The topic of interest rates has caused some very spirited discussions for me over the years. I feel very much influenced by the adages of yesteryear about focusing on savings, but this is an era where aggressive and savvy use of credit may be more sensible, particularly if one can lock in loans with interest rates lower than the pace of inflation. In the United States in particular though, I have noticed that for savings, the historically low interest rates we have experienced is the elephant in the room changing the kind of future most people will have, but surprisingly one rarely hears anyone talking about it.
When the ability to accumulate savings or nearly all passive income sources are taken away, it makes for a particularly disenchanted culture. I have saved quite a few bank statements from my past, and I came across one the other day that indicated my general savings account in 2000-2001 bore an interest rate of 2.63 percent. I then shopped my bank’s CD (certificate of deposit, or term deposit) and savings rates and found that a general savings account at my bank cannot be more than 0.05 percent with deposits of even over $100,000USD and a one year certificate of deposit they disclose that the rate is 0.15 percent (I imagine one could find or negotiate 0.6%).
As far back as I can remember, interest rates have fairly consistently fallen in the US, accelerating more rapidly after 2001 and then again in 2008. By 2010, I was in San Francisco for several weeks and getting into an argument with an Australian man in his 50s who kept insisting I move all my assets into high interest savings accounts. At that time, my Kansas-based bank’s interest rates were nearly as paltry as now, but there was a program where one could get 2.5 percent on their checking account if they had their payroll checks direct deposited and had ten monthly bills coming out of the account as automatic payments. At the time, I did only contract work and had no bills that were owing monthly, since I was preparing to move to Canada, thus making me ineligible. A younger Australian traveler pointed out that in the US at that time (and still now), it was better to have cash in hand, but the Australian could not wrap his head around it because a fairly flexible savings account in Australia at that time might still pay 6.5 to 7 percent. Today, in summer 2014, I have looked into the matter further, and the three banks I know of in Australia – National Australia Bank (nab), Commonwealth Bank, and Westpac – advertised no more than 4 percent interest for a one-year commitment. A few years ago, I noticed that the only two stable, advanced economies with robust savings interest rates were South Korea and Australia, as well as the smaller player, New Zealand.
For a time, there was a lucrative if dicey practice called the “carry trade” whereby individuals or entities managed to borrow massive sums at near zero interest rates in Japan, deposit the money in Australia, and then collect the interest as profit at much higher interest, and pay back the loan in Japan. For a time in 2011 and 2012, the Australian dollar was the fourth most traded currency in the world in spite of its relatively isolated position in the world. A combination of events and regulation from Fukushima to advanced nations collectively deciding to crash the Japanese Yen to help their exports most likely spooked this kind of transaction.
Interest and usury as a whole is most likely a drain on societies because that means that there is never enough money in the system to pay off debts, which would invariably cause a crash of one kind or another every few years and make a certain number of parties go bankrupt as a matter of mathematical necessity. That said, these probabilities are still in place, but a reliable means of planning and source of income has been eliminated in Europe, Asia, and North America, and the few places with the advantage still in place are faltering (Australia’s 23-year long recession-free period may be coming to an end now). Rising interest rates, which are expected to be set in motion slowly starting in the fourth quarter of 2014 in much of the world (eyes are most closely aimed at the UK right now, reporting restoration of GDP numbers that are finally matched with Q1 2008) also could cause tremendous problems as a greater share of national budgets would need to go to servicing debts.
Either way, low interest for savings combined with skyrocketing tuition and senior care costs combined with stagnating wages, increased medical costs (in the US), and the near requirement of tech purchases and services is the perfect storm of eroding equity. Even if economic data in the next few years shows robust conditions, the consequences of not being able to save is going to continue to slip by because it is silent and incremental, but the cumulative effects over a generation or more are already catastrophic for most middle-earning households.
The only solutions I have heard of have to do with individuals setting up loan contracts with people they know so that the interest rate being charged is lower for the borrower and higher for the individual lender. I do not know the legalities involved in this kind of transaction. Furthermore, avoiding ownership of property or prolonging the ownership of property and renting out parts of it seems to be the most stable way to recover the investment because rising prices are not guaranteed, and even if one is the beneficiary of that type of capital gain, they need to leave the area upon sale of the property, because other properties will have increased in price, nullifying the advantage.
We may be experiencing a brief abberation in the finance world, but dramatic increases in interest rates are not in the cards for the foreseeable future.
-for a totally different article and experience, please visit “A Journey Across Time – My Unorthodox Past Life Regression Experience”