Over the course of the last few days I have been swamped with media calls to discuss the “deposit tax” on Cyprus account holders and the potential impact on global financial markets and, more importantly, the possibility of such an event occurring domestically. (See recent Fox Business Interview) So far, Cyprus has not been able to pass such a direct tax against depositors and has gone to Russia for a helping hand. However, the question of whether such an event could happen in the U.S. is a much more interesting point of discussion.
While I find it doubtful, but not totally improbable, that a direct deposit tax would be instituted by domestic banks – the issue of the Fed’s monetary policies, particularly since the last recession, has had a significant impact on “savers.” As we have discussed in the past individuals are not “investors” but rather “savers.” Therefore, in planning for retirement, of which there is a very finite and generally short time frame within which to achieve that objective, individuals must not only have a return ON their principal, to maintain purchasing power parity of those saved dollars, but also the return OF their principal so that it may be reinvested to generate further returns. One without the other, as has been see witnessed first hand over the last decade, is a losing proposition in the achievement of those retirement goals. As my friend Doug Short recently showed in his amazing commentary on working age demographics – the age group that should be seeing declines in employment, 65 and older, are actually showing increases. The destruction of principal since the turn of the century, which is far more disastrous than it appears when adjusted for inflation, has ended the dream of retirement for many individuals.
Beginning in 2008 the Federal Reserve began a consistent, and generally unprecedented, series of monetary actions specifically designed to artificially suppress interest rates. The belief is that by creating an artificially low interest rate environment, and boosting asset prices, that it will in turn spur economic growth and consumption. The chart below shows the Fed Funds Rate as compared to the 10-year treasury rate since 2007.
It is hard to believe that it was just 5 short years ago that the 10-year treasury was yielding above 4%. That was a return high enough to offset the rate of inflation. Today, with the Fed keeping overnight lending rates (Fed Funds Rate) at effectively zero – savings accounts are yielding roughly the same. This has in turn forced “savers”, by design, to move money out of the safety of personal savings accounts to chase higher rates of return. The next chart shows the declined of personal savings rates as interest rates were pushed lower.
Unfortunately, the drive for higher rates of return has sent individuals buying the most risky of yielding assets driving yields on “junk bonds” to record lows. This will, as it always has in the past, end badly once again.
However, the decline in personal savings rates is not solely due to the artificial suppression of interest rates. The Fed’s monetary programs have led to a rising cost of living, particularly in food and energy, which has chipped away at the purchasing power parity of the dollar.
This is not a recent monetary phenomenon but rather one that started more than 30 years ago. As interest rates have steadily been pushed lower by the Fed – the surge in accumulation of debt to offset the declines in savings and incomes has weakened economic prosperity. The chart below shows the decline in GDP, interest rates, savings and incomes. The offset to the declining standard of living has been access to credit.
Here is the point of this discussion. The continued drive by the Fed’s monetary policies to artificially suppress interest rates to create a negative interest rate environment for savers is a defacto “tax” on savings as shown in the chart below.
While the individuals in Cyprus have been faced with an outright extraction of capital from their accounts – U.S. savers have had their savings negatively impacted much more surreptitiously.
The problem is that the actions of by the Fed are having the opposite of the intended effect. If you refer back to the chart above you will see that economic growth, savings, and incomes have all declined as the Fed has continually driven rates lower. Lower interest rates have not the boon of economic prosperity as advertised. What history does show is that higher levels of personal savings are necessary to support productive investment which leads to economic growth rates.
What the manipulation of interest have historically led to is speculative financial bubbles. Whether it was the “tech bubble”, the “credit bubble” or the “housing bubble” the driver of each can be directly linked backed to the Fed’s monetary policy actions. With the Fed now going “all in” with current monetary easing programs it is highly likely that the next asset bubble is already well into formation – the resolution of which is not likely to be any kinder than the past two.
So, can the U.S. potentially have a direct tax on savings? It’s already happened.
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