to do so, but it just ain't so. There are too many non-governmental, independent entities that make the same calculations. All the information that goes into the calculation is freely available. If there were big disparities, you would hear about them.

As to the debt before you knock a Nobel laureate economist as "loony" you should do a bit of research. There is no economist that advocates paying off the US debt. The US had debt since it first took on the debt of the thirteen colonies in 1790. There has only been one time the US was debt free- and that only lasted about a week. In 1838 when the government auctioned off al the western lands stolen from Native Americans. There always has been debt and there will always be debt. Were the US to pay off all its debt, and fail to issue more, the world economy would pretty quickly become chaotic. Like it or not, US debt has become the investment currency of the world. That said, are there levels of debt that are damaging to the economy? There are, but no one has yet shown what that specific level is, as a % of GDP, the standard measure of an economy's debt. So, there is no requirement that debt be extinguished, nor is there any substantial economic reason to do so. The trick is to dealing with our debt as it is now, is to have an economic growth rate that is greater than the growth rate of the debt. Thus debt becomes an ever decreasing % of the economy as measured by the GDP.

As to concerns that the US may go down the same road as Greece, that is simply a ridiculous comparison. There is simply no similarity between Greece's economic issues and our own. So, have no fears on that score.
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Old 09-26-2015, 06:34 AM   #17
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"The elephant in this room is the nearly 20 trillion dollar US national debt."

The LIE continues , the total debt , including "off budget" debt is actually about 16 x to 20x higher.

"Unfunded liabilities" is the term for what we as a nation are on the hook for.

Until we default all will be paid , or the money to pay it will be borrowed visibly.

A default , going bankrupt ,is a controlled process.

Inflating away the debt , (most govs of the world choice,) usually leads to the gov failing.

That is a positive for govs as useless things like a Constitution can be discarded (for the" emergency").
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Old 09-26-2015, 01:22 PM   #18
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So many Limbaughheads on this forum!
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Old 09-27-2015, 11:32 AM   #19
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THD, while a rise in interest rates would affect the cost to finance the national debt with less immediate impact the long term effects will be devastating. I understand rolling maturities, rates, and terms of bonds. We do a similar thing in reverse for our interest bearing investments in the insurance company. It helps even out the returns and protect from the variables in the market. However as those mature we are going to more short term bonds because the market is at historical low returns. We have an audit committee meeting next Friday to go over that strategy as well as other things

We have accumulated so much national debt that there will be a day of reckoning.
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Old 09-27-2015, 02:08 PM   #20
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THD, while a rise in interest rates would affect the cost to finance the national debt with less immediate impact the long term effects will be devastating.
You cannot prove or predict that. In fact you do not know that. So it is only your opinion, right?
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