Investors vs. Savers

In his blog “Life after full-time work” Don Ezra, former Director of Russell Investments and extensive researcher and writer on the financial market, presents the idea that Low Interest Rates are actually a Tax on Savers. 

Here is why: The Central Bank sets the interest rate, then artificially forces it down through “quantitative easing” which in essence penalises the saver by the percentage difference of the normal rate and the lower rate.  He believes this difference can be viewed as the equivalent to an increase in income tax rates.

He concedes that lower interest rates encourage investment into enterprises that are working to grow, as they should gain more profits which are valued higher now with the lower interest rates.  And borrowing is cheaper thus both consumers and companies do more of it.

The fact is economists do not distinguish between investors and savers, but Don Ezra says we should.  He defines an investor as someone seeking long-term growth and who can afford to take the shorter-term risks that accompany growth-seeking investments.  A saver is someone who cannot afford to lose money and requires short-term certainty.

Don Ezra states: therefore, lower interest rates are good for investors and bad for savers.

“The cost of the stimulus is borne, at least in part, by savers, who get paid less.” This includes those in retirement as their planning timeline is shortened and thus, they are more risk adverse.  It is not meant as a snide, it is just that central bankers cannot find a way to help borrowers without hurting savers.

Great food for thought as we debate fiscal responses to the COVID-19 market fluctuations.  Click on the following link to read the full article.