Savers Are Evil

We live in an odd world where Nobel prize winning economists do not understand the economy.

Why save? In today's economy there is no reason to. NY times columnist Paul Krugman:

Complaints about low interest rates are usually framed in terms of the harm being done to retired Americans living on the interest from their CDs. But the interest receipts of older Americans go mainly to a small and relatively affluent minority. In 2012, the average older American with interest income received more than $3,000, but half the group received $255 or less. The really big losers from low interest rates are the truly wealthy — not even the 1 percent, but the 0.1 percent or even the 0.01 percent. Back in 2007, before the slump, the average member of the 0.01 percent received $3 million (in 2012 dollars) in interest. By 2011, that had fallen to $1.3 million — a loss equivalent to almost 9 percent of the group’s 2007 income.

In a sense Krugman is right, interest is paid to the wealthy, but this is due to a degree to low interest rates. Let's say that one wants to live off one's savings—not a bad goal for a retired person. Let's also say that $30,000 a year is your retirement income goal. In the current rental world in San Diego a modest apartment rents for $1200 or so a month, so this is not a large amount of money. Older investors should invest conservatively, so the rate they get is at most 2%. In fact that is too high. How much capital would this older person need? So here is the math: X * .02 = $30,000. This person would need $1.5 million to live off the interest. Yes, I think we would all agree that Krugman is right and this person is "wealthy." Yes, Social Security will provide some income. Personally that will be $880 a month or so for me. Let's say that Social Security will provide on half of that $30,000. That means our hypothetical retired person will need $750,000 in savings. This is still by most people's standards "wealthy." But is an income of $30,000 a year wealthy?

You tell me.

What purpose do interest rates serve? And who benefits from lower interest rates? I will leave these questions for the next few blog posts.