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Savers or Borrowers?

Apr 5, 2011 • Businesses, Economic Debates, Financial Markets, Government, Households, Money and Monetary Policy, Thinking Economically • 144 Views    No Comments

In 1987, a $100 savings account would have earned close to $9 in interest. In 2005, $3.75 or so. Now, maybe 47 cents?

The WSJ, had a good article describing how savers are suffering. The retirees who expected to depend on interest income until they died have much less. As one retiree said, “At one point we thought we’d have a little money to leave our kids. That ain’t gonna happen.”

The Economic Lesson

Monetary policy decisions force us to make trade-offs.

When the Fed started targeting lower interest rates, its goal was to jump-start the economy. With a 0-.25% fed funds rate, banks could borrow from each other for almost nothing and then have inexpensive money to lend. Lower interest rates, they hoped, would encourage businesses to borrow, expand and hire.

If the opportunity cost (the sacrificed alternative), though, was higher rates for retirees who live on their savings, then should the Congress implement deficit reduction through Social Security and Medicare?  

 

 

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