How long has it been since you earned any money by saving? You definitely can’t include the 1 percent interest you earned last year, which was taxed at 15 or 25 percent by the federal government and 5 to 10 percent by your state. No, the interest that you think you made lost ground to the over 2 percent inflation that boosted prices last year.
Honestly, it’s been years since you’ve actually saved any money. What your savings accounts have been doing over the last few years is losing money.
If you are surprised by this, then it may shock you to learn that your own government is responsible for repressing your savings.
Financial repression is an old term that goes back several decades. It refers to tactics that central banks and governments implement to alleviate sovereign debt. In our recent era, it has been in the form of artificially low interest rates.
It’s an interesting financial maneuver. By artificially lowering interest rates, governments can restructure debt at low costs, spend cheaply and hopefully, grow the economy fast enough to avoid future economic repercussions.
There is a financial victim in this type of policy: savers. With interest rates returning losses, savers can’t earn a reasonable return on their money. That means that a large portion of private wealth also erodes.
Interestingly, the government and central banks never try and sell financial repression on the merits of government needing debt. That’s a sure way to aggravate voters. However, this isn’t to say that these policies don’t have marketing.
Financial repression is often touted as a way to provide cheap credit to companies. That credit is to be used for buying capital. The purchasing of new capital creates jobs and boost consumer markets.
However, this recession has proven that this reasoning doesn’t hold water. According to HBR, companies are currently sitting on nearly $2.8 trillion in cash over the last 24 months. Low borrowing rates have actually created a situation where companies have no impetus to invest or pay down their own debt. It’s not a war chest, it’s a vault.
Artificially low interest rates are definitely hurting savers and unless you are buying I-Bonds, it’s wreaking havoc on your emergency savings. However, I’m curious as to whether savers are simply taking their medicine or seeking out riskier returns. Today’s mega-financial universe has any number of financial products, safe or risky. Still, more people may be induced to spend.
We are definitely living in an era of financial repression, but I’m not sure it matters as much to savers anymore.