The Fed’s Immiseration of People Who Live on Interest Earnings
By Robert Higgs • Friday February 10, 2012 12:27 PM PDT • 16 Comments
As I have noted previously, the 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.
As the graph above shows, personal interest earnings rose substantially from 2004 to 2008, then dropped precipitously when the Fed’s new policies took effect in the last quarter of 2008. During the past year, such earnings have more or less stabilized in the neighborhood of $1 trillion. However, the present amount is approximately the same as the amount that was earned in the year 2000—eleven years ago.
These data, however, are given in nominal dollars, whose purchasing power has declined substantially over the past decade. As the graph below shows, the price index for personal consumption expenditures has risen since 2000 by approximately 28 percent. Therefore, the current flow of personal interest income has purchasing power equal to only about 78 percent of the purchasing power of the personal interest income earned eleven years ago. Of course, the decline since the peak in 2008 has been much greater—in the neighborhood of a one-third drop in real terms.
Defenders of the Fed historically have argued, among other things, that central-bank monetary policies have a sort of neutrality: they affect aggregate demand, the overall price level, and other macroeconomic variables, but they do not attempt to carry out the kind of micromanagement of the economy that Soviet-style central planning attempts. This argument has always been bogus because monetary policy was never—indeed, could not be—neutral. It always had differential effects on different classes of people and different sorts of economic activity, depending in part on who received new infusions of central-bank money first, second, and later in the process and on how these persons’ actions affected ongoing real economic processes. Nonetheless, defenders of the central bank might have argued that at least the Fed did not attempt in any direct way to determine definite changes in the distribution of income, either personal or functional.
Such defenses now ring unmistakably hollow. Even apart from the Fed’s entry into clear credit-allocation activities (e.g., buying mortgage-backed securities rather than Treasury bonds alone), 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?
Tags: Economics, Federal Reserve, Inflation, Money and Banking 
It’s a tragic irony that the only one willing to stand up for the retirees/elderly, Ron Paul, is met with hostility, from that very same group.
Seems like this would be a message the Ron Paul campaign would do well to emphasize! They could make their worst performing demographic one of their strongest areas of support!
Robert Fellner | Feb 10, 2012 | Reply
Oddly enough, the Fed’s zero rate policy amounts to income redistribution since very few households have significant financial assets. It has the added benefit of allowing a massive federal debt/deficits without having to deal with a budget-crushing debt service payment. I’d say the Fed is hardly independent these days.
Otto Maddox | Feb 10, 2012 | Reply
From early 2007 to December 2010, Florida’s unemployment rate went from 3.5% to a peak of 12.0%. This increase was much sharper than the increase in the national average, and Florida’s peak was about a year after the peak in the national average. These unemployment numbers can be a little slippery, but this helps illustrate how hard Florida was hit in the Great Recession, and what you are describing is part of that equation.
Bill Bergman | Feb 10, 2012 | Reply
Maybe it is not the Fed as much as it is the economy is in a slump?
http://macromarketmusings.blogspot.com/2012/02/can-raising-interest-rates-spark-robust.html
Anon1 | Feb 10, 2012 | Reply
IF, twenty five or thirty years ago people who are now retired,instead of taking the advice of their money managers to invest in paper assets and equities for retirement income had instead purchased gold and silver coins (Eagles,Maple Leafs,Krugerands)and just stored them in a safe place,today they would have not only come out way ahead but would have a secure hedge against inflation. Right now, the American Government is so desperate for money that they have come up with legislation(not yet,but soon to be put into law) to force people to convert much of their IRA and 401K retirement accounts into U.S.Treasuries. These Treasuries would pay about 3% which is way below the real inflation rate of about 10%. For the average saver it is not too late to convert their retirement portfolio into Gold and Silver and take physical delivery for safe keeping. There may be a tax penalty involved but its better than holding worthless paper.
Libertarian Jerry | Feb 10, 2012 | Reply
Higgs, you have described my financial situation, in detail. I wonder how many more are in the same Titanic.
richard | Feb 12, 2012 | Reply
Does Obama really need a legislated tax increase in addition to this stealth tax on America’s savers?
WSmith | Feb 13, 2012 | Reply
On the one hand, only if you had invested exclusively in floating rate bonds would you be in this situation, people who hold a diversified bond portfolio (including fixed rate bonds) have done very well lately as their income has not decreased and have recieved significant capital gains.
On the other hand, it is not the FEDs job to provide retirees with a decent income, thats the job of the financial advisors.
Salvador | Feb 13, 2012 | Reply
Gold keeps going up faster than inflation. Better than the fed.
Dennis Fargo | Feb 13, 2012 | Reply