REAL Yield Purchasing Power

I read an article by Keith Weiner, which highlighted the evil that is interest rate suppression – sometimes called financial repression. He points out that, after a lifetime of saving, a senior earning near zero interest return on his money would be forced to liquidate his savings to live.

He’s absolutely right, but he gives a false impression when he starts comparing today’s “Yield Purchasing Power” with the experience from 1979. Keith dismisses the importance of rising prices as he concentrates on yield, but it’s the REAL yield which matters.

A zero interest rate, in a zero inflation rate environment, is the same as a 10% interest rate if prices are rising at a 10% rate, except for three things.

• In the latter case, taxes on the make believe earnings of 10% reduce the yield to the holder of the nest egg. Government mandated interest rates would need to be that much higher to offset the tax take. In a zero interest rate world, there are no apparent earnings for the IRS to take a bite from.
• In the zero interest rate/zero inflation world, the person being denied an income from his life savings can see clearly that it’s his government which is applying the royal screw. While even a dimwit can see this, it’s different in the 10% interest rate/10% inflation world. Most people wouldn’t see the connection clearly enough to know who to blame.
• The government operates in a political world. Science and statistics are manipulated for political advantage. The CPI, the main spotlight for rising prices, massively under-reports the speed of rising prices. In a high interest rate/high CPI world, the CPI can’t be trusted to reflect price increase trends accurately. Under today’s adjustment formula, the CPI hike of 2% would have been closer to 8% using the 1979 methodology. If you think your even, earning 2% while losing 2% to inflation, think again. If the 8% is more accurate, then you’re getting a negative 6% real yield on your money (less taxes on the 2%).

Both cases stink. Both cases are theft plain and simple. In both cases, the thrifty saver is forced to eat into his savings in order to live. Under ZIRP, he must withdraw some of his physical savings. Under a 10%/10% regime, he must allow the purchasing power of his capital to be eaten away by inflation as he spends the interest he thinks he’s earned.

However, I would say that the low rates/low inflation scenario is marginally better, since the voter can know who to blame and who to try to throw out of office.

It’s not the Yield Purchasing Power which matters so much. It’s the After Tax, Real Yield Purchasing Power.