Macro Impact of Rates

I mentioned in the prior post that higher rates impact consumers in a negative fashion; Let’s look at some additional details, and respond to some bad dope on this.

There has been a
meme circulating, attributable to Charles Biderman of Trimtabs, that
the overall impact of rising rates is a net positive to US Households. MSN’s Jon Markman described it thusly:

Here’s the math: Households held $6 trillion in cash,
savings accounts, and certificates of deposit with maturities of less
than one year at the end of 2005. The interest earned on all of that
paper is at least one percentage point higher this year than 2005 and
two percentage points higher than in 2004. As a result, says TrimTabs,
consumers will receive $61 billion more in income from higher
short-term interest rates this year than in 2004. That’s real money
they can spend on clothes or cars, and invest in stocks.

That’s the upside of higher rates. The down side? Trim Tabs estimates
that $836 billion in adjustable-rate mortgages will reset this year. If
the average increase in adjustable mortgage rates is 2.5 percentage
points, then higher interest would only cost consumers $21 billion.

First, that omits all the other variable debt obligations — most especially credit cards.

Second, and perhaps more importantly, there seems to be some confusion here between median and mean (with issues of distribution and dispersion).  This is not the first time I have noticed this habit out of Trimtabs.

This issue is easily resolved for the typical family:  How much variable debt obligations does your household have? Have much variable income bearing instruments does your household own?

Add ’em both up. If your monthly/quarterly debt obligations are greater than your interest income , rising yields hurt you; If you have less, they help you. 

Where Biderman’s analysis loses touch with reality is his explicit statement that because ALL American households have more cash/CDs/bonds/etc than they do have debt, rising yields helps them!

Technically, that specific statement is true — but its also terribly misleading. When you see how those interest bearing income instruments are distributed across the US, its apparent that a big percentage of households are hurt by rising yields. The prime beneficiaries are the very wealthy — and retirees living primarily on yield — assuming they are laddered, have CDs and savings accounts, and are not rate locked. 

For most American families, however, rising Yields are burdensome. The impact is likely to be felt in retail spending.


Addendum: In one of those wonderful pieces of irony that you couldn’t make up if you tried, the Director of Public Relations for Trimtab is named Puffer;  (How great is that?) That’s even more appropriate in light of their cheerful reading of data.




How higher rates pad our wallets
Jon Markman
MSN Money,  Wednesday, March 29, 2006

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What's been said:

Discussions found on the web:
  1. calmo commented on Apr 8

    Then there’s a fish named after him and I would say you speared him but good.

  2. jcf commented on Apr 8

    Receiving greater interest on bank deposits, CDs etc. doesn’t improve one’s situation a bit if it’s merely compensating (to whatever extent) for higher inflation.

  3. Mark commented on Apr 8

    My god I read those “research reports”. They are nothing but research-cheerleaders for the sell-side.

  4. Detroit Dan commented on Apr 8

    ‘I read those “research reports”. They are nothing but research-cheerleaders for the sell-side’ Mark

    Which reports are you referring to?

    (BR: cheerful reports)

  5. Microcap Speculator commented on Apr 8

    Let’s not forget that a huge chunk of that cash is held in checking accounts that generate zero or negligible interest.

  6. Tim commented on Apr 8

    I think that was a typo, his real name is Fluffer.

  7. thecynic commented on Apr 8

    that’s great news…
    my first question is if households were in such great shape why did the Fed lower the rates (negative territory) in the first place? by this logic, the Fed would have been better off raising rates in 2000-2003. that way everyone would have better returns on their savings and would have spent more preventing the recession… this throws current economic theory upsidedown. i’m glad these guys at trimtabs figured this out before it was too late.
    who knows what kind of assumptions these idiots are making, but one they seem to be that spreads on debt and savings move lock in step. we all know banks are quick to raise prime but slow to lower it. i help a local bank price loans and cd rates. guess what, surprise, they don’t move lock in step with the Fed Funds rate. most local banks still pay paltry savings and money market rates. 1YR+ cd rates are a bit better but that is to attract money so they can lend against it, but the tighter the spread the lower return on assets, which is obviously not desirable. these guys act like everyone is enjoying 4% better yield on their cash accounts since 2004. i think its a stretch.
    the second side to the equation, revolving credit rates don’t even float at a set spread to Fed Funds or Prime.. it’s exponentially higher on the way up and the opposite on the way down.. (they aren’t even considering mortgage debt. wouldn’t revolving debt be higher without refis?) so even if you assume that these households have a positive net worth on their short term cash flow, it’s still virtually impossible to pick up enough yield on you savings to offset what you are losing on your revolving debt as it rises faster. it’s the difference between “tight” and “easy” money.
    if their logic is correct, then banks and credit card co.s wouldn’t be in business.
    and last but not least, as jcf correctly points out, inflation throws this argument out the window… but don’t tell that to the supply-siders like Laffer and Kudlow.
    nice try Puffy..

  8. Iasius commented on Apr 8

    I guess it doesn’t matter then who owes that $6 trillion and now has to pay $61 billion more interest than in 2004?

  9. Idaho_Spud commented on Apr 8

    *stands up and applauds* thecynic. Couldn’t have said it better, so I won’t try.

    One of the good things about rising rates is that it will encourage savings and discourage borrowing and the ‘culture of debt’ that a decade of easy money has created.

    Borrowing *should* make people wince and swallow hard, and saving *should* make them feel good. But all that’s been turned on its head. A return to normal monetary prudence would be welcome in the US.

  10. Alaskan_Pete commented on Apr 8

    Spot-on Barry. The ridiculous notion that you can take sum data without factoring in distribution rears it’s ugly head in alot of the cheerleading camp. It’s a reminder of the time-worn phrase: “There are lies, damn lies, and statistics”

    Enjoy the weekend. We are finally getting warm..45 for a high!, and sunny here on the last frontier. T-shirt weather, no kidding.

  11. David commented on Apr 15


    It’s not the fed’s job to protect or even ‘help’ consumers. It’s the fed’s job to protect and serve the banking industry’s best interests

  12. David commented on Apr 15

    first link with quotes didn’t work. Pardon the repeat, you can delete the first one moderator. Thanks


    “my first question is if households were in such great shape why did the Fed lower the rates (negative territory) in the first place?”


    It’s not the fed’s job to protect or even ‘help’ consumers. It’s the fed’s job to protect and serve the banking industry’s best interests.

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