As Low Rates Depress Savers, Governments Reap the Benefits

The following is an excerpt from an article in:

The New York Times
Tuesday, September 11, 2012

As Low Rates Depress Savers, Governments Reap the Benefits

By CATHERINE RAMPELL

A consumer complaint is ricocheting around the world: low interest rates are eating away at savings.
Bill Taren, a retiree near Orlando, Fla., discovered in August that his credit union would pay only 0.4 percent annual interest on his saving account, even though inflation averaged 2.8 percent over the last year. So he and his wife decided to just stuff their money in the mattress, he says, because at least there “we can see the cash when we want.”

Jeanne and André Bussière, in Annecy, France, have a stable pension and a bank account that pays 2 percent interest — “almost nothing,” they say — even though the consumer price index rose an average of 2.5 percent over the last year.

Jiang Rong, an information technology professional in Xiamen, China, decided to dive back into the speculative real estate market rather than watch his savings wither at the bank. In China, too, the cost of living is outrunning savings, as local restaurants nearly double their prices.

The fact that interest yields are so low in so many parts of the world is no coincidence. Rates are determined not only by markets, but also by government policy. And right now many governments say they have good reason to keep their own borrowing costs as low as they possibly can. Just last week, the government’s report on job growth in the United States showed continued weakness, and an international forecasting group warned that the European economic powerhouse, Germany, will fall into recession later this year.

Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases.

Along with keeping rates low, governments are using a variety of tactics to encourage captive audiences, like pension funds and banks, to buy their debt. Consumers, in other words, are subtly subsidizing governments without even knowing it. Economists have compared this phenomenon to a hidden tax on people’s wealth.

“If you ask a central banker is that what you’re doing, and why you’re doing it, they’ll say ‘No, we’re just trying to get the economy going by making it easier for the private sector to borrow,’ ” said Neal Soss, chief economist at Credit Suisse. “But I have a syllogism for you: The government makes the rules. The government needs the money. So why should it surprise if the rules encourage you to lend the government money?”

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U.S. Chamber Calls for Tax Reform as U.S. Corporate Rate Becomes Highest in the World

Says United States Should Adopt Simpler System with Lower Corporate and Individual Rates and Territorial System

WASHINGTON, D.C.—U.S. Chamber of Commerce Executive Vice President for Government Affairs Bruce Josten issued the following statement today ahead of the U.S. corporate tax rate becoming the world’s highest on April 1, 2012:

“In just a few days, the United States will hold the dubious distinction of having the highest corporate tax rate in the world. By simply standing still, we are falling behind. We need fundamental, comprehensive tax reform to improve our tax system, strengthen the economy, and help American companies compete and win.

“The United States tax system is increasingly out of step with the world economy and its competitors’ tax systems. As countries such as Canada and the United Kingdom have moved to reform their tax systems and lower rates to encourage economic growth, America’s inaction puts American worldwide companies at a competitive disadvantage and threatens our economic recovery.

“The Chamber believes now is the time for comprehensive, fundamental tax reform that lowers the individual and corporate rates and keeps them synchronized. Reform should also shift to a territorial tax system, bring taxpayers certainty, simplify the tax code, and provide adequate transition rules to get our tax code from where it is now to where it should be.

“Ultimately, the marketplace, and not the tax system, should allocate capital and resources. We can’t allow our tax code to continue to punish American businesses and taxpayers. We need reform and we need it now if we are serious about driving economic growth, creating jobs, and enhancing American competitiveness.”

The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations.