Tags: CD | euro | US | interest

Don't Plan to Live Off Your Interest Just Yet

By Wednesday, 11 June 2014 08:01 AM Current | Bio | Archive

The European Central Bank (ECB) took an unusual step last week, cutting the interest rate it pays on bank reserves to a negative 0.1 percent. Instead of receiving interest, eurozone banks now pay interest on any cash they park with the ECB.

I doubt the move will help restart Europe's stalled economy, but they evidently have no better ideas. Long-suffering U.S. savers might feel better; our paltry yields don't look quite so terrible now, although they are nevertheless still terrible.

Not so long ago, American retirees could park their cash in safe, simple bank accounts and earn a noticeable amount of income. As recently as 2007, $100,000 in a six-month certificate of deposit generated more than $5,000 in interest annually.

Last year, that same $100,000 six-month CD earned a whopping $390 per year, according to JPMorgan Chase.

While earning $390 is better than paying $100 — as would be the case if U.S. banks treated us the way the ECB treats its member banks — neither amount is impressive.

This is no accident. The Federal Reserve wants your money in risky assets like the stock market, so their policy reflects it.

Might this policy change in the near future? I thought so just a few weeks ago. Some Fed governors seemed ready to wind up the QE3 program and start hiking short-term rates later this year or in early 2015. Now I'm more dubious.

The ECB's negative rate move is aimed less at lending policy than at currency devaluation. Europe needs to make its exports competitive with American, Japanese, Chinese and other countries' products. Devaluing the euro currency is one way to do this. Unfortunately, Japan is already going down that same path with the yen. The United States might do likewise.

Global capital always flows to whatever destination treats it the best, that is pays the highest risk-adjusted yields. I believe we are in the early stages of a global currency war.

Competitive currency devaluations could force the Fed to keep U.S. yields near zero for years to come. Raising interest rates would strengthen the dollar and dampen U.S. exports — at a time when our economy needs every advantage it can get.

This scenario has many potential outcomes, none of them good. The best case would be another decade or two of Japanese-style credit deflation. Investors will have pockets of opportunity, but they will be much harder to find than a six-month CD was in 2007.

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PatrickWatson
The European Central Bank (ECB) took an unusual step last week, cutting the interest rate it pays on bank reserves to a negative 0.1 percent. Instead of receiving interest, eurozone banks now pay interest on any cash they park with the ECB.
CD, euro, US, interest
405
2014-01-11
Wednesday, 11 June 2014 08:01 AM
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