The Fed's immiseration of people who live on interest earnings.

• Author: Higgs, Robert
• Position: Etceteras ...

Given the Federal Reserve System's policy during the past five years of, first, driving nominal short-term interest rates down almost to zero and, more recently, undertaking Operation Twist, with the intent of driving longer-term interest rates down to levels that in real terms equal or fall below zero, we might well wonder whether Chairman Ben Bernanke and his colleagues consciously decided to give a shove to the wheel of history that John Maynard Keynes longingly anticipated in order to bring about what he called "the euthanasia of the rentier" (1936, 376).

In any event, no one can dispute that people who rely on the interest earnings of low-risk invested funds to support themselves--such reliance being a situation in which many retired persons in particular find themselves--are now in severe difficulty. Bank savings accounts are paying interest rates of 1 percent or less ("Online Savings" 2014). Certificates of deposit are paying 0.40 percent to 1.33 percent, depending on the term to maturity ("Nation CD & Investment Rates" 2014). U.S. Treasury bonds with terms to maturity of five to thirty years are yielding in the neighborhood of 1.6 percent to 3.6 percent, the higher rates being for the long-term bonds (U.S. Department of the Treasury 2014).

In short, the highest yield available to ordinary investors who seek a simple, low-risk investment of their funds is, at best, roughly equal to the rate of overall price inflation--and then, for a bond with a thirty-year term to maturity, only with substantial risk of capital loss if interest rates should rise. To put the matter another way, nearly all ordinary investors are now being progressively impoverished because the nominal return on their investments is too small to compensate for the loss of the dollar's purchasing power during the term of the investment. Getting a positive real rate of return is effectively impossible for the proverbial widows and orphans. Only investors who know how--and are willing--to invest in risky equities, precious metals, crude commodities, and other such esoteric assets stand any chance of earning positive real returns and then only with great risk of substantial capital losses.

As figure 1 shows, personal interest earnings rose substantially--by about 50 percent--from 2004 to 2007-2008 and then dropped precipitously after the Fed's new policies took effect in the last quarter of 2008. (1) During the past three years, such earnings have more or less stabilized...