Interest income loss from rate cuts

Word’s getting around, from CS:

The side-effect of the Fed’s near-zero interest medicine – the collapse in personal interest income over the last few years. The decline in interest income actually dwarfs estimates of debt service savings. Exhibit 2 compares the evolution of household debt service costs and personal interest income. Both aggregates peaked around $1.4 trn at roughly the same time – the middle of 2008. According to our analysis of Federal Reserve figures, total debt service – which includes mortgage and consumer servicing costs – is down $206bn from the peak. The contraction in interest income amounts to roughly $407bn from its peak, more than double the windfall from lower debt service.

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22 Responses to Interest income loss from rate cuts

  1. Monica Smith says:

    Keep in mind that 30 year Treasuries were returning 8.1% in 1991. That was the bench mark. Other investments, even rental housing had to “earn” more to be worth doing. 9% was the rule of thumb, I think. By 2000, the FED had cut rates so far that interest on one year CDs, which had been about 6% in the mid nineties, were returning about half that. So retirees who relied on Social Security ($10,000 a year) and had a nest egg of $100,000 in guaranteed savings, saw an income of $16,000 drop to $12,000 and then less. It’s that drop which made them marks for promises of higher returns if they put their money in mortgage instruments, etc. that were being touted at the bridge club and the church social.
    Greenspan really was the evil architect. In 1992 he said the equity Americans had accumulated in their homes needed to be “liberated for the market.” In about 2000 he warned that the federal surplus and paying down the national debt was a “concern” and prompted the tax rate reductions that constrained revenues at all levels. It’s my sense that he saw pulling the levers of the economy as a game and a challenge to see what would have the greatest effect. What I think we should have learned is that our system of exchange and trade is easy to derail and very hard to get going again. Jiggling prices is particularly tricky because increasing prices prompt people to spend and falling prices prompt people to hold off. If they think something they need will cost more later, they’ll buy it now; if they think it will cost less, they’ll wait. That’s why, if a house isn’t selling at the price asked, one has to raise the price. People do act on their expectations more than their experience.
    The banksters are right that there’s uncertainty about. But, that’s not what’s making people reluctant. What’s got people spooked is that the banksters have proved untrustworthy and there’s nothing uncertain about that.
    For decades ordinary folk were denied loans or charged unreasonable amounts because their “credit score” wasn’t right. Then it turned out that people like Romney borrowed billions on a hand-shake, ran companies into the ground and left workers to clean up the mess. And now the money bags want to put a financial engineer in charge of the country.
    So, let’s talk about vaginas and visas for migrants. That people don’t understand money is not a happenstance.

    Reply

    WARREN MOSLER Reply:

    hap·pen·stance noun \ˈha-pən-ˌstan(t)s, ˈha-pəm-\

    Definition of HAPPENSTANCE

    : a circumstance especially that is due to chance
    — hap·pen·stance adjective

    Reply

  2. RonT says:

    Cannot QE still be expansionary due to distributional effects?

    Yes, it screws the savers more than it helps the people with underwater mortgages, but savers don’t spend the money anyway and mortgage relief, even if modest, is extremely helpful.

    Reply

    Crake Reply:

    @RonT,

    I think banks are being resistant to lowering the rates of existing loans that are making payments. So unless you have top credit and can afford the re-finance costs, you cannot enjoy the lower rates.

    Reply

    WARREN MOSLER Reply:

    and at the same time they are being criticized for having been to lax and caused the crisis.

    Reply

    WARREN MOSLER Reply:

    possible, but the data tells me otherwise.

    Reply

  3. Dave Begotka says:

    When times are bad its easer and more likley for the masses to see the ponzi………

    Reply

  4. Crake says:

    Warren, this discussion of how QE, and lower rates, has been deflationary because of the lost interest income, hit home today in how clueless actually policy makers are. Lacy Hunt, an ex Fed board member, was on radio show today in Houston, and I, a lay person, was able to ask him simple questions that caused him to contradict his whole point.

    I am wondering if you find this an exception to how they think or is it really the norm:

    He started off, after the host asked him to grade Fed policy of late, saying that he would give the Fed an F over the last few years because QE has caused so much inflation that it has eroded the confidence in consumers and instead of helping has been the main problem with our economy now. He said it caused inflation by the massive reserves that were created as the Fed expanded its balance sheet.

    I called and said I was confused how reserves could cause inflation since reserves are not money. The only way I could see even a remote hint at inflationary pressure would be if reserves caused lending to increase to an extent that demand increased faster than supply but my question was, isn’t it the opposite, by that I mean banks are not reserve constrained in their lending, literally at the end of the day, if a commercial bank’s increased lending caused it to be short reserves, it would have to borrow them from another bank with excess reserves or if it did not do that, the Fed would supply the reserves, creating them on its own, and charge the bank a automatic fee on that reserve loan, therefore a bank is never reserve constrained and therefore an increase in reserves does not flow to more lending as he claimed.

    He did not answer directly, instead he talked about money multipliers and how excess reserves caused banks to lower their lending requirements and this led to more consumption lending, which leads to unproductive loans that tend to not be repaid, etc. I then asked if that is actually happening “because all the reports I have seen over the last few years point to an opposite reality. Most of the QE criticism is that it does not lead to more lending, it is pushing on a string as they say and reports are that banks have cleaned-up their own balance sheets and have been more restrictive in lending, not less as you just said.” I asked, so you are saying all these reports are wrong and that increased lending, with a trend of lax lending requirements, has been happening instead?

    He said he could not hear me, so the host iterated what I asked, saying that “press reports are that banks are not lending much but you just said that QE lead to an increase in lending and more lax lending requirements, so the press reports are wrong?” Hunt, contradicting himself in my opinion, said those reports are correct over the last few years but right now lending is starting to pick-up “modestly” passively stressing modestly. To me it seems he admitted that all his inflationary claims were built on assumptions that are not taking place, yet the way he answered the host, I really do not think it even registered with him that his hypothesis was counter to that reality he acknowledged.

    The host then asked him what keeps him up at night. His answers was the increased US government debt. He said it will not happen tomorrow but certainly in just a few years, all market confidence will be lost, and the US government will not be able to borrow anything and will have to rely completely on tax revenue to operate and when that happens we will be forced to cut government spending 50% or more over-night.

    Reply

    Sidchem Reply:

    @Crake, The debt vigilantes must be the wet dream of Lacy Hunt.

    Reply

    WARREN MOSLER Reply:

    norm
    :(

    Reply

    Greg Reply:

    @Crake,

    “The host then asked him what keeps him up at night. His answers was the increased US government debt. He said it will not happen tomorrow but certainly in just a few years, all market confidence will be lost, and the US government will not be able to borrow anything and will have to rely completely on tax revenue to operate and when that happens we will be forced to cut government spending 50% or more over-night.”

    To which I would then say, “So a cut in govt spending of over 50% would be bad?? Isnt this exactly what the republicans are pushing for, massive cuts in govt spending? Im glad you at least acknowledge that govt spending is necessary to keep our GDP afloat!! Thanks!!”

    Reply

    Crake Reply:

    @Greg,

    I was off the phone at that point : ) The host agreed with Hunt and said it is very dire situation and would should address it now before it gets to that point.

    But take note, this is the exact same host who hosted Warren Mosler (on my recommendation) on the same radio show about 6 months ago and after Warren’s talk ended (and as you can imagine Warren’s message was the complete opposite), that same host said how true everything Warren said was and that Warren should be our president and his assistant scream I would support that. So many of these hosts are running in all kinds of different directions at the same time.

    Reply

    WARREN MOSLER Reply:

    as in i know what they are, i just forget whether it begins with a w or an h

  5. ian says:

    What date was the Credit Suisse note written? I am trying to find the full note.
    Thanks for the post

    Reply

  6. mike norman says:

    So how does this “square” with your prior post about Saudi production indicating strong demand? Don’t you need income to have strong demand? If central banks are robbing income via rate cuts, what’s going on?

    Reply

    WARREN MOSLER Reply:

    think of how strong demand for crude would have been if we were growing at 5%!

    Reply

  7. Paul Palmer says:

    If those numbers are correct, it’s also $201B in extra vig for the banks.

    Reply

    Unforgiven Reply:

    @Paul Palmer,

    I’m not seeing vig for the banks here, rather I see less NFA’s added to the private sector. Seems like the contraction in consumer credit would mean LESS vig for the banks, if you define vig as up-front loan fees (that they would get for booking the bet against the borrower’s future income).

    Reply

    WARREN MOSLER Reply:

    also, with govt a net payer of interest, there’s a ‘savings’ there

    Reply

    Paul Palmer Reply:

    In 2008, both household debt service and personal interest income are $1400.
    In 2011, household debt service is $1194, but personal interest income is $993.

    Where does the $201B go? In 2008, it was even, household debt service matched personal interest income. In 2011, personal interest income didn’t come close to matching debt service.

    Reply

    WARREN MOSLER Reply:

    personal income has been supported by govt deficit spending. this helps explain why the deficit is still too small

    Reply

  8. SteveK9 says:

    Anything to keep those bonuses high.

    Reply

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