We hear about interest rates just about every day now. How “patient” will Federal Reserve Chair Yellen be about raising rates? What will the quantitative easing by the European Central Bank do to stimulate growth in Europe? Inflation or deflation – when are they coming, which one is worse?
None of these questions are easily answered. Even the people making the decisions aren’t certain how their choices will ultimately impact the economy. And these are the people that wake up and go to bed thinking about interest rates.
For the rest of us, I’d say we think about interest rates maybe once a month – right about the time when our savings account statement comes and we’re reminded of the fact that we are getting practically nothing for parking our money at our respective financial institutions. It’s a tangible reminder of all the monetary policy chatter we hear about and for many of us who’d like to get something more than 0.05% for letting the banks hold our money, it’s not a very pleasant one. But is it possible that we should be tearing open those statements and jumping for joy?
I won’t actually expect you to celebrate, but the next time you think about your paltry savings account interest at least consider these reasons why getting paid next to nothing might not be such a bad thing.
As a lender, either to a bank via savings account deposits or to a government or corporation via buying a bond, it’s reasonable to expect some compensation for letting the borrower use your money for a period of time. Obviously that compensation decreases in low-interest rate environments. While these low rates aren’t great for you as a lender, keep in mind they are benefitting you as a borrower. Before the Great Recession, a 6-month CD paid an average of 2.12% while the average 30-year mortgage rate was 6.23%. Today, a 6-month CD pays about .3% and a 30-year mortgage costs 3.83% on average. If you’re borrowing at today’s low rates, the reduction in your borrowing costs might outweigh the loss of interest on your savings account. Furthermore, you’ll get to keep that low rate if and when savings account rates do go up.
Even if you are debt-free, you still can benefit from a low-interest-rate environment. Though you aren’t personally borrowing at low rates, many businesses that you own in your portfolio are. Having access to low-cost capital has enabled many businesses to stimulate growth, helping increase their share price. Again, as a lender you don’t make much but as a shareholder you do.
If these benefits still haven’t made you feel better about that 0.05% deposit rate, consider this – it could be worse. You could actually have to pay the bank to hold your money. That is exactly what is happening in European countries like Denmark, Sweden and Switzerland. Deposit rates in these countries are actually negative, meaning banks could require customers to pay them an interest rate for keeping their money. Switzerland’s deposit rate has gone as low as minus 0.75%. Even yields on 10-year bonds in Switzerland have gone below 0%. After holding a 10-year Swiss bond to maturity, some people might not even get their full principal back. Yet, people are buying these bonds at yields of minus 0.55% because it still represents a better return than minus 0.75% on their savings accounts. Just think, at 0.05% your bank account is outperforming the Swiss by 80 basis points!
I wish I had a secret investment to share that would pay you 5% interest on your savings without requiring you to take any more risk. Unfortunately, that just doesn’t exist in today’s market. What I can tell you is that you are probably benefitting in some way from low rates, either as a borrower or equity owner. And even though lending doesn’t pay what it used to, it still pays something. In a world where making less than nothing is a reality, making practically nothing seems pretty good by comparison.