These Are Odd Times for Savers

08.10.08 | Money Management | 0 Comments | by Fred Siegmund

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America has relatively low interest rates at a time when banks and credit intermediaries are curtailing loans and cutting bank lending. Low interest rates do not normally go with less borrowing. Low interest rates, or falling interest rates, should increase borrowing and lending whereas higher interest rates decrease borrowing and lending.

Low interest rates are part of the Federal Reserve Bank's current policy to keep up spending and avoid a recession at the same time home mortgage foreclosures help limit lending since defaulters restrict the banking sector's loanable funds.

As savers, we need borrowers or interest rates would be zero. In general, the fewer the borrowers the lower the interest rate, but we should worry too about the new mix of loans.

Banks are having trouble finding enough business and industry borrowers. In the search for new borrowers they keep turning to more consumer lending and promote the use of consumer spending and consumer debt with heavy advertising.

A recent New York Times article entitled "Given a Shovel, Americans Dig Deeper Into Debt" quotes an advertising executive. "One of the tricks in the credit card business is that people have an inherent guilt with spending." … "What you want is to have people feel good about their purchasing."

The article also reported from Federal Reserve Bank data showing the percentage of disposable income used to pay debt keeps going up year by year reaching 14.5 percent in 2007. That is one piece of data and one sign of the rising consumer debt among many signs including personal bankruptcies.

The growing reliance on consumer debt and consumption spending makes it harder for the Federal Reserve Bank to maintain the economy. Sure, they can lower interest rates, but credit card interest rates continue above 20 percent for millions of consumers.

The lower interest rate policy applies primarily to business loans, but essential consumer spending depends more on people's income rather than interest rates.

America must keep up consumption spending to prevent a recession but threats to continued consumption grow with the numbers who earn stagnate wages, or who are unable to pay credit card debts, or file for bankruptcy, or have reached credit limits. Defaults limited new loans.

Government spending and tax cuts will stimulate consumer spending, but government, especially the federal government, are already running big deficits.

These are tough times for savers with interest rates low and limited ability for the Federal Reserve Bank to stimulate the economy. As savers we are in the awkward position of hoping others will go on buying, buying, buying so that we can save.

As savers, we can't change the rest of the world, but we can avoid get rich schemes, pay our monthly credit card balance and do our best to avoid paying interest and fees even as we earn less from our savings.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

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