The federal government has imposed a virtual tax on savers, costing them $360 billion since 2007, according to a new report by the research division of a major management consulting firm.
The Federal Reserve’s “Quantitative Easing” policy has dropped interest rates to almost zero, effectively taxing the flow of interest payments to older people who have diligently saved cash for emergencies or retirements, according to the “discussion paper,” which is titled “QE and ultra-low interest rates: Distributional effects and risks.”
The virtual tax had the effect of quietly transferring $900 billion to the federal government, and also boosting revenue for cooperating big banks by $150 billion, says the report, which was produced by the McKinsey Global Institute, which is run by one of the world’s major management-consulting firms, McKinsey & Company
“Our headline finding is that ultra-low interest rates have produced significant distributional effects,” said the report, which estimated that lower interest rates have cost U.S. savers $360 billion since 2007.
The “QE” term is shorthand for “Quantitive Easting,” which is a euphemism for the legal creation of new money by the U.S. Federal Reserve. The money is used by the Fed to buy packages of shaky mortgage securities on Wall Street, many of which were bought by regulated banks during the housing bubble that eventually popped in 2007.
The QE policy began just after the 2008 election with the fed’s purchase of $600 billion in mortgage securities from Wall Street firms. Since then, the fed’s spending has fluctuated, but it is now spending $65 billion of created money per month on Wall Street.
That rise in the stock market has helped people who own stocks — including many of the people whose interest-payments have dwindled to a trickle.
That stock-boost has mostly benefited wealthy people, contributing to the increased gap between rich and poor in President Barack Obama’s economy.
From 2009 to 2012, incomes of the richest 1 percent “grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012,” according to a widely cited study by Emmanuel Saez, a professor at the Berkeley campus in California. While the middle-class has shrunk, the “top 1% captured 95% of the income gains in the first three years,” according to Saez’s September 2013 analysis.
The stock-price rise has created a trickle-down stimulus for the economy, as profitable-banks and stock-owners spend some of their cash on products and services through the economy.
But it has also created what many describe as the latest bubble, following the technology bubble in the late 1990s and the government-boosted housing bubble in the early 2000s.
In June 2013, the stock market fell 4.3 percent in three days when Ben Bernanke, the Fed’s chairman, suggested he would shrink the QE policy. Since then, the Fed’s members, and President Barack Obama’s nominee to the job, Janet Yellen, has suggested the QE policy will continue until the economy recovers. Since June, the Dow Jones index has climbed from 15,000 to just above 16,000.
The Fed’s spending has indirectly also boosted housing prices, helping many older people who own homes. But that policy also drives up real-estate prices for younger Americans, including married couples who want to start a a family.
But the low interest rates created by the QE policy also ensure that younger people can get cheaper mortgages from banks, taking on heavier debt loads to buy those more-expensive houses.
Unsurprisingly, the feds’ purchases have left it with a $3.6 trillion storehouse of risky assets. “The assets the Fed holds have jumped by over $800 billion, or about 30%, to more than $3.6 trillion since it first announced its latest bond-buying program last September,” said a September report in the Wall Street Journal.