We already have negative interest rates in practice for savers in the USA

Published by Alex Bugeja on November 14th, 2019 9:08am. 1597 views.

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The Federal Reserve in the US has been under pressure lately, most obviously from the President himself, to lower interest rates to match those in other countries, i.e. to negative levels. The reasoning seems to be that the US economy is considerably more solid and therefore a better credit than those countries, so why shouldn't we "deserve" interest rates to match? 

Of course if countries were allocated credit in the same way individual borrowers were, that might even be a solid argument. Things get a bit hairier when it comes to countries though. One big knock about negative interest rates is that they penalize savers to incentivize borrowers, and encourage risky lending practices and investments as those savers search elsewhere desperately for yield. Arguably we're seeing some of that already.

The truth of the matter though is that savers in the US are already getting the short end of the stick in this respect when you account for the effect of taxes and inflation on their earnings.

The calculation is simple:

US inflation is above 2%, has been for a while, and is projected to continue to be so: 

At the same time, the best rate you can hope for on your savings is around 2% tops:

That already makes things slightly worse than a wash. Of course it's considerably worse in practice when you account for the effect of taxes. Interest income earned on savings is considered to be ordinary income in the US, and is subject to tax rates of 10% to 37%, depending on the tax brackets your income falls into.

Assuming an overall tax rate of just 20% on your total income, that 2% optimal interest rate on your savings is already down to 1.6% in practice. You're not keeping up with inflation at all - your money in the bank is deteriorating in value. You have a negative interest rate.