Savers, Save Your Breath

01/26/2012 9:18 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

There’s very little overlap between those hurt by low interest rates and those truly in need, writes MoneyShow.com senior editor Igor Greenwald.

They’re weeping for the soon-to-be impoverished widows and orphans again, after the Federal Reserve extended its pledge to keep interest rates “exceptionally low” for some 18 months, through the end of 2014.

A New Jersey retiree complains to Reuters that she feels as if she’s “being punished,” in a story about how “US savers suffer” as a result of “financial repression.”

Down in Texas, an economist argues that the Fed’s rate freeze is not just “crushing retirees” but also encouraging deficit spending in Washington and even delaying the housing rebound.

Fed Chairman Ben Bernanke was asked to talk savers off a ledge not once but twice during Wednesday’s press conference. One questioner tied Republican criticism of Bernanke and the Fed to the plight of “Republican primary voters on fixed incomes.”

The Fed chairman explained that he feels the pain of such unfortunates, but that “when the economy goes into a very weak situation, low interest rates are needed to help restore the economy to something closer to full employment and to increase growth, and that in turn will lead ultimately to higher returns across all assets for savers and investors.”

Half an hour later, he was asked about the Fed’s 2% inflation target and “people out there who are going to say the Federal Reserve has finally just admitted it: Their policy is to destroy 2% of the value of my dollars every year.”

Bernanke pointed out that the target’s hardly new, and is also widely used overseas to keep deflation at bay. “The argument,” he continued, “is not a very good one unless you’re one of those people who does their lifetime saving in the mattress.”

The more conventional depositors and investors collect interest and returns sufficient to offset inflation, at least in the long run, Bernanke added.

That’s an artful dodge, of course. In the long run, as Keynes observed, we’re all dead. And in the here and now inflation is at 3% and rates on a one-year CD top out at 1%.

And you know what? It hardly matters. Because the people who really could most use some extra interest income and the people with sufficient assets to generate the same are by-and-large non-overlapping groups. The pinched retirees are simply the acceptable public face for the demographic with the most to lose from low rates: your friendly neighborhood multi-millionaire.

Interest and dividends contributed a big fat nothing to the income of the 25% of American households with least wealth in 2009, according to a Fed study. The next 50% of Americans derived 0.8% of their income from that source. The number rose to 2.2% for those wealthier than 75% of their countrymen but not quite wealthy enough for the top 10%.

The top 10% collected dividends and interest equal to 12.2% of their income, but that sample is seriously skewed by the top 0.01%. Like Mitt Romney, for example, who earned no wages, salaries, or tips but $3,295,727 in taxable interest income for 2010.

Whereas, according to the Fed, the median value of a US household’s bank accounts was $4,000 in 2009.

The 16% of families with CDs invested a median of $20,000. Slightly more than half of all households had retirement account, with a median value of $48,000. For the typical American family, low interest rates are way down on the list of pressing problems.

They’re a bigger deal for the top 1%, which owned 60% of all financial securities, 39% of the assets in trusts, and 38% of stocks and mutual funds in 2007. The top 1% controlled 42.7% of the nation’s financial wealth that year, and the next-richest 19% held another 50.3%…leaving 7% for the other 80% of Americans.

Those other 80%—in fact, more like the bottom 99.9%—rely overwhelmingly on another source of income: employee compensation. This accounted for 64% of Americans’ personal income in November.

Government benefits, which also ultimately depend on the tax revenue generated by economic growth, delivered another 18% of the pie. Personal interest income was at 7.5%, and of course much of that went to the fabulously wealthy.

Lower borrowing costs have an indisputable and direct effect on jobs. Much of the investment that creates jobs is financed with debt, and cheaper debt improves a project’s projected returns. An new production line that might be unprofitable if the cost of capital is 7% might be perfectly sensible if that cost drops to 4%, especially if low rates are also stimulating demand.

The way to help widows, orphans, and retirees is to build a thriving economy that can support them, with a government that can afford to do its part. That’s also the best way to help the 13 million unemployed, most of whom are dealing with much bigger problems than the shortchanged savers.

The Romneys of this world are doing fine. They should stop using retirees as human shields.

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