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Governments gain from low rates

By Sheyna Steiner ·
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.

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