Robbing the Saver!
The U.S. Government, by the actions of the Federal Reserve Bank, is effecting one of the biggest robbery schemes on the planet by setting the Fed Funds Rate to effectively Zero for an extended period of time. Yes I know that this is being done in an attempt to stimulate the economy, but it is in effect a phantom tax on savers by changing the rules regarding the value of capital in mid stream. This "tax" is causing many savers to spend principal from their nest egg when their plan was to be spending 'earned' interest income. This has distorted the market value of capital. It is almost ridiculous to think that home buyers can pay interest rates of less than 4% for 30 year money. This can only happen because the taxpayer is providing the guarantee for these mortages since no rational private investor would commit money on these terms if their own capital was at risk. We seem to have learned nothing from the bursting of the Housing Bubble in 2007.
This action by the Federal Reserve Bank has been a major windfall for banks and a major cost to depositors in banks and investors in money market funds. It also has made the cost of borrowing for the U.S. Government much less than historical rates. The Fed Funds Rate has varied widely over the last several decades but this is the first time that the rate has been effectively zero for multiple years running. The Fed Funds rate during the period from 1992 to 2009 was in the 2-6% range with a nominal average of about 4%.
Impact on Savers
As of year end 2012, bank deposits were $5.4Trillion and money market funds holdings were $2.6Trillion so the impact on savers in these accounts are as follows:
Bank Deposts Money Markets
Total $5.4T $2.6T
Interest rate delta 4% 4%
Annual Interest $216B $104B
Interest 2009-2012 $864B $416B
So the total impact of the Federal Reserve monetary policy on savers with these types of accounts since the beginning of 2009 has been over 1.2 trillion dollars!
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