ZIRP carries significant costs for US households

Courtesy and full permission of SoberLook:

Ben Bernanke (Reuters): “Interest rates are low because our economy is still in a fragile recovery,” Bernanke told a town hall meeting in Washington with educators.

“Lower rates are intended to restore more normal levels of employment and growth.”

That may be true, but on average a prolonged low interest rate environment has been hurting US households. Here is why.

Many economists point to the household debt-service ratio as an indication that low rates are helping consumers. The ratio has declined from the “bubble” years – roughly to the level it was in the 90s. It is true that one reason for this decline is the drop in interest rates (lower mortgage payments for example). But it’s not the only reason. The US consumer has deleveraged considerably since the financial crisis, reducing debt levels (lower credit card balances for example) and therefore lowering the debt-service ratio. This component of the reduction has nothing to do with lower interest rates.

Interest income as a percentage of disposable personal income (DPI) on the other hand had declined dramatically, far outpacing the decline in debt-service ratio. Consumers are not benefiting from the lower debt burden because their savings accounts are not paying them anything.

Source: JPMorgan

In fact net household interest income (interest received less interest paid) is near record lows (negative) in dollar terms. That’s money coming directly out of US consumers’ pockets.

Source: JPMorgan

A key negative side effect of persistently low rates on households is the delay of retirement. This inability of many Americans to retire on their savings because of low rates is keeping them in the workforce, limiting job opportunities for younger workers. In fact this increasing number of older participants in the workforce, likely at the expense of the younger workers, is visible in the labor participation rates (broken out by age).

Labor participation rates for younger and older Americans
(source: Bureau of Labor Statistics)

The low rate environment is not the only factor in the delay in retirement, but its impact is unmistakable.

Blake Hurst (the American Enterprise Institute): – In a recent Wells Fargo/Gallup survey, one in three investors report that low interest rates have forced them to delay retirement. Forty-two percent of people now investing say that low rates have made them doubt that their retirement savings will last as long as they will, and nearly 40 percent of retirees report reduced consumption because of low interest rates.

It is true that some households have been helped by record low mortgage rates. But on the whole, the consumer is worse off in a prolonged low interest rate environment. Therefore keeping rates low over the next few years is by no means a riskless strategy for the Fed, requiring a thorough cost-benefit analysis. There is no question however that the costs to US households will be significant.


  1. Quite so. What do those who own their home and who hoped to retire on some sort of passive income do – sell what they have, their home.

  2. There’s always trade-offs in these situations. Anytime you are using IR policy to help out one group, it comes at the expense of other groups. There is no such thing as a free lunch.

    Personally, I think interfering with the market rate of interest is reckless. And holding them down near zero is borderline criminal.

    • It is not “borderline” in my book, it is crime against humanity 😉

      For me personally, any government agency interference to the market forces is to be frowned-up because usually it will have more harms than benefits in the end due to unintended consequences and policy execution risks.

      • “any government agency interference to the market forces is to be frowned-up”

        This is an ideological position.

        The real issue to be considered is this: do you continue rigidly holding to a “free market” policy position, even when (a) most others are not, and (b) the fact that others are not is having the consequence of placing your own long term strategic well-being at risk?

        • Well, it is personal view and maybe ideological but for me it is also based on historical facts as I mentioned above, it may end in creating more harms than benefits gained.

          The other thing to consider is you mentioned about consequence of placing our own well-being at risk by not following others printing money and adopting ZIRP: Whose well-being are you talking about ? The people with high-debt ? Industry with high capital requirement ? Yes, of course but how about the savers / investors ? And as I mentioned above the jury is still out to determine whether QE and ZIRP in US and Europe will create more goods than evils in the long-term for those economies in general. Personally I am cautious to the “un-intended consequences” and the Murphy’s Law in many of the government policies in the past which tried to manipulate market forces, especially in currency debasement and financial repression.

          • “Whose well-being are you talking about ?”

            The nation’s strategic well-being as a whole.

            My primary concern is the capacity of the nation to achieve and maintain at least a fair resemblance of self-reliance. Hollowing out thence offshoring/selling your manufacturing, food production, and/or energy capacities is hardly wise in that context.

          • The nation’s strategic well-being as a whole.

            Sorry, again this is like circular but who’s the proper authority / judge to determine which side of argument is best for the nation’s well-being as a whole ? In short-term, there’re always be winners and losers for any government policy and in the long-term, again the jury is still out there but based on past experiences of currency and interest rate manipulation – the records are not good.

            The second point is having self-reliance in terms of manufacturing and food supplies seems to be good objective of every nation on earth but realistically, it is not possible and practical for every nation to have it and there are some examples of nations who don’t have such capacity but managed to achieve prosperity for its people anyway. So, for me personally it is not the sacred cow of economic goal.

          • Fair points all, Deo.

            My view is that the world has fundamentally changed post-2008. The dream fantasy of globalisation is really a nightmare; a fantasy that, if successful, could only ever lead ultimately to total control by and for the benefit of private, multinational oligopolies. For decades prior to 2008, a nation could get away with outsourcing key strategic sectors. But now, as evidenced by the myriad forms of veiled and bald-faced protectionism / interventionism increasingly being practiced by everyone (except us!), it seems clear to me that the tide is fast running out for globalisation, and its central mythology of “free trade / free markets”. I do not want to see Australia left standing with no clothes on.

          • Deo

            The next 40 years will not resemble the last 40 years. The cheap Asia we have relied on to supply us with cheap consumer goods will no longer be there and, indeed, will be competing with us for scarce resources that so much depend on for our ‘good life’

            It is already too late. We have wasted our valuable birth-rite. However further continuation of our current idiocy will make our world more and more difficult.

            Note I’m not a big fan of more and more government. In this case both bureaucratic and political government are acting like total fools, but private enterprise has gone right off the chart in terms of indulgence and idiocy.

  3. Ronin8317MEMBER

    The horse pulls the cart, the cart doesn’t push the horse. An era of low growth leads to Central Banks lowering interest rate, not the other way around.

    The ZIRP policy is a bailout of the banks at the expensive of everyone else so the policy is working as intended. As to delay of retirement, I believe the changes to Social Security is more of a factor, given how most US retiree have no retirement savings at all.

    • Ronin
      Central Banks have been running negative to zero RAT rates through 90 odd% of my now somewhat stretched lifetime being now some 50 years economically conscious.

      Negative and Zero RAT are indeed the important factor in leading us to where we are. The policy of continuing with the policy is the defi9nition of insanity.

      • dumb_non_economist

        Flawse, you’re in front of me by a long shot, your vintage but only economical conscious for the last 6 yrs, however always been a tight arse when it comes to spending!

  4. as discussed previously in a similar thread we live in an age where the prolificacy of government and the corruption of banking are making a mockery of personal financial prudence.

    Save for your future only to see it inflated away at 0% interest? Or rack up loads of debt and spend now with no plan to ever repay it?

    damned if you do…

  5. That really illustrates the true cost of ZIRP. While debt ridden individuals are having arguably the best personal economic conditions in history the savers and retirees are all suffering from a lack of income. What many people forget is that this type of income drives the economy just as much as anything else, without retirees spending and savers getting negative real returns why would they be motivated to go back to their previous spending habits?

    If interest rates drop another 0.75-1.00% then our savers and retirees are going to be very much in the same boat. It doesnt seem like smart long term economic policy to torpedo your own strongest source of long term spending and neglecting it for the debt fuelled fickle majority.

    • It doesnt seem like smart long term economic policy to torpedo your own strongest source of long term spending and neglecting it for the debt fuelled fickle majority.

      +1 with your argument but the people with mortgage are not even in majority here.

      • Exactly right Deo, that is the truly scare thing about interest rate policy attitudes in this country. The media cheers along as rates drop and laments when they dont yet all its doing is hurting savers who are as you the majority in this country. In the long term its only going to hurt the economy, but economists and politicians are too attached to the debt fuelled growth of yesteryear to really look at whats actually going on.

        At the end of the day the first politician who endorsed a good interest policy would be politically destroyed for neglecting “working families” and allegedly pandering to the likes of Gina Rhinehart and Clive Palmer. Even though in reality the current policies may be helping Sheryl and Dave down the street with their new Landcruiser and McMansion but its hurting Grandma and Grandpa who now dont have disposable income and now wont be spending $3k on christmas presents for the grandkids.

        • Tarric
          A policy of zero or negative RAT rates is also a policy of more Foreign Debt and more sales of our national assets to foreign interests.

          The idea that we can just print, have low interest rates and money and wealth just appear like the tooth fairy has about the same logical standing as the truth fairy

  6. Diogenes the CynicMEMBER

    So if ZIRP doesn’t work why is Australia toying with the ZIRP future? It clearly has not worked in Japan nor does it seem to be working in Europe.

    Perhaps higher interest rates and letting banks fail might actually be the go? I did read a paper on the 17th century Dutch situation where they effectively did this – the recession was nasty but short.

    • You wouldnt happen to have a link to that paper by any chance? I would love to have a read of it.

    • It is the standard “creative destruction” argument of capitalistic economic system but with current day TBTF entities like banks and insurance companies and lack of spines in the politician stocks…I guess that may not happen soon.

  7. I’m hoping someone might answer this rookie question for me:

    How can the RBA force the banks to lower interest rates in the face of increased funding costs?

    I wonder if Australia might some day have near-zero interest rates (like the US) but then I imagine that the banks can’t/won’t drop their rates much lower than they are now because the cost of credit (from foreign credit markets) is too high.

    Can someone clear this up for me? How do all the other countries with near-zero interest rates do it?

    • The central bank can buy the bank’s bond with low / zero yield and thus giving free money to the banks.

    • mrfish
      Much of current economic thinking seems to be based on the USA situation.
      When we have negative to zero RAT rates we decrease savings and increase credit creation. In western economies much of the resulting increased consumption comes from Foreign sources creating Current Account Deficits and the resulting Foreign Debts.
      The US, because of its original status as the international currency reserve issuer and the sheer size of its economy, has simply printed USD to pay for the increased imports.
      Nevertheless currencies such as the USD and pound sterling are continually worth less in terms of the amount of real goods they will buy. Expect this process to accelerate.
      In Australia’s case we have financed the resulting Foreign Debt through asset sales. Hence our whole economy is now dominated by foreign owned enterprises.

      Now this all works until it no longer does. There are small moves every day to reduce the importance of the USD as the Reserve currency. In Australia’s case, finally at some stage, we run out of assets to sell.

  8. This is where Sharia finance has a lot going for it. When the cost of money is effectivily nil, the risk/reward is skewed. The banking system should be paying a fee for the funds provided by the central bank.

    The whole issue though is the set up of the central bank system in the states.

    In relation to Australia, I feel that when the RBA was created in 1959 taking its function from the CBA, the beginning of Australias adjustment from a creditor nation to a debtor nation began.

  9. Jack (as you are no doubt aware)correlation, particularly in this case, is not proof of cause.
    Nevertheless you have the date exactly right!

  10. “Self reliance” is the fantasy, unless you believe the populace will tolerate a lower material standard of living. And of course we won’t.

    We live in a globalized market which is producing opportunities for anyone who possesses energy and ambition.
    If you would rather live in “walled garden” economy cut off from the world, i suggest you take a close look at North and South Korea.
    Two nations at extremes of the globalized economy. Which would you rather live in?

  11. “Self reliance” is the fantasy, unless you believe the populace will tolerate a lower material standard of living. And of course we won’t.

    Of course you are correct.
    However we cannot continue to live beyond our means forever. Eventually we run out of assets to sell to finance our over-consumption.
    In addition the world is changing. In the next 50 years we will not have cheap Asia to both produce cheap goods for us and lend us money.
    They will be prosperous nations, viz South Kore, competing with us for scarce resources that we depend on for our excessive standard of living.

    • That’s why I no longer see insurance as good industry to invest in, especially with riskier enviromental profile recently. The alternative to more expensive cover is smarter and more selective cover by insurance industry but there will be outcries by general population if this happens.

  12. Large +1 to the majority of comments above.

    Slowly but surely the penny is dropping and people are starting to realise that manipulating interest rates ( especially downwards) is NOT a costless exercise and has extremely seriously consequences.

    It distorts fundamental decisions to save, invest,  consume and the perception of value across the border often for entire generations. The last time the Merchants of Debt went wild ( 1920s) the population’s attitude to debt was scarred for a lifetimes and beyond ( many of the children born during the 1930s grew with the same deep suspicion of debt and leverage).

    However because many of the consequences of pushing interest rates down to stimulate growth (pull consumption forward) are subtle people dont notice them until low interest policy is run hard ZIRP over an extended period.

    It is good to finally see some attention on the mad policy of using low interest rates to repair the damage of a debt boom bust.

    We must soften the consequences of the bust as best we can not try to pretend we can prevent the boom going bang with low interest rates.

  13. In retrospect, it’s not that difficult to see what happened.

    The technocrats, invoking their economic pseudo-science as intellectual and moral justification, placed the creditor-class and the banks upon a pedestal, making debt sacrosanct, and thus moved heaven and earth to bail out the creditor-class and the banks. Then they told everybody else to go to hell, which is where we are now.

    But things didn’t turn out as the technocrats planned. Or did they? The creditor-class is now suffering mightlily, as well as any demand that this class might create in the real economy, as this excellent Sober Look post explains.

    It now appears the only beneficiaries of ZIRP were the banks, and more specifically, only the largest banks. The low interest rates helped the banks in two ways:

    1) They reduced debt payments, making it possible for more people to continue making their payments and to keep their loans current, and thus reducing delinquencies and defaults, which helps both the banks’ balance sheet and profits and

    2) They resulted in a greatly increased net interest margin for the largest banks, as this study by the Federal Reserve reveals, which greatly enhanced bank profits:

    “Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009”


    So for those who believe in the old saw “the proof is in the pudding,” the only class that the Fed threw a lifeline to was the largest-bank class, with everybody else getting the shaft.