I chose this as a convenient reflection of U.S. interest rates in general. I remember 1981; I had finished all my postgraduate studies and was working full time, had paid off my car and had a modest-rent apartment. I had savings every month which could be easily invested in CDs yielding over 10%.
It's a different world now. The recent economic turmoil has focused attention on unemployment and how that is affecting the young and middle-aged workforce. But there is a large segment of older, retired people who are facing economic difficulties of a different kind. When one hears of retirees living on "fixed incomes," that income may be an unchanging defined dollar amount from a pension, but more often the term refers to income from savings instruments such as bonds, CDs, annuties, and mutual funds. Those rates are now at all-time lows, and as various items mature and need to be rolled over, the replacement instruments may have rates of 1% or lower.
If an elderly person planned his/her retirement years on the historically-reasonable basis of 4-5% yield on savings, and now faces a yield of 1-2%, that represents a 50-80% drop in income and a decision to change a lifestyle or to consume the savings. There are a lot of people out there who are silently suffering.
Source.
The crash of 1987 isn't noted (I remember the WSJ's Hemingway-esque lede: "The stock market crashed yesterday.") but you can see that the decline seems to start there. A few upward bumps but each followed by a deeper dip…
ReplyDeleteAnd to add insult to injury, you have to move your savings each year to get any sort of return at all.
ReplyDeleteNew customers get shiny glittery rates, existing customers get a slap in the face with a wet fish.
But what is the real value of that money?
ReplyDeleteA review of the consumer price index would suggest there's more to it - that 1980 investment yielding 15% wasn't even keeping pace with inflation (and TIPS weren't available until 1997).
I wonder what the real interest rate has been. Remember using the inflation rate ex post does not capture the expected inflation rate when people make their investment decisions ex ante. Looking back, it would look like the best idea to buy into 10-year bond in 1980; but in 1980, how would you know that the inflation rate wouldn't shot up to 30%? Fair to say that relying on risk-free investments alone probably won't carry you very far in terms of saving for retirement.
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