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?

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?

Menzies
Where are you getting 1.5-2.0% interest on CDs?

BruceK said:

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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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.

menzies said:

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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Lots of nearly zero rates on savings accounts. BOA Savings 0.01%, Money Market 0.03%.

Tunajoe said:

Menzies
Where are you getting 1.5-2.0% interest on CDs?

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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%.

Tunajoe said:

Menzies
Where are you getting 1.5-2.0% interest on CDs?

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Check the rates on bankrate.com.

1 year CDs are around 1.3%, 5 year around 2.25%.

Thanks guys!
Geez, Bank of America is like .25%

Tunajoe said:

Thanks guys!
Geez, Bank of America is like .25%

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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.

"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.

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.

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.

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

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.

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!

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.

"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").

So many Limbaughheads on this forum!

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.

Moonstruck said:

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.

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You cannot prove or predict that. In fact you do not know that. So it is only your opinion, right?

For those who think astronomical debt doesn't matter, nothing to worry about, just carry on, we're Chicken Littles, Limbaugh-heads - if that's true, then why don't we just write every citizen a check for $100k? That would be nifty, it'll sure stimulate the economy, it'll make people dance in the streets, and heck, debt is okay. Stop goofing around about a $15 minimum wage, let's just mandate a six figure income for every citizen. Yipee.

I'm being facetious of course, but my point is, at some point it's unsustainable and triggers a collapse. Greece is a perfect, present day example of unsustainable government debt and outlay. If $20 trillion is still just peachy, what is dangerous? $40 trillion? (That is not a rhetorical question, I'd like to know.)

My household finances would collapse in about five minutes if I bought a million dollar boat. Now granted, I can't print more money like the government or issue myself loans to buy more time, but this argument that the same ultimate logic doesn't apply micro/macro is nonsense. From Argentina to Greece economic history is littered with examples of the results of govt recklessness and irresponsibilty.

If debt is no big deal, then I want my Kadey Krogen tomorrow.

kthoennes said:

For those who think astronomical debt doesn't matter, nothing to worry about, just carry on, we're Chicken Littles, Limbaugh-heads - if that's true, then why don't we just write every citizen a check for $100k? That would be nifty, it'll sure stimulate the economy, it'll make people dance in the streets, and heck, debt is okay. Stop goofing around about a $15 minimum wage, let's just mandate a six figure income for every citizen. Yipee.

I'm being facetious of course, but my point is, at some point it's unsustainable and triggers a collapse. Greece is a perfect, present day example of unsustainable government debt and outlay. If $20 trillion is still just peachy, what is dangerous? $40 trillion? (That is not a rhetorical question, I'd like to know.)

My household finances would collapse in about five minutes if I bought a million dollar boat. Now granted, I can't print more money like the government or issue myself loans to buy more time, but this argument that the same ultimate logic doesn't apply micro/macro is nonsense. From Argentina to Greece economic history is littered with examples of the results of govt recklessness and irresponsibilty.

If debt is no big deal, then I want my Kadey Krogen tomorrow.

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I am not being snarky either, but you really need to understand the huge difference between micro and macro economics.

menzies said:

You cannot prove or predict that. In fact you do not know that. So it is only your opinion, right?

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Yes, that is my opinion. It seems obvious to me that when the cost to finance the debt is many times that of today, the only way to finance it is with more debt. Anyone want to buy some Greek government bonds?

So what is devastating about financing debt with more debt? First of all more debt adds to the cost of financing the debt. Increased interest rates on top of that means even more cost. Pretty soon there would have to be some painful things happen to the economy such as devaluing the currency to pay with cheaper dollars. I see nothing but pain to come from this huge debt we are building.

"I see nothing but pain to come from this huge debt we are building. "

I would not agree , the pain is HERE NOW!

The current US and world economic problems are all caused by a lack of growth (to service the debt) which will continue.

Deflation is back min Japan , the world leader in "Borrow your self rich" now going on its 3rd decade.

The time to stop spending on Bread and Circus handouts to be paid for by the generations yet to come,is long past.

WE are seeing the results of this insanity right now.

FF-Where is the pain now? And what does Japan's nearly 20 year problem with potential deflation mean for us? You seem to think that it presages some disaster for us. Economic growth seems to be moving along quite decently, the latest 2015 annualized rate is 3.9% growth, a bit higher than the 1945-2014 historical average of 3.25%. I assume from your many comments over time that you are in favor of some sort of "austerity" program, I assume significant cuts in spending, for the US economy. Can you share how you think this will work and how it will benefit the economy?

THD said:

... I assume from your many comments over time that you are in favor of some sort of "austerity" program, I assume significant cuts in spending, for the US economy. Can you share how you think this will work and how it will benefit the economy?

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Well for one thing if we drastically cut spending now, one benefit will be that our descendants won't curse us quite as badly for enslaving them with staggering debt. I see no one has still answered my question about how much debt is dangerous, if $20 trillion is just peachy. And if debt is good, why can't we all have a check for $100k right now?

"Austerity." That's hilarious. As if there were Greeks starving in the streets and widows and orphans living in cardboard boxes after Greek cuts. 20% tax increase on cigarettes. 20,000 public employees, formerly guaranteed a job for life, were supposed to have been laid off (at 60% pay for life) - but then of course Greece broke the IMF terms and hired back 15,000 of them. Means testing for public benefits. Retirement age raised to 65. A cap on retirement benefits for those who retire under 55 (!!). Oh the humanity.

KT-First-in answer to your question-there is no existing study that has determined what level of debt is dangerous. The amounts of public debt in relation to GDP varies wildly around the world. The effect of public debt on a country's economy also varies wildly dependent on the particular circumstances of each economy. There is no black line level at which debt becomes a bigger burden than an economy can bear. I think there is a small disconnect though on attitudes towards debt. No one, not even the most possibly liberal economist in the world, holds that debt is universally good, should be totally ignored, or holds that debt should just be increased without regard to any potential effects on an economy. The more generally true statement would be that most classical economist believe that debt is a fiscal tool just like any other fiscal took available to a country to manage its economy. And it should be used in the circumstances that economic history shows that it is effective. Can a country carry debt ad infintum ? Of course it can, just like you (or the vast majority of people) can carry debt personally all your life.

As to Greece, Greece is in no way comparable to our own, not is its debt in any way comparable to our own. The short version is that Greece is a member of the EU, cannot issue debt is its own currency, and is reliant on the other members of the EU to purchase tis debt. Yes, Greece has some systemic problems it must solve and it eventually will. But it the actions of the other members of the EU as much or more than Greece itself that caused a debt and liquidity crisis there.

On "austerity"- It is normally defined as steep cuts in spending accompanied by tax increases. The theory has been dubbed "Expansionary Austerity." The theory, first espoused by and based on research by, the Harvard economist Alberto Alesina, holds that steep spending cuts and corresponding tax increases create confidence by business in an economy and that the positive effects of that confidence will outweigh the negative effects of the spending cuts. Unfortunately, his original research has been to have been shown to be a bit flawed and the "austerity" experience since, primarily in Europe, has been shown not to work. The negative effects of the spending cuts have not been offset by increased revenues fro higher taxes or by increased economic growth. In fact, in virtually every country that has tired or been forced to try an "austerity program", the economy has actually regressed, not grown.

As to whether steep cuts now will benefit future generations, that is unknown. Are debt loads truly staggering? Well, not really right now. Will they be in the future? No one can really say, it depends on too many factors, growth of the economy, our own revenues and expenditures, the rest of the world economy. One thing that is known for sure is that steep cuts in the current, today, economy will create some very serious problems not the least of which is a very substantial decrease in economic growth. Incomes decrease, consumption decreases, tax revenues decrease. Net wealth of the populace decreases. I fail to see how any of that leads to a benefit to my future generations.

THD -- Thanks for that thoughtful (but I still think entirely wrong-thinking) response. Talk about thread creep, but worthwhile even so I think. I remember sitting in one of my PhD classes a few years ago -- public admin though, not economics, but we were talking about the intergenerational transfer of massive debt. Of course there has been some econ writing on that topic, but surprisingly not much, and it hadn't occurred to a lot of faculty to even consider that topic. Whether interest rates jump or not, debt service is already draining a huge amount away from discretionary spending. Economic preservation here and now, preservation of wealth and prosperity and stability here and now, at the expense of future generations. We run up debt but ultimately somebody else pays the bills -- and we think of that as doing a favor to them, that we'll bequeath lots of wealth to them, so foisting the debt upon them is justified. Ach, who cares, they'll just inflate themselves out of it, the burden will magically diminish over time, like pixie dust on a windy day, and meanwhile they'll get all our junk when we're dead. Here you go grandchild, you get (some fraction) of my stuff, so the debt is justifiably yours too. We're doing you a favor by preserving wealth and stability now at your expense in 2080.

And what an odd line of thinking -- because we (maybe) bequeath some wealth, we can saddle them with massive debt too and so then it's all okay, because citizens yet-unborn got all our stuff. So I'll tell my great grandchildren in 2080 that they shouldn't resent the trans-generational debt because they got (some of) my stuff. And funny you almost never hear Krugman talk about massive intergenerational opportunity costs of this current practice. The fact that we're bequeathing something to future generations no more justifies irresponsibility and self-centeredness and self-indulgence than it would have justified slavery because after all, the country was able to bequeath huge amounts of capital drawn from the labor of others. This is not much different in my opinion -- we are bequeathing assets to future generations ultimately purchased at their own expense, not ours, because we are unwilling and unable now to pay for it ourselves -- leeching again on the labor of others. It's like I buy myself an Escalade and when I die I bequeath the Escalade and the auto loan to my children, and we think that's somehow okay. (I know, we're back to the macro/micro distinction, and you and I don't agree on that either.)

KT-I agree on the thread creep but I enjoy the "conversation". I think the first disconnect is with the idea that we are "saddling" future generations with debt. For that to be the case, there has to be an assumption that (1) the debt service, the interest on the debt, will become so burdensome that it crowds out other needed spending or (2) the debt principal will ultimately have to be repaid to the bondholders. As to the first, are we "saddled" with the debt of the previous generations? The $18 Trillion is the accumulated debt since 1790. So far, I think we are handling it pretty well. Our debt service costs are about 7% of the current budget. As both the GDP and the US budget increase over time, those costs are forecast by the CBO to decrease to about 5.8% in 2025. Similarly, the CBO estimates about 3.5% GDP growth over the next ten years and estimates that the budget deficit will run at about 2.7% of GDP annually. By their estimate, the debt, as a % of GDP will decrease to about 77%, from its current just over 100%, And these projections are based on the law as it exists today, no changes are forecast. So, any action the US that results in (1) a lower deficit, or (2) greater GDP growth those %relationship will improve. Of course, knowing politicians as we all do, they can also totally screw it up.

As to the second point, repayment of principal, in effect we have never paid off the principal, not since the US assumed the Colonies' debt in 1790. The government has just rolled it over from year-to-year and added to it in most years. The fact is it, or very large portions of it, will never be paid off. Our bonds provide a necessary benchmark investment for international financial markets. That is a position we most certainly want to maintain.

Now, all that said, can the ability to issue debt be abused? or not used wisely? or can economic policies be implemented that end up required the issuance of debt to cover deficits? The answer to all of the above is yes.

As I mentioned back in the beginning, there is no "bright line" on debt in relation to GDP. I certainly hope we do not have to ever find out where that line is for the US. My hope hope, so far not rewarded, is for responsible economic leadership from both sides. Haven't much of that lately.

Good discussion here. To get back to the macro economics, the huge debt soaks up investment capital that could be used to grow the economy. Also, inflation devalues currency. So, working our way to making our massive debt smaller in relation to the GPD, we are also penalizing many sectors of the economy namely those on fixed incomes most of all.

The way to make the debt smaller in reality to GDP is to actually grow the economy in real numbers to that point. At the numbers we are growing at presently it will never happen.

There is one sure way to tell what amount of debt is dangerous. Just keep piling it on. It will happen.

Greece has one disadvantage as opposed to the US. Greece has no control over the Euro, and can't devalue that currency. They would have to go back to the Drachma which would be chaotic.