While paging through the local paper yesterday, I spotted a bank ad touting a 48 month Certificate of Deposit for 3.5% APY. The barely legible print at the bottom of the ad said that the CD requires a $10,000 minimum of new money to the bank. Wow, I bet people will be standing in line for the bank to open this morning.
What was featured much more prominently in the ad is that this bank is a proud sponsor of “America Saves Week.” According to its website, “America Saves is a national campaign involving more than 1,000 non-profit, government and corporate groups that encourages individuals and families to save and build personal wealth.” The organization’s National Advisory Committee consists of government agencies that do their best to discourage and erode savings: the Federal Reserve Board, Internal Revenue Service (IRS), and the Department of the Treasury.
The IRS and the Treasury are directed to carry out their duties through acts of Congress. It is the tax code that has turned the U.S. into a primarily consumer driven economy that encourages borrowing and spending rather than saving. Interest income is taxed because the government has brainwashed the public that only “the rich” have interest income. Tell that to millions of senior citizens and every other person who wants to save. (The least the government could do would be to only tax interest income on individuals whose income is at least $100,000 a year.) Instead of spending money on sorely needed infrastructure projects that create jobs and help state and local economies, the government’s solution was to pass a $168 billion stimulus package, encouraging the public to spend their forthcoming rebate check on consumer discretionary items.
The Federal Reserve’s monetary policy has done everything possible to discourage saving. First it was through keeping interest rates too low for too long. Besides causing the housing and credit bubbles, it encouraged people and institutions such as insurance companies and pension funds, to invest in risky securities to obtain a higher yield. The dual mandate enacted by Congress in 1978 has done nothing to increase the Fed’s focus on savings. The only group helped by the FOMC’s accommodative policy is the banks; low rates widen the yield spread between the interest banks pay to savers and the rate banks charge borrowers. As financial companies have tightened their lending standards, borrowers are not benefiting from lower interest rates.
The FOMC has chosen to ignore ever rising inflation that not only makes saving harder, but further erodes it. When people have to pay so much for the necessities of daily living (including taxes of all stripes), all the education in the world will not turn the national savings rate around.