Higgs: Immiseration of Personal Interest Income
"Fed’s policy of acting to hold interest rates well below free-market rates in recent years has had the effect of greatly diminishing the earnings of people who rely on interest income. Such people include especially many retirees who do not wish to hold risky assets with substantial variability of earnings. In the past, many retired people have held the bulk of their wealth in the form of bank certificates of deposit, bonds, and bond-heavy mutual funds, hoping that their incomes would be secure and predictable when they were no longer working. The Fed’s actions in recent years have taken a heavy toll on such people’s earnings."
MP: Bob refers to a graph showing personal interest income in nominal terms, displays a graph of the PCE price index, and discusses how the effects of reduced personal interest income would be even more dramatic if adjusted for inflation. The chart above combines those two charts into one, and displays real personal interest income adjusted for inflation, which supports Bob's conclusions that: a) real personal interest income has dropped by more than a third since 2008, from $1.4 trillion to $973 billion, and b) the flow of personal interest income today at $973 billion has only about 77% of the purchasing power of personal interest income in 2000 ($1.26 trillion).
"It is plain that the Fed is acting in a way that impoverishes a definite class of persons—those heavily dependent on interest earnings for their income—and, moreover, that a policy of keeping interest rates on low-risk assets near zero must eventually wipe out such persons’ incomes completely. In that event, people who worked and saved over a working lifetime, taking personal responsibility for guaranteeing their self-sufficiency during their elderly, nonworking years, will be able to survive only at the mercy of the providers of private and public charity.
The link between the Fed’s policies and this undeniable effect is too direct and too obvious for anyone, including the Fed’s managers, to overlook or misunderstand. We may only conclude, then, that the Fed’s managers either: 1) want to wipe out the retirees and others who rely heavily on interest earnings, or 2) consider these people’s immiseration an acceptable price to pay in order to achieve other objectives. Can any decent person approve such policy making?"
HT: Warren Smith