Why Interest Rates Are Rising Everywhere – Except Your Savings Account
That was the headline from this recent WSJ article.
Back in the 1980s, a general lack of savings in America was one of the many reasons why America was going to collapse, and we were all going to die…
This was ostensibly because Japan and other countries had much higher savings rates and that in turn provided a great source of cheap capital that was going to propel Japan permanently past the United States.
But… not so much. Japan’s economy collapsed in the early 1990s and has never really recovered.
It turns out that America had a decent amount of savings after all, but it just wasn’t in banks (it was in 401ks, IRAs, and other investment vehicles).
In addition, according to this Investopedia article – 10 Countries With the Highest Savings Rates, high savings rates are not always linked to more economic growth in any case.
But – banks desperately need savings or deposits because that is where they get their money to lend to other people or companies, and lending is how banks make money.
If banks pay 0.5% for a deposit, for example, and lend that money out at 6%, they are effectively making 5.5%.
So, why aren’t banks offering to pay more right now for deposits?
They don’t have to.
This is because Americans have been saving at a record pace in recent years and most banks have more than enough deposits to cover their lending business.
Per the WSJ article above, banks had a total of almost $17 trillion in deposits as recently as June.
Things could change quickly for banks, however, if (1) depositors start to pull money from banks en masse in order to look for higher returns in an inflationary world; or (2) deposits just start to dwindle in general, as incomes drop and inflation surges (which has been happening in recent months).
This happened in the 1970s and 1980s, and banks were forced to offer higher rates for deposits, and it could of course happen again.
If it does happen, banks will lose their competitive edge when it comes to jumbo mortgage financing too.
Interestingly, in the 1990s and early 2000s, banks did not have the competitive edge resulting from a very low cost of funds, and they often could not compete with mortgage banks or non-bank lenders.
But – since the 2008 meltdown, banks have had an enormous advantage on the jumbo mortgage front because their cost of funds has been so low (because they pay almost nothing to their depositors).
Note: This is why it is very important for mortgage banks to have strong relationships with commercial banks to whom they can sell low-rate jumbo loans.
RATES PLUMMETED TODAY
Rates fell sharply today because a bunch of bond investors saw the yields being offered Friday and said…”hey…. these are great returns right now that we can’t get anywhere else, and we think rates are going to fall anyway because the economy is so weak– so let’s buy bonds!”
Or at least that is partly why they fell, and it is another indication that investors have deeper insights than the Fed or the media.
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