Sympathy for the Savers

Bloomberg news reports: "Savers May Be Hobbled for 15 Years: Gross"

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors may be at a disadvantage for as long as 15 years as the U.S. keeps borrowing rates low to reduce its debt burden.

“Savers are being disadvantaged” when compared with debtors, Gross said during an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “What policy makers are trying to do is rebalance this imbalance, in terms of too much debt and too attractive rates on savings. It’s basically called financial repression. We call it pocket picking.”

First, "investors" are not disadvantaged, as claimed in the first line. You can invest in stocks, bonds, commodities, currencies, etc. Gross means people cannot earn money simply by parking their money in a liquid, risk-free asset. You can still earn plenty of money by doing a good job at investing. Nothing entitles you to earn money by doing absolutely nothing other than having money.

If the real rate of return on money is low, that means many people want to hold safe, liquid assets. It's supply and demand. Saving might be a virtue, and you might feel entitled to a reward for delaying gratification. But the price system still holds and your virtue will be no more highly rewarded than will the industriousness of an unskilled Chinese laborer in a country full of industrious unskilled laborers.

Households have lost real estate value, which many people perceived as risk-free. Now they want to rebuild their supply of safe assets. Since many people want to buy safe assets, their price rises and their yield falls.

The Fed is not doing anything extraordinary to keep real returns low. If the Fed were acting extraordinarily, then nominal GDP would not be growing at a 3.9% rate, as disclosed today. Nominal GDP grew at a 5% rate for most of recent history.