On The 'Real' Financial Impact Of ZIRP

Tyler Durden's picture

Via Chris Turner,

Determining the financial impact from Zero Interest Rate Policy (ZIRP) (or Zero Lower Bound) to responsible savers poses difficulties.  The concept seems simple; gather some background data and chart the results.  Well, not so easy.  First – one needs to gather data and unfortunately, the data rests in different databases (but that’s OK for geeky data miners that like to make calculations).  For charting and calculations, the following data sets provided information:

  1. Total Savings Deposits – FRED
  2. Average Interest Rates on Savings Deposits – FRED (M2OWN)
  3. Inerest Income – IRS tax stats, NIPA tables
  4. Effective Federal Funds Rate – FRED (FEDFUNDS)

While the omnipotent FOMC suggests they understand all, they clearly misunderstand the impact of arbitrarily lowering the Fed Funds rate.  Using data from 1964 to present (when the data sets coincide), we are able to see the historical relationship between total savings and amount of interest income earned on the savings. 


Note that prior to 2001, as savings increased (blue line), interest income received also increased (red line).  After 2001, a funny thing happened on the way to the bank – yeah, savers saved (responsible) but received less interest.  The green line shows the impact of Fed Funds rate on average savings account interest rates.

The next chart simply shows 1964 to 1986 and the rate at which savings increased and interest received increased.


Both rates move in tandem – as savings increased (except during late 70’s early ‘80s), interest increased.   As data goes – the 1982 period where interest received exceeded savings account holdings could be an anomaly in three separate sets of data or just representative of high interest rates paying large interest payments.

Scaling into the shaded area from Chart 1 representing 1986 to present, the following chart depicts the effective Fed Funds rate determined by FOMC and the resultant savings and interest during the period.


Remarkably, as savings increased when Fed Funds rate remained around 5%, interest income continued to rise.  However, post 2001, the interest income received stopped growing at the same rate.  With the exception of 2005 to 2008 when rates went back to a “normal” 5% range – the interest income earned has remained stable at 1 trillion.

The following chart rescales the previous one to better show the relationship between Fed Funds rate and the impact on savings (removed the total savings).


The chart clearly depicts that when the Fed Funds rate declines (to “stimulate” the economy), the net effect is less interest paid by banks to those responsible savers.  Let’s give credit to the FED though – from 2005 to 2008 – savers benefited.

This last chart summarizes the actual loss to savers.  Rather than using the FOMC to direct rates – what if the rates simply floated (market rate)?  Using the long run historical mean of Fed Funds rate allows a calculation of where rates “should” be without FOMC intervention.   Applying this rate to the actual savings provides a net amount savers could have earned during the last 11 years. 


While the loss to savers (shaded orange) does not match the same rate rise in savings (green line), the conservative and cumulative effect is a loss of just over 9 trillion in savings during the entire period.  This represents the current account loss of nearly 2.8 trillion as of Oct 12.  Savers could be garnering nearly three times the current amount in interest income if interest rates represented the long run historical mean.

But at least the banking system is saved.

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RSloane's picture

The point here is don't even think about saving up for a home if you don't have one now because to save up for one will require you to throw a portion of that money away for the 'common good' , eg, bankers who wouldn't give a loan to people like you anyway.

redpill's picture

Everyone hates banks and bankers but then like an obedient dog they'll eagerly agree when some oligarch asshole swears that everyone will die unless they all get bailed out perpetually.  Why people are so fucknut stupid that they can't conceive of the notion that there is a better, more honest way to have an economy is beyond me.

RSloane's picture

Absolutely, and I don't understand it either. You know its going to happen again. After the failure of Tarp, Son-of-Tarp, QE1, QE2, Son-of-QE2, QEi, multiple Sons-Of-QEi, Twist, Sons-Of-Twist, Zirp, and the idiotic stimulus that we HAD to pass, there is going to be another TARP-Stimulus direct handing of money to the banks to avoid another 'disaster'. You know what? Bring on the fucking disaster already. Its got to be better than this.

Richard Chesler's picture


But at least the banking system is saved.

No. The current crop of thieving cockroaches running TBTF institutions were saved from their own incompetence and malfeasance.


RSloane's picture

Didn't banks used to be the place that people put their money into for safety, garner a modest interest on their nest egg, get loans for homes, save for their children's education, put away some cash for emergencies?

If that's an apt description of how historically banks functioned, then I would argue that for most of us there are no banks at all.

redpill's picture

Since interest rates are zero anyway the only place you should put money in a bank is in a safe deposit box.


RSloane's picture

Its sad isn't it. The only reason to use a bank would be to put money into a dark hole and pray it has some value when you take it out. My grandmother did that with an iron box she kept in the floor of a fruit cellar, yet her iron box did not cost the taxpayers trillions. Are we going backwards or forwards? I don't know anymore.

redpill's picture

I don't know either, but it sure as shit isn't "FORWARD"

WTFx10's picture

Only leave enough in the bank to pay the governments extortion fees and bills. The invest in pm's or hold the cash. Fuckem ,when it goes belly up you don't have to run to the bank to try and get the money they wont give you. If it is worth anything then you have some cash on hand if its not then you have toilet paper.The majority of the population will have under 100k anyways. the wealthy job creators, the government Zionist traitors and with any luck the Zionist banksters will loose the most. But i doubt it since they play this game every hundred years or so and always still come out holding everything they have stolen.

HD's picture

For the same reason people stand back and let the TSA fondle their children and strip search grandma...they feel powerless.

Stuck on Zero's picture

I disagree.  Start saving fro that dream home now.  Do it by buying Krugerrands and hiding them under the mattress.  Wait for five years until that $1 million dream home costs you a small handfull of the Krugerrands.


Waterfallsparkles's picture

Bernanke is a hoarder.  He is trying to hoard all interest paying assets.  Especially the mbs.  If people do not pay their Mortgage then he owns all of the Houses.  I think he is on his own power trip.

Mean while spending is down with the people that rely on the interest on their savings.  They may even be liquidating stocks and other assets to survive.

TheSilverJournal's picture

What's the value of the US housing market? $10T maybe? At this rate, the Federal Reserve will own every American house in only 20 years.

Joe Davola's picture

I was about to thump my chest and say 'not mine, I've held the title for years now', then I recalled that whole Kelo thing.

PUD's picture

I Don't buy it. If "savers" are reaping high interest rates then someone else is paying high interest rates. If the above logic were true then we should be rooting for 20% rates so savers all get rich.

it doesn't work that way. The more interest created the more money via debt has to be created to service it.

adr's picture

In part you are right, but right now the bank takes the 16% APR off the credit cards and puts it in their pocket. Often times leveraging that interest income 100X or more to buy securities instead of giving the interest income back to the savers.

When I could get a 5% savings rate at the bank, my credit card interest was 6.9%. If I wanted to use the credit card as a loan so I could pay over time instead of depleting my savings, I could charge $5k and keep $5k in my savings account for a net 1.9% interest rate on the loan.

Now the best you can do to offset high interest rates is to subtract .02% from the 16.89% credit card. The $.20 a year you get off $10k in a savings account isn't going to do much.



Offthebeach's picture

Back in your day with you getting 5% and the bank putting it out for 7%( 40% over your 5%) muppets were docile. The were spoon fed by the Big Three and the major rags. Nice. Send Your Kid To Vietnam docile.
Now not so much. Muppets got the Internet and the old establishment propaganda mills are near shells. The muppets got ideas, worse are questions. Hence, the risk is higher and the deposits are sub 2% and a card is 12%+( 500% spread ).
The House always wins until its burnt down or the suckers wise up and refuse to drag their pathetic savings in anymore.

swabeyjw's picture

Bang on. Interest with our current banker/government cartel only works in an ever expanding world. Don't forget inflation is mostly an issue for those that see cash as a place to store wealth. Spend it fast and snuggle up to those government contracts.

CClarity's picture

If he plays this approach much longer, he's going to instigate a bank run.  An entire finsys bank run here in the USA.  Yes yes I know.  "But where is it safer than her in the USA?"  It's safer where an unelected central bank doesn't rule the finsys.  Honestly, accounts in Mexico are safer.  Canada surely.  New Zealand.  But best . . . you know, PMs, ag land, and art.

SheepDog-One's picture

'Banking system is 'saved'....well until they again have an 'overnite electronic run on the banks' or something then its back to square 1 again, except this time 10,000,000 times worse than the last.

kaiserhoff's picture

Back in the Ice Age (pre-Clinton) lots of analysts tracked GNI, Gross National Income.  Similar to GDP but includes international interest and dividend flows, and less subject to inventory stuffing.  As data become less reliable, GNI, less government spending and transfer payments, might help show what is really going on.

Joe Davola's picture

Has the banking system actually been saved?

TheSilverJournal's picture

ZIRP!!! Just the concept is funny. Of course the government thinks the government should be able to borrow for free.

adr's picture

My bank had a sign for .02% APR on savings accounts above $10k.

WHERE DO I SIGN!!!!!!! WOW!!!!!!

In 1 million years I'll be rolling in the dough.

Another sign proclaimed the fantastic rate of 13.9% on the bank's credit card.

edifice's picture

13.9%? Jesus... I think the line of credit I have through my bank is around 4%. I opened mine pre-crisis, though.

Offthebeach's picture

2% APR= They don't want or need deposit.

13.%= They don't want to lend unless they can gang bang you ( with no curtsey reach-around ).

2% in and 14% out on the street is 600%.

Prophetwithoutprofit's picture

Perhaps the analysis misses another key point.  Not only are savers hurt but the Treasury is hurt.  Most of the interest paid to savers would have been taxable income.  How much tax revenue was lost by this short sighted FED ZIRP policy?

QQQBall's picture

How much of tax revs were given BACK to homebubblers? This has nothing to do with fairness or prudence. The gov't has been highjacked and the feeders and breeders are being sustained to power The Matrix.   

QQQBall's picture

Good effort and the underlying premise is worth addressing: Simply that there is a cost to everything.  The wealth transfer is from savers to borrowers/over-levered at artificially low rates.  Bernank is NOT a hoarder - by taking impaired assets at face value and then reaccepting the proceeds as deposits and paying interest on them is one big wealth transfer....

Why do we need a Private Banker to control our money supply? The same private banker(FED) is buying all the UST debt issuance anyway (and some in the EU too?) and supporting the private global banking system and calling it economic stimulus... The stockholders in failed banks should have been wiped out with the bondholders getting paid with any "net asset value" or simply being converted to the new stockholders. Yes asset prices would have declined and the prudent would have stepped in and started buying.  The world would not have ended. As it is the prudent are getting crushed.  


CrabGrassKila's picture

Alas, Benji just would not exist, if not were it for Copulating......


jplotinus's picture

The disincentive to saving, let alone the actual income losses, directly caused by zirp, is as clear as a policy statement can be. It says banks "yes,"all you others "no" or rather "hell no"or most apt of all "go screw yourself no."

Will someone tell me again, why is the Marriner Eccles building still there?

NeedleDickTheBugFucker's picture

ZIRP was implemented to recapitalize a financial system that is insolvent while causing no economic loss to bank shareholders and managements.  I'm so sick and tired of the rationlizations from the TPTB - threat of deflation, savings glut, need to stimulate "animal spirits" etc.  Unfortunately, these faux capitalists abhor the truth and the term "wealth transfer" has such a nasty ring to it.

Offthebeach's picture

In a free market, at a time of high risk and shortage of money willing to be loaned and risked, you would think money would get a high price.
But the big parasite banks were busted, and couldn't afford the price, so central command Federal Reserve ordered price controls on borrowed money. Hence like in all price control rackets, shortages in the real economy and plentiful and wasted in the political command economy.

cashtoash's picture

May be the Fed has become muslim, Islam bans use of interest on money

falak pema's picture

money laundering at zero cost that impoverishes the virtuous to replenish the unscrupulous.

Caracalla could not have done better when he gave free Roman citizenship to the cuthroats of Alexandria in 213 AD; those who would kill his enemies for nothing. The streets ran red with blood.

ZIRP was invented right there<

JR's picture

Chris Turner, with this research on the 'Real' Financial Impact Of ZIRP, at last has provided the critical but missing puzzle piece to Bernanke’s official, but incomplete, picture of the U.S. economy.

Turner’s research side steps the official line and documents in part why the average standard of living in the U.S. is not rising while debt in the U.S. is rising massively.

Bernanke is not just asset stripping savers to save Wall Street with artificially low ZIRP but he is destroying the economy to do so. Consequently, too much ZIRP-induced debt relative to GDP “has now reached the point of producing negative impacts on the economy.”

Unfortunately, according to Dr. Lacy Hunt, “the issue that has yet to be realized is that you cannot solve a debt problem after the fact. It has to be resolved before it reaches critical mass.”

Dr. Hunt made these observations On Debt Disequilibrium, Deleveraging, And Depression this past June on Zero Hedge:

“This is critically important to understand. While the media remains focused on GDP it is the wrong measure by which to measure the economy. A truly growing economy leads to rises in prosperity. GDP does NOT measure prosperity — it measures spending. It is the measure of real personal incomes that measures prosperity. Prosperity MUST come from rising incomes.

“GDP, on the other hand, can be distorted through government spending, which masks the effects of declining prosperity through weaker incomes. GDP does NOT lead to an increase in prosperity....  

“While the liquidity interventions by the Fed have increased stock prices — it has also continued to create pressure on the average American by deteriorating prosperity….

“The increases in debt without a productive return will ultimately lead to a larger proportion of government debt in the economy, versus private debt, with no relative increase in GDP. To put this into perspective - without changes to the current system government spending will reach 40% of GDP by 2050.

“This will not happen as the system will collapse long before then.” 


Marc45's picture

Why the sympathy for savers? Saving is an investment, your return is the interest rate plus any currency appreciation(ie. a stronger dollar).
The environment for saving US dollars in an interest bearing account is just horrible right now. It's like buying real estate in late 2006. Any interest, which is very low, will be further reduced by a weaker dollar.

What everyone needs to realize is the Fed wants you to put your money into growth assets like the stock market and will punish you for saving.

The moral of the story: Don't put your money in a crappy investment. Find something that is working with current government policies and the economic situation.

luna_man's picture






icanhasbailout's picture

aaaaaand it's gone!