CD rates Blog

Finance Blogs » CD rates » Governments gain from low rates

Governments gain from low rates

By Sheyna Steiner · Bankrate.com
Wednesday, September 19, 2012
Posted: 9 am ET

The low interest rate regime Americans are currently living with does not impact everyone equally. While rates on certificates of deposit languish -- typically coming in much lower than the rate of inflation, borrowers benefit from the very low CD rates.

And not just consumers benefit but so do governments that borrow as well as issue bonds, and those governments have a great need for loans these days. That point is underscored in the New York Times story published last week, "As low rates depress savers, governments reap benefits."

From the story:

Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases.

Along with keeping rates low, governments are using a variety of tactics to encourage captive audiences, like pension funds and banks, to buy their debt. Consumers, in other words, are subtly subsidizing governments without even knowing it. Economists have compared this phenomenon to a hidden tax on people's wealth.

The Federal Reserve has gone on the record, acknowledging that the prolonged low-interest-rate policy is a burden on savers. But, Fed Chairman Ben Bernanke pointed out in the FOMC press conference last week that a deep recession could be equally detrimental to savings.

Get more CD and Investing News with our free weekly newsletter.

Follow me on Twitter @SheynaSteiner.

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.