Why are interest rates so low?

[rekees4300]

Banks love it because they are essentially getting free inventory as opposed to actually having to pay depositors.

Banks love to make money by transferring it from their customers to the bank. IMHO interest rates of .01% are a ripoff. If you would like to earn 9.62% then invest in Treasury I bonds.

Individual - Series I Savings Bonds FAQs

 

[Doughknob]

The economy is a self serving monster that is little controlled by politicians, media, or businessmen. I have to stop here or I will go off on a rant and enough of you think I am crazy and wrong.

Not crazy at all. Dead-on with that ‘little controlled by….’ statement.

 

[YanmarFever]

Banks love to make money by transferring it from their customers to the bank. IMHO interest rates of .01% are a ripoff. If you would like to earn 9.62% then invest in Treasury I bonds.

Individual - Series I Savings Bonds FAQs

Rekees
Where do you buy them, and how long do you have before they mature?

 

[/pine]

It's been a long time since I had to take a course in economics (back when there was the gold standard)....but IIRC...inflation is/was a direct result of the gov. printing more money than there was gold to back it up...

Below is from an article from 2012

Paper money creation allows the government to spend more, it keeps interest rates low and it makes stock prices high. It sounds too good to be true. And, it is. There are negative consequences (both actual and potential consequences) that I have not yet mentioned. The worst actual consequence so far has been a sharp increase in food and gasoline prices.

It has been known for centuries that printing money creates inflation. There are different kinds of inflation, however. These can be grouped into three categories: CPI ex-food & energy, asset price inflation and commodity price inflation.

Not sure how it works without the gold standard but I do know the fed started printing money long before COVID...like starting in 2008...it's finally catching up...COVID only delayed the effect...

 

[mike0000]

Rekees
Where do you buy them, and how long do you have before they mature?

treasurydirect.gov

I recently learned about I bonds through another forum. I opened an account and plan to open one for my wife too.


Mike

 

[npalen]

treasurydirect.gov

I recently learned about I bonds through another forum. I opened an account and plan to open one for my wife too.


Mike

The I-bonds mature in five years at which time they can they can be redeemed without the three month interest penalty. They have to be held one year before they can be redeemed at all. (cashed)

There is a $10K limit to purchase(s) per year but to take advantage of the current high interest rate of 9.65%, you can also purchase gift bonds that may be given to another person such as your spouse or children to the extent of the $10K limit per year for that receiving person.

You and your spouse could each buy a $10K bond (or any amount of $25 or more) as well as a gift bond which could then be exchanged between spouses the following year. All these start earning interest in the month they are purchased.

The interest rate is tied to the current inflation rate and is subject to change every six months so you cannot lock in the current interest rate like on a CD.

I am using proceeds from 401K RMD's to invest in I-bonds and will continue to do so as inflation runs rampant, then the proceeds will probably go back into mutual funds. Federal income tax on I-bond interest can be paid annually or when the bond is redeemed. No state taxes on I-bonds.

 

[2manyrocks]

The more they try and get us a "soft landing" the worse they are going to make it. I am starting to think to just let the market do it's thing and flush out all this leveraged money.

Thinking about this overnight, high fuel prices might just do what they lack the guts to do.

 

[Jchonline]

It was back in the early 1980s when prices started skyrocketing just like they are doing right now in 2022. The difference is that the gov't is saying we just have a 7% inflation rate while everything we buy is 2 or 3 times what it was a year ago. In the early 1980s I put $20,000 in a 5 year CD at 18% interest and after 5 years it was over $45,000. It seems that inflation is worse now than it was then but cd rates are still less than 2%.
Putting $20,000 into CDs now means they will be worth less than $10,000 in 5 years after inflation.

Banks are in business to make money. They make the most money and gain the most stability from longer term loans. When their rates to borrow money are near 0%, they will almost always try and sell loans to make revenue.

Offering CDs or interest bearing accounts is a cost center for a bank. They only due this if they need more capital for lending. Therefore you wont see these types of interest rates go up unless the loan rates get so high the volume decreases.

 

[hosspuller]

Be aware the interest rates I-bonds are paying is calculated from two factors... The inflation rate AND a fixed rate. The current "fixed" rate is ZERO ... Yet the inflation rate you're getting is taxed by the feds. So, your money is losing value, maybe compensated a bit by the inflation rate paid, (changed every 6 months) but the gov't gets a kick-back on that. The gov't always wins... even when it's losing.

 

[npalen]

Be aware the interest rates I-bonds are paying is calculated from two factors... The inflation rate AND a fixed rate. The current "fixed" rate is ZERO ... Yet the inflation rate you're getting is taxed by the feds. So, your money is losing value, maybe compensated a bit by the inflation rate paid, (changed every 6 months) but the gov't gets a kick-back on that. The gov't always wins... even when it's losing.

That's true but 9.65% interest is better than 0.50% interest. You get taxed either way.

 

[dmccarty]

The interest rates are low because of all the tens of trillions of debt the US government holds. If interest rates go up to where they were in the 80s, all of the money collected in taxes would not be enough to pay just the interest on the debt.

Back around 1990, the US budget was around a trillion dollars and the interest payments on nation debt was $200 billion a year. The debt payment was high because of the high interest rates at the time.

Having a debt payment of 20% of the budget was criminal. Think of the tax cuts and/or things that could have been bought. My issue was, how much IS $200 billion? It is a number but what does it represent?

At the time, the US Navy had 14 or 15 aircraft carrier groups. A carrier group consists of a carrier, aircraft, at least one cruiser, frigates, destroyers, supply ships, and one or two nuclear attack subs. This would have cost $10-20 billion. Even if the cost was $20 billion for a carrier group, it meant the US could have bought 10 more carrier groups with the payment on the national debt. To put it another way, the national debt payment would have allowed the US Navy to expand its fleet by 2/3s from it's starting point. At a minimum.

THAT is how much $200 billion was worth.

The US government, and us, are in between a rock and a hard spot. Increasing interest rates will increase the debt payment, and because the US government does not live within it's budget, this will increase the debt, which increase the debt payment, and on and on and on.

Flip side is, as Warren Buffet said, the way for a debtor nation to pay off its debt, is to devalue the currency it pays to the countries owning the debt...

 

[TheMan419]

Banks love to make money by transferring it from their customers to the bank. IMHO interest rates of .01% are a ripoff. If you would like to earn 9.62% then invest in Treasury I bonds.

Individual - Series I Savings Bonds FAQs

Yes but that rate resets every 6 months based on inflation. You cannot cash it for 5 years without losing 3 months worth of interest. So if inflation tanks again you will get a very low rate of return.

 

[Larry Caldwell]

The ten second sound bite and meme psychology has led to an absence of a coherent plan to address current challenges. We have modern historic precedent for our inflation spike. Johnson's "guns and butter" deficit spending piled up the money explosive, and the Arab oil embargo touched off a decade of extreme inflation. Does anything sound familiar? Change the names to Trump's tax cut and the Russian oil embargo and we're right back where we were 50 years ago.

In the '70s we were wedded to an energy infrastructure based on choices from the 1920s. A century later we are still trying to base our lives on an extractive technology that can be interrupted at multiple points in the extraction-transportation-processing-transportation chain with multiple opportunities for profiteering.
We have the ability to break the century-old cycle of energy price inflation, but we don't have the will. It would require a restructuring of society for better energy efficiency, as well as developing alternative energy resources.

Unfortunately, market manipulation will favor inflating energy costs while restricting competition from new sources. Where do you think all that money is going?

 

[Larry Caldwell]

Rekees
Where do you buy them, and how long do you have before they mature?

I bonds — TreasuryDirect

www.treasurydirect.gov

 

[Snobdds]

The ten second sound bite and meme psychology has led to an absence of a coherent plan to address current challenges. We have modern historic precedent for our inflation spike. Johnson's "guns and butter" deficit spending piled up the money explosive, and the Arab oil embargo touched off a decade of extreme inflation. Does anything sound familiar? Change the names to Trump's tax cut and the Russian oil embargo and we're right back where we were 50 years ago.

In the '70s we were wedded to an energy infrastructure based on choices from the 1920s. A century later we are still trying to base our lives on an extractive technology that can be interrupted at multiple points in the extraction-transportation-processing-transportation chain with multiple opportunities for profiteering.
We have the ability to break the century-old cycle of energy price inflation, but we don't have the will. It would require a restructuring of society for better energy efficiency, as well as developing alternative energy resources.

Unfortunately, market manipulation will favor inflating energy costs while restricting competition from new sources. Where do you think all that money is going?

Larry, I see you don't understand how targeted tax cuts work....then you try to draw parallels to the 60's, which is crazy because nothing is even remotely close.

Educate your self...

IRS data proves Trump tax cuts benefited middle, working-class Americans most

Republicans’ 2017 tax reform law did exactly what was promised: It lowered taxes for all income groups.

thehill.com

 

[MossRoad]

...

Educate your self...

 

[Snobdds]

Larry might be a little old, but don't make fun of him.

 

[npalen]

Yes but that rate resets every 6 months based on inflation. You cannot cash it for 5 years without losing 3 months worth of interest. So if inflation tanks again you will get a very low rate of return.

Yes, that is exactly what I hope will happen and if it doesn't it could be called hedging the bet! I would gladly lose three months of interest to see rampant inflation under control!

 

[Larry Caldwell]

Larry, I see you don't understand how targeted tax cuts work....then you try to draw parallels to the 60's, which is crazy because nothing is even remotely close.

Educate your self...

IRS data proves Trump tax cuts benefited middle, working-class Americans most

Republicans’ 2017 tax reform law did exactly what was promised: It lowered taxes for all income groups.

thehill.com

Watch the birdie. While you were raking in the dough, the massive economic stimulus on top of an already expanding economy was burying you in guano. Interest rates are low because the Fed bought treasuries to keep them low, and all that money went right into the economy. In the olden days when there were actually adults in this country, this was known as "monetizing the deficit" and was considered a sign of the impending apocalypse. If nobody is willing to loan the government that much money, just print more.

Asset inflation has been roaring for several years now. People who think they understand economics were delighted by the gains in their stock portfolio, blithely ignoring the fact that the cash value of any investment depends on a functioning monetary system. The Fed is dancing on a tightrope without a net. There is no way they can sell their bond portfolio without bringing down the economy. There is no way the federal government can service its debt if interest rates rise enough to make bonds an attractive investment.

I expect a crash that will make 2008 look like a Sunday picnic. I expect everyone's taxes to double, because the US Government has frozen bond redemptions, and has retreated to cash only operation. If you don't like that scenario, close your eyes, click your heels together three times, and chant, "It can't happen here."

 

[Larry Caldwell]

Larry might be a little old, but don't make fun of him.

I tried to start a thread on inflation here a year or so ago. It went nowhere, and I can't even find it in a search. IIRC, one phrase I posted was, "If current economic policy does not cause inflation, we know nothing about the cause of inflation."

I have a low opinion of economists. Their theories have little predictive value. I'm more of an historian. I am old enough to have seen this scenario before, and have studied enough history to know our current crunch is not unique. Substitute national debt for war reparations and we look just like the Weimar Republic.