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When interest rates were 5-6% I could practically live off the interest and preserve my principle. Now that interest rates are near-0 I and millions of other seniors are just spending our savings down to nothing. Does this have the effect of decreasing money supply? In other words, if one million seniors spend 10 billion dollars of their savings in a year for everyday necessities has the money supply actually decreased by 10 billion dollars?
if one million seniors spend 10 billion dollars of their savings in a year for everyday necessities has the money supply actually decreased by 10 billion dollars?
only if, as an example, the entity you give the pile of cash to were to burn it.
No, its not going to decrease the money supply as the funds will just change ownership.
In terms of seniors spending their money, that is obviously good for the economy.
But is that good for the banks? Where once the banks had that 10 billion on deposit to lend, once it's all spent they then have empty banks accounts. Multiply that by tens of millions of depositors and you're talking hundreds of billions of dollars that have evaporated from the banks' books.
But is that good for the banks? Where once the banks had that 10 billion on deposit to lend, once it's all spent they then have empty banks accounts. Multiply that by tens of millions of depositors and you're talking hundreds of billions of dollars that have evaporated from the banks' books.
When seniors spend their money its just changing hands, the money will still be deposited...just in different accounts.
When seniors spend their money its just changing hands, the money will still be deposited...just in different accounts.
makes sense. the banks are kicking themselves for paying 5% all those years when the last 5 years have proved that people will keep money in accounts even it's only paying 0.02%.
makes sense. the banks are kicking themselves for paying 5% all those years when the last 5 years have proved that people will keep money in accounts even it's only paying 0.02%.
The last few years have proved that when the economy is depressed and there is a lack of demand for money (for investments, etc) then banks can pay hardly anything in interest.
The last few years have proved that when the economy is depressed and there is a lack of demand for money (for investments, etc) then banks can pay hardly anything in interest.
Let's assume that things go back to the level they were at pre-2007. It's a stretch because I don't really think the economy will ever come back like it was before; I think high unemployment is here to stay. But let's assume it does. I was earning 5-6% interest on my CD's at that time. Employment was 4.5% or so; GDP was much higher, of course. Do you think the banks, having figured out that they don't have to pay high interest rates anymore (because like you say, whether it's my money in there or I spend it and it becomes someone's else's it all winds up in the same bank) will actually raise interest rates back to 5%?
Do you think the banks, having figured out that they don't have to pay high interest rates anymore (because like you say, whether it's my money in there or I spend it and it becomes someone's else's it all winds up in the same bank) will actually raise interest rates back to 5%?
You're not getting it. The isn't something the banks have "figured out", the banks can get away with paying low interest rates when the demand for credit is low. If the economy returned to a healthy level banks would have to pay higher rates of interest to attract the same amount of money.
Interest rates are determined by supply/demand, banks would find it almost impossible to get many funds if they offered say 1% when treasuries were paying 6%.
Interest rates are determined by supply/demand, banks would find it almost impossible to get many funds if they offered say 1% when treasuries were paying 6%.
Oh, good point. i forgot about banks being in competition with the treasuries. So now the question is will treasuries ever go back to 6% when it would increase interest paymenst on the national debt by hundreds of billions of dollars. I think we are in this boat with next-to-nothing interest rates for the rest of the century, as the national debt will never be under control in the foreseeable future.
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