How the End of Negative Interest Rates Affects Your Life

Then Federal Reserve Chairman Ben Bernanke listens as he testifies on Capitol Hill in Washington, before a Senate Joint Economic Committee hearing on "The Economic Outlook," on May 22, 2013. Manuel Balce Ceneta/AP Photo

Commentary

Most people under the age of 40 have no financial experience in a world of positive interest rates for most dates of maturity. Maybe that sounds geeky and like it doesn’t matter much. However, it’s actually a huge thing.

The financial situation that emerged after 2008—the Federal Reserve chairman from back then got a Nobel Prize recently for creating disaster—affected not only finance but culture and morals, and not only of the United States but the whole world.

In the past 60 days, everything has begun to change, because of the current Fed chairman’s attempt to avert an inflationary disaster. He began to raise rates once he realized that he had been trolled during the pandemic to delay his intention to patch up the Fed’s balance sheet and get the country back on the path to normalcy. His campaign began in earnest early in 2022, when he commenced the steepest increases in lending rates in Fed history.

We are just now seeing the fruits of this work. The 10-year interest rate as adjusted for inflation has just crossed back into a territory of positivity that we haven’t seen since 2007. During the intervening years, everything became very distorted. That’s now being rectified with huge implications for our lives and culture.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

Let’s think about it this way. Generations over hundreds and thousands of years have been acculturated to believe that good things come to those who wait. Sacrifice some now and you earn greater rewards later. Study hard for the exam and you get an A. Study hard for all exams and you graduate with honors. Graduate with honors and you have a better chance of getting a good-paying job.

So on it goes with the whole of life. The more you defer your consumption and indulgence in the here and now, and think about the future, the better off you will be. That presumption is naturally built into the financial system. The yield curve in normal times provides a higher payout in the future than it does in the present. It teaches us to defer consumption, forgoing whatever joy there is in the present, in favor of great reward down the line.

Again, in normal times, that means that savers win in the long run. Keep socking money away in the bank rather than taking that extra vacation, give it a few years, and you have a solid nest egg.

All of economics is supposed to work this way. The guy alone on the island who wants to catch more fish needs to spend a day or two making a net but in order to afford that time away from scooping up fish as he sees them, he needs to save up food to live on while he constructs his capital goods.

Saving is essential for the creation of capital goods. That’s why societies with cultures that emphasize deferred consumption get richer over time. They can afford to invest for the long term rather than living hand-to-mouth. During a period of great prosperity after World War II, the personal saving rate was typically in the double digits. This build-up of the pool of savings prepared the way for a long period of prosperity.

Aside from the phony-baloney infusions of cash during lockdowns, the trend in the past 15 years has been toward ever-lower savings rates, reaching the preposterous current level of 2.2 percent. That’s completely unsustainable if we want to see economic growth in the future.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

For a decade and a half, people who socked away money expecting a return have been punished, because interest rates have been negative for savers within a 10-year time frame. This has had huge implications for macroeconomics. It sent financial capital hunting for some return. It was found in the stock market and especially with speculative and highly leveraged companies. This created a kind of perpetual motion machine: money was making money simply because so much of it was pouring into such speculation. Dividends were out and the constant expectation of higher and higher valuations was in.

We need to appreciate just how unprecedented this situation was. The rule that good things come to those who wait was replaced with a new rule: Only suckers think about the future.

When then-Fed chief Ben Bernanke pushed his new policy, he was flipping all economic and financial logic on its head. Federal funds rates in the 1970s hit negative levels but that wasn’t due to a low-interest policy but rather high inflation. Since 2008, rates have been negative as a matter of policy even as inflation was relatively low, thus creating a crazy scenario that rewarded indulgence, irresponsibility, and immediate gratification along with all the tools necessary to realize that.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

By punishing savers and directing financial capital toward long-term projects in an artificial way, he was setting up a whole sector of the financial market for failure, plus misdirecting vast amounts of capital. The only way to avoid the consequences was essentially to keep that trick going as long as possible.

And it wasn’t just the United States. The zero-interest (really negative-interest) policies of the Fed were continued in Japan and adopted in the UK and EU, too, which meant an entire world of loose money all in the name of fueling economic growth. But that economic growth didn’t come. Instead, we got a wild speculative binge that lasted longer than anyone thought possible.

What people did to “save” money was actually something of an illusion. They dumped cash into their 401(k)s to avoid the taxman and that in turn was “invested” in stocks. But this savings and investment was really a pretend form of consumption: the buying of a financial stake in companies, not with the hope of their profitability, but with the expectation that others will do the same and valuations will rise.

In this case, the great distortion lasted a very long time, until finally inflation came home and started eating away at the value of the dollar in terms of its purchasing power for goods and services. This threatened economic stability at the most fundamental level.

Jerome Powell decided to do something about it. The UK and EU have followed the same reversal of policy, and even Japan is now on board. The results spell a fundamental turnaround in how people earn a return.

The most obvious first consequence has been to devastate the housing market. This all happened in a shockingly short period of time. It was only 18 months ago that homeowners all over the country had lines of people waiting to buy their homes, and why not? Lending rates were very low and buyers were flush with cash from several rounds of COVID stimulus.

But with the Fed’s reversal, the depletion of saved cash, plus the reduction of purchasing power, the cost of buying a home soared through the roof, causing a whole generation of would-be buyers to rethink their plans. The whole house of cards came crashing down in a fury. Today, millions are threatened with the possibility of being underwater again, just as they were in 2008.

We wonder how we ended up in a world where young people think nothing about the future and fritter away the hours looking at dopey videos on their phones rather than studying or working, and adults who preach long-term thinking and saving are punished for their old-world values; this is how. This is the world Bernanke created.

Despite all the pain of our moment in time, we really should welcome a return to normalcy. Already, people have started buying certificates of deposit again, just like my father did when he was young. Give it some time and you might be able to save money in the bank by using what we used to call a “savings account.” Imagine that! And it won’t be invested in the Nasdaq. It will be socked away earning a normal rate of return like the old days.

Much else will change, too, among which—gradually but relentlessly—the culture of short-term gratification and unsustainable financial speculation. This transition will be painful but it’s necessary if we are ever to get back to the path of genuine and sustainable economic growth and financial success over the long term.