Upping the Risk Factor

Moneybox
A blog about business and economics.
Feb. 6 2012 2:39 PM

Upping the Risk Factor

Here's a Wall Street Journal article on the impact that low interest rates have on a particular subset of savers:

Robert Marcotte can't afford to play it safe anymore. With interest rates likely stuck near zero for nearly three more years, the 61-year-old retired telephone-company manager is about to ramp up his holdings of stocks and municipal bonds, using money now at the bank in certificates of deposit.
"It gets me a little uneasy," says Mr. Marcotte. "Since I'm not working, I am very risk-averse, but still need to generate income."
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This, I suspect, is what people are getting at when they say that low rates punish savers. Marcotte would like to live in a world where it's always possible to earn a positive real rate of return while keeping your money in risk-free investments like U.S. bonds and FDIC-insured banking instruments. In today's world, you can't do that. If you keep money in the bank, you get a guaranteed negative real return. If you insist on obtaining a positive real return, you'll have to take risks.

What I would say in response is that low rates are the symptom rather than the cause here. Not only would it be nice to live in a world where Marcotte can get a positive real rate of return without taking on risk, I'd like to live in a world where Marcotte's niece is sure to be able to find a job somewhere in town if she's willing to show up on time, work diligently, and learn how things work. That's what the full employment economy looks like. Not that everyone is guaranteed a good job or pleasant job, but at least a job. If you go down to the local mall or closest downtown, someone will have help wanted signs in the window. These are two sides of the same coin. In a healthy economy, if you've got money burning a hole in your pocket a bank will pay you to hire it and if you're able-bodied someone will pay you to work. When the economy's not healthy, both of those factors break down and they break down for the same reason. If there are no customers, nobody's going to hire you and nobody's going to want the loan that would create the demand for your money.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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