Low Interest Rates Subsidize Wealthy Households

Tyler Durden's picture

Authored by Hal Snarr via The Mises Institute,

When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.

Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”

While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.

Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts.

The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.

Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.

The table above summarizes a thought experiment that measures the reduction in annual interest paid by each group at two different interest rates, 5% and 1%. The richest 1 percent, the next 9 percent, and the bottom 10 percent pay $30 billion, $119 billion, and $415 billion in annual interest payments, respectively, at a 5% rate of interest. At 1% interest, the corresponding annual interest payments decline to $6 billion, $24 billion, and $83 billion.

The last column reports the decline in total interest paid by each group that results from the interest rate declining from 5% to 1%. The bottom 90 percent, as a group, receive the lion’s share of the savings. After the interest rate is lowered, the group’s aggregate annual interest payment declines by $332 billion. The savings to the richest 1 percent is only $24 billion.

The above results suggest that the bottom 90 percent benefit mightily from a decline in interest rates. However, this is misleading because there are 98.9% more people in the bottom 90 percent than there are in the top 1 percent.

According to the U.S. Census, there were 117 million households in the US between 2011 and 2015. This means there were about 1.17 million households in the richest 1 percent, 10.5 million in the next 9 percent, and 105.3 million in the bottom 90 percent. Dividing the values in the above table’s final column by the number of households in each group gives the reduction in annual interest payments for each household in each group, assuming the households in each group are equally wealthy.

The per household annual windfalls for each group are $20,852 for the richest 1 percent and just $3,154 for the bottom 90 percent.

Investment compounding makes the disparate benefits from the decline in interest rates even more disparate. For most households in the bottom 90 percent that live paycheck to paycheck, their $3,154 windfalls are likely being used to repair their cars, cloth and feed their kids, or purchase consumer goods. Members of the top 1 percent who reinvest their $20,852 windfalls can grow this stream of payments to just over a quarter of a million dollars in 10 years at an annual rate of just 4%.

The above thought experiment illustrates that central bank interest rate cuts are essentially tax cuts for the rich. To be consistent, those who oppose tax cuts for the rich should also stand against monetary policy that disproportionately benefits the richest households as well.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Juggernaut x2's picture

<Trump will get rid of the Fed

<Trump is a cheap-money whore that loves the Fed and he will condone the Fed's ZIRP policy that fucks over the mouth-breathing mopes that voted for him.

FreeShitter's picture

The FED will get rid of trump, if Trump starts to grab that pussy too tightly.

secretargentman's picture

The richest 10% are also going to pay the lowest interest rates for their consumer debt, because their credit ratings will be stellar. Perhaps as an encore to the Obamacare fiasco, Democraps should devise a "law" whereby poor people can't be charged higher interest rates than rich people? LOL It would be consistent with their apparent IQ...

jin187's picture

Then we can have a bailout, the rich will use the bailout money to buy up all the foreclosed poor people houses, and sell them back during the recovery at twice the price. Rinse and repeat.

Jus7tme's picture

The bottom 90% do even worse than the numbers in the article indicate. First of all, nobody pays 1% interest rate on any kind of loan, except banks themselves. Second, much of the bot90 debt is credit card debt, on which interest rate has not dropped much at all. So the whole caculation is bogus.

GotGalt's picture

Jus7tme - exactly, I was going to mention the same thing.  When central banksters rush in to enact ZIRP/NIRP, does anybody really think the bottom 90% is borrowing at anywhere close to the low rates of the top 10%?  Of course not, we are subprime nation where best interest rates go to the top 5-10% of credit profiles.  Subprime nation is up to their eyeballs in 50% pay day loans and 25% VISA transactions.  They likely bought a used car with a 16% subprime loan that will end up being repossessed in 5 months. 

techpriest's picture

The top 10% do not borrow at super low interest rates. Now, some types of financial firms do, but upper 10%/1% individuals have productive assets, and during bubble blowing the money tends to flow into those assets.

Here's an example:

Most people, when they buy a house, pay based on how much of a payment they think they can make. When interest rates are high, house prices are low (because the buyer can't afford the payment). When rates are low, payments are lower, so people can buy a more expensive house. This means that money flows into housing, which can be seen in higher prices.

Now, if you are older and you bought investment property, this is great news because that money is flowing to you as a higher net worth. If you are a young guy like me, it is awful news because it means that I will have a harder time buying my first house. Sure, the payments are better, but the absolute price, i.e. how much money I can't save or invest, is higher, which makes it harder for me to save, invest, and get ahead.

This is one of several examples where low interest rates enrich the people who already have assets, while punishing those who are too young to have acquired anything yet.

For the subprime borrowing, I would recommend people stuck in that look to Dave Ramsey's stuff. I remember losing sleep over $2k in credit card debt and standing in line at Food at First to save money and pay off debt. At the time I was bombarded with personal loan offers, but after that breadline experience I fucking hate debt and shredded those offers the minute I recognized them, every time.

JRobby's picture

This is about crushing those that make ends meet on $50k or less and forcing them down into GOVT dependency. The $50k to $100k are stalled in a supended animation of slowly being consumed by inflation. The car takes a shit, they are in trouble.

techpriest's picture

Makes you wonder why you should take out loans at all.

We're in a recession, because what you can pay cash for today is less than what you expected to pay cash for in the 90s (depends - electronics are outrageously cheap). However, I'd rather take the hit now and be clear of debt.

IMO the biggest enemy of the "bottom 90%" is the TV. The TV has a way of making a lifestyle about 20% bigger than your own look normal for someone in your situation, which means you must be inferior and need to borrow to buy those status symbols.

shizzledizzle's picture

Actually I would like to share something I recently found out... The Farm credit Bureau I got my land loan through will allow you a savings account up to the value of your loan and during it's duration they give you %4 interest! Once your loan is paid off, it drops down to %2 (still a decent rate). This effectively could allow you to borrow @ near %2 provided you have the amount in savings you want to borrow. I'd also like to point out that they are always a pleasure to deal with (unlike my bank). I understand that this isn't a viable option for everyone but wanted to point it out. 

Sudden Debt's picture

Are you angry because somebody gets more then you?

How much taxes did you pay last year?


money whore... you just can't have it that not everything is going your way. Those who'll get 20K will have contributed so much more to society then those who get 3K. In respect, those 20K is peanuts compaired to that 3K

jin187's picture

From my personal experience, wealth is saved, not earned. I know people that make 3x more than I do, and have less money. It's because they are stupid, and piss their money away like it means nothing. No other reason at all. Then they bitch and whine about the 1%, never realizing that if they'd just saved or invested all that money they spent on drugs and partying, they'd be part of the 1%.

In.Sip.ient's picture

We all know this.


But all the debt slaves think they benefit from ZIRP.

Got 'em coming and going... as usual...


JRobby's picture

4.5% car loan that you are upside down on at month 58 is still a bad deal.

Buying groceries on a 25% credit card is the last stop before GOVT dependency.

I am Jobe's picture

Trump will bankrup the country . Yeah the inbred fucks who voted for this guy

JRobby's picture

Inbred fucks? Brilliant!

wisehiney's picture

High or low rates fuck everyone if they are not set by the free market.

Tim Knight from Slope of Hope's picture

Low Interest Rates Subsidize Wealthy Households

And there's yours news flash for the day.

In later reporting, we will examine whether Yellen will be the next Sports Illustrated swimsuit model or not.

Fantasy Free Economics's picture

p { margin-bottom: 0.1in; line-height: 120%; }a:link { }

This is a good article but there are a few things he could have mentioned.


Fed policy has kept profit margins high and real wages low.

The whole concept of deflation being bad for the economy is complete bunk.

At any given time it is normal for one group to have a temporary advantage over others.

With deflation, labor benefits for a while. Resources are relocated, life goes on and the advantage moves to another group in time. Stimulus prevents this from happening and the advantage stays with producers of goods and services, consumers no longer want to by.


jin187's picture

Fed policy has nothing to do with wages. Demand drives wages, and automation, illegal immigration, and abuse of the H1 visas, have resulted in too many workers, for too few higher paying jobs. As long as every job that pays 1 1/2 times the minimum wage has more applicants per position than the company can fire in a year, they have no reason to increase wages.

As a matter of fact, most companies have shifted their focus to reduce the impact of turnover on quality, rather than wasting resources on worker retention. Why give raises, benefits, and deal with worker issues, when you can just dispose of them like trash, and grab another McWageslave from the endless line of desperate applicants?

globalintelhub's picture

Just a form comment, in the picture this guy is so happy but the bills appear to be single digits, $1s and $5s, so there can be anywhere from $30 to $100 floating down on this guy.  Unless this guy lives under a bridge, which he probably doesn't guaging from his suit and haircut, $100 isn't anything to be happy about, it will cover his room service bill, and all.  

Dilluminati's picture

We needed an article like this?

Gravity causes an apple to fall from a tree to the ground.

Low interest rates impoverish retirees and benfit the 1% who probably deserve a guilotine!

Bad Management = Guilotine.

brushhog's picture

The problem is, in order to "hurt" the rich by raising rates, you'll also have to hurt the poor. Sure the poor might get hurt slightly less, but it will sting everyone. The only way to change that would be to implement "progressive interest rates", by income. So if you make 30-50k you pay 3% interest...make 51k-100k you pay 4%...etc, and so on. Of course, the rich have the ability to reduce their debt and increase their savings to take advantage of whatever policy shifts come down the pike.

Umh's picture

You would go broke loaning money at low rates to some of the poor people I know. Hell; you would go broke loaning them money at high rates, because they are not going to pay you back.

Drop-Hammer's picture

America's financialization/commoditization/monetization/corporatization was the jew's plan to control America's wealth.  Not a new phenomenon.  Been going on for over a 100 years.  It is just that now the curtain has been drawn back, the evil magicians revealed, and those chickens coming home to roost.  Smoke and mirrors can only go on for so long.

khakuda's picture

The much more important factor is that low rates increase asset prices like stocks and bonds, so the wealthy REALLY benefit relative to the poor.  The average scrub trying to save for retirement or buy a house gets dramatically less for his/her money after a Fed driven low interest rate orgy of asset price inflation.  As a result each dollar buys less retirement savings in the form of stocks and rents rise faster than inflation as house prices climb faster than inflation.

pitz's picture

The financial and insurance sector has been one of the largest beneficiaries of low rates.  I get a good laugh out of people who claim that the next 30 years of rising rates are going to be good for big finance/insurers, when we already know the past 30 years of falling rates produced the best of times.


It'll be engineering firms, and legitimate industrial companies occupying the prime RE in downtown NYC going forward, not the current crop of financial puke firms who will be relegated to nondescript warehouses in New Jersey.

My Days Are Getting Fewer's picture

This article is both naive and stupid:

Rich people only take on debt, when they can deduct the interest against taxable income.  That means that the effective interest rate is reduced by 40%.

Poor people pay no income tax.  But, they pay payroll taxes (FICA + Med tax + State unemployment and disability tax).  They can not deduct interest paid on debt against payroll tax.

There are zero usury laws, to place a ceiling on interest charged on debt. 

Poor people pay usurious interest rates on payday loans, pawnshop loans and creditcard loans.  Rich people do not because they do not take on this kind of debt and borrow against real estate or in a business context to deduct the much lower interest rates against taxable income.

jin187's picture

The sad thing is that there are laws that cap the interest on debt, particularly loan shark like scams such as title and payday loans. The problem is that most states cap them between 200-400%. Before they started doing that, you'd have those places charging 800% or more. Fuck, the more I type, the more I think I should start a payday loan place.

Mikeyyy's picture

And when interest rates go up, Tyler will write, "High Interest Rates Subsidize Wealthy Households."

Åristotle's picture

To be consistent, interest rate cuts and hikes represent theft not mal-investment. The principle is not the level of interest rates. It is how new currency is introduced. O were Mises still alive to right his errors.

Sudden Debt's picture

The richer you are the less value money has.

5 years ago, I went on vacation on a vacation budget of about 6000 euro's.

This year, I ended up spending 25000 euro's for 3 weeks of vacation with my family.

It might be hard to understand but you can't spend on the same level as you did when you made less money. Something changes.

And that's why people with money are needed in society, they buy stuff and do stuff others would never do but which does employ a lott of people.

And at a certain moment, 20K is what you make each day and 21K is what you spend each day.


Only in a communist utopia things are fair... untill the KGB busts your door because you don't comply.

Why do we want everybody to get the same as everybody else?

There's no such thing as fair. 

Only dopehead who dream of getting 20K because they're broke will never understand. But what they didn't even figure out is that they won't even get that 3K.


I had a discussin a while back about pensions.

Why should I get the same kind of pension as some guy who collects trash for the city?

I contributed a shitload more then him. Why should he get a pension as high as his salary while my pension wouldn't even cover the downpayment of  my car?

because it's fair?



Anteater's picture

Ten years ago our whole family spent six weeks in Indonesia for $1000.

I beat that. Two years ago I spent twelve weeks in Cambodia for $1500.

And now US Congress has means-tested your MC, meaning that after

you paid into the TRUST FUND for many decades, if you also saved

up some money for retirement, YOU NO LONGER QUALIFY! Some

blue monkey'god'r with a Green Card gets your MC and SS instead!

Better start looking for some 3W hellhole with good medical care!!

jin187's picture

Because he was smart enough to negotiate the best deal ever with the stupid city and state officials you voted for.

BTW, this is the difference between rich and poor people. They both earn 20k a day, the rich spend 19k of it, and the poor spend 21k.

I know multiple people who have gotten about a million dollars in inheritances, settlements, etc. All of them were broke within a year, because they immediately stopped working, put it in a checking account, and spent it all on cars, trucks, boats, drugs, alcohol, and vacationing. Nevermind that even with a conservative investment strategy, you could make more than most people make in a year just off the interest and dividends.