The P.A.

A weekly address from Patrick Adams,
President of St. Louis Community Credit Union

That’s a Lot of Bran Flakes, My Friend

On November 24th, 2014, posted in: Uncategorized by 1 Comment

losing centsIt’s been six years since the Federal Reserve placed the federal-funds rate at near zero. To you, me and our neighbors, that “near zero” thing has equated to really low rates on our savings and certificate of deposits. How low? I joke regularly that my CD is earning “a couple of paper clips, a rubber band, two jacks and a piece of chewing gum.” In other words, those of us who save are making almost nothing. 

If you’re retired and on a fixed income, you’re really being skewered. Just prior to the Great Recession, we had something called “normalized rates.” It is what you think it is — a normal rate environment. We had one-year CDs paying just north of 6 percent. Now, not so much — try 1 percent on for size. You know what that equates to? A lot of two-for-one early-bird dinners at the Chuck Wagon (salad bar not included).

I’ve said it before: This low rate environment has been brutal for retirees. They’ve saved all of their lives and invested their hard-earned money in CDs of varying terms in order to get a monthly dividend check to help augment retirement, social security and the like. Sadly, that monthly dividend check has been shrinking like your favorite t-shirt in a hot dryer. There’s a lot interest income now than when you started saving.

A by-product of retirees earning less is that they spend less too. DUH! OK, so you aren’t shocked by the obvious. But how about a few numbers that drive home the point?

  • Retirement-age people — between 65 and 74 years old — have lost an average amount of just under $2000 per year in annual income.
  • Our elders who have eclipsed 75 years old have lost $2700 per year.
  • According to Charles Schwab, that’s a total of $58 billion in income lost by our older generation since 2008.

That’s a lot of Bran Flakes, my friend.

This group of folks (let’s call them seniors) spend just under 10 percent of the American consumer economy. In general, seniors spend more than their income, which is why they take their interest income and inject it right back into the economy. That ain’t happening.

We search for ways to stimulate the economy — well, here’s an idea. The Federal Reserve should raise interest rates. Then Ma and Pa Kettle will do their part for sure.

The Fed’s plan with low rates was to push up stock prices. As stock prices go up, so does investing. They were right, unless, of course, you’re living month to month and don’t have a stock portfolio. Then you need CD rates to go up. Investors in the stock market are happy. So are people who borrow money. But Grammy and Gramps, who saved their whole lives, are getting hammered.

This holiday season, Fed, respect your elders and give them the gift that keeps on giving — raise their interest rates.

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