How Do Negative Rates Affect Consumer Savings?

Ideas from Forbes Investor Team
BlackRock CEO Larry Fink recently lamented that low interest rates are hurting the economy by depressing the returns that consumers earn on their savings. As a result, he reasoned, people will have to save more than they otherwise would to meet their retirement savings objectives. That means less consumer spending, an essential ingredient for vigorous GDP growth.
Fink’s cause-and-effect linkage sounds logical enough, but it conflicts with another notion about savings. Tax-based government programs such as Individual Retirement Accounts seek to raise the savings rate by increasing the reward for saving. Should it not follow that reducing the reward for saving—by lowering interest rates—will depress rather than boost savings?
In any case, it is hard to reconcile Fink’s assertion that low interest rates depress savings with the following comment from the Wall Street Journal (John Letzing, Negative Rates Upend the World). The article addresses the impact of negative interest rates, which several of the world’s central banks have instituted: “In theory, the negative rates should prompt people to spend their money or hoard it in cash, rather than save it at a bank and watch it shrink.”
Other Responses Are Also Possible
There are still other possible consumer responses to low interest rates. For example, instead of increasing the percentage of their income that they save, people may attempt to boost their returns by switching to riskier investments. Alternatively, as suggested by Thom Melcher of PNC Asset Management, they may postpone retirement and plan less opulent retirement lifestyles.
Which of these responses should policymakers expect and what are the probable market responses for which investors should plan? A truthful answer is that the economists do not have savings completely figured out.
Take those government programs designed to encourage saving. Former Federal Reserve Chairman Paul Volcker has argued that they do not appear to add much to the national savings rate. Rather, he has suggested, the programs merely induce people who would have saved anyway to take advantage of a tax-exempt method of saving. source by
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