With hope and a prayer

How low can interest rates go? No one really knows but the Fed is continuing its current policies hoping to drive rates even lower.

The target rate for bank borrowing is already 0% to ¼%. That is reflected in the rate banks pay depositors. Savers don’t think of the Fed as a competitor, but it is. It is setting the market rate because it can and has more money to lend than any other single saver/depositor.

While the Fed seems surprised that people aren’t borrowing more money, it has its own data to explain why. The recently completed Survey of Consumer Finances (SCF) included more than 6,400 responses. The data shows that the median household income has declined over the past decade with the largest declines in the highest decile.

The Fed and Congress are hoping spending will be stimulated by cheap loan availability and bring about economic recovery and increasing tax revenue. The SCF, however, identifies the problem that neither can change.

Younger individuals are facing lower wages, more competition for job opportunities and higher debt from student loans than their parents or grandparents. Financial stress for the 20-somethings results in delayed marriage, delayed births, delayed home purchases and delayed most anything else requiring payments. After all, what bank is going to lend to a debt strapped unemployed person? How can we expect much economic stimulus from this group? It is not there.

The over-55 age group had smaller declines in income, but they aren’t inclined to borrow more money even at historically low rates. Empty nesting Boomers are an increasing portion of our population. Even with income, their goals have rotated from educating children to paying down debt (which they have) and saving for retirement (which they are). They are not inclined to borrow more money at any price when they are trying to recover from recently damaged finances.

If our leaders at all levels of government do not face the reality of lower revenues, even greater austerity will be facing us at every level.