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‘Fiscal cliff’ to sock CDs?

By Claes Bell, CFA · Bankrate.com
Tuesday, December 4, 2012
Posted: 10 am ET

One of the big issues facing the country these days is whether Congress and President Barack Obama can strike a deal to avoid the sudden expiration of the Bush tax cuts coupled with a sharp decrease in federal spending -- what's known as the "fiscal cliff."

If the two sides don't reach a deal, there could be a surprising casualty: savings rates.

An analysis by Market Rates Insight finds that the growth of consumer deposits was nearly twice as fast in the nine years following the Bush tax cuts as it was in the nine years preceding.

The analysis examined two time periods, pre- and post-tax cuts. The first time period was from June 1992 to June 2001, prior to the enactment of the initial tax cuts measure, the Economic Growth and Tax Relief Reconciliation Act  of 2001 (EGTRRA). During this nine-year period, total deposits in FDIC-insured institutions increased by $1.5 trillion, or 42 percent. However, during the nine years after the tax cuts took effect, total deposits increased by $4.1 trillion, or 82 percent, which is nearly double the rate of growth compared to the first period.

Dan Geller, executive vice president at Market Rates Insight, says skinnier bank accounts are a predictable result of higher taxes.

"People will have less money because the average household will pay an extra $2,500 a year in federal income tax," he says.

I asked Geller if that slowing growth might actually benefit savers by forcing banks to offer higher CD rates to attract new deposits.

"There are a few scenarios to declining deposits," Geller says. "If demand for loans increases and deposit level decreases, interest rates on deposits will go up as well as loan rates. If demand for loans remains the same, and deposits levels decrease, banks that need to increase liquidity will pay higher interest rates on deposits, but will be at higher risk due to the additional expense."

What do you think? Would you save less if tax rates went back to Clinton-era levels?

Follow me on Twitter: @ClaesBell.

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