Are You Listening J Powell?

On today show we are looking at whether increasing interest rates is effective at combatting inflation.

The theory is that when interest rates rise, people are encouraged to save money and benefit from the income that is available from those higher interest rates. This is particularly true if interest rates are higher than the rate of inflation, so that you get a real positive rate of return on interest-bearing instruments.

When I think back to the early 1980s, I can remember conversations with my mother about putting my savings into high-yield bonds that were government-backed. I did not truly understand the math behind nominal interest rates versus real interest rates at the time I was particularly impressed when in that one year, I earned 18% interest on a $10,000 bond. For a teenager that $1800 in interest was a lot of money.

In the late 1970’s the personal savings rate was around 9% and then in jumped in the early 1980’s to around 13%. These were the days when Pauli Volcker pushed Fed interest rates all the way up to 19%.

That steadily declined until it hit a low in 2005 of 1.4% and then another low again in 2007 of 1.9%.

We witnessed a bit of a recovery in personal savings through the 2010’s to about 8.5% in 2019. Then with all of the stimulus money during the pandemic, personal savings jumped to 32% in 2020, before falling down to 12%, and then spiked again to 26% in the second wave of the pandemic.

Personal savings rates are now down to 3.2% after nearly two years of rising interest rates. The increase in interest rates is not having the desired effect. People are not saving more. Not only that, credit card balances are through the roof. Revolving consumer credit increased to nearly $1.1T in the first quarter, up from $727B in April of 2021. This supposedly strong economy is being funded by credit card debt. People are running out of credit.

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Host: Victor Menasce

email: [email protected]