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Falling Rates Aid Debtors, But Hamper Savers

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Households and corporations alike are refinancing their loans in droves to take advantage of interest rates that seem impossibly cheap. But those same low rates come with a flip side, driving down the income of retirees and others who live off their savings.

It is a side effect of a government policy meant to push down interest rates to a point that businesses and consumers are compelled to borrow and spend again, and yet it is hurting anyone with a savings account.

With the regulated rate that financial institutions can borrow from one another at almost zero, banks are paying savers next to nothing. The average returns on interest-bearing deposit accounts slipped to 0.99 percent in July, according to Market Rates Insight, which tracks bank rates. It is the first time its measure has dipped below 1 percent since the 1950s, when its data begins.

As a result, the amount of money on deposit at United States bank branches fell during the first half of 2010, Market Rates Insight reported this week. It was the first time that had happened in nearly two decades, indicating that people are dissatisfied with how little interest they are earning from their bank accounts.

Perversely, coming after a devastating financial crisis caused by companies and households that feasted on borrowing, ultralow interest rates are penalizing people who have paid down their debt and are now trying to save. It is also punishing those who rely on the proceeds of their nest eggs to pay the bills.

“It’s the whole point of low rates, to entice borrowing and discourage saving, but it means a massive wealth transfer from savers to borrowers,” said Greg McBride, a senior financial analyst at Bankrate.com. “It is a trend on steroids now because interest rates have been cut to the bone.”

For example, anyone keeping $500,000 in a 12-month certificate of deposit earning a rate of 1.5 percent annually — one of the best savings rates available nationally these days — would earn $7,500 a year, hardly enough to live on. Just three years ago, that same investment would have generated $26,250.

Wow this news is unexpected who would have thought this would happen. It only works if living costs come down as well but that would mean deflation....

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Equivalent to an economic dirty protest, smearing the shit on all walls.

In 2000 it was pretty much just the tech sector that saw a collapse in demand and expenditure.

In 2008 it was banking and anybody reliant on leverage.

Next we will see what happens when when the finance of pretty much the whole population of countries buckles.

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Wow this news is unexpected who would have thought this would happen. It only works if living costs come down as well but that would mean deflation....

But this has interesting effects - one of those is the rising of insurance premium (as fixed income investment returns drops to low level), so insurance company needs to charge more to cover their payout (which was partially covered by investment returns).

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