Distributional effects of ultra-low rates, Part 2

Somewhat humorously, the zero-bound is succeeding where our political system is failing: general discontent has given us some pretty strange bedfellows. The more hawkish voices of course want a more aggressive policy, and are being joined by a growing number of more progressive types who’d like to see corporations making money the hard way—developing new ventures and investing in labor and productivity—instead of through the financial engineering enabled by extremely  low rates.

In a 2013 paper, “QE and ultra-low interest rates: Distributional effects and risks,” McKinsey estimated that in the US, the UK, and the Eurozone governments had garnered about $1.6 trillion while households lost about $630 billion in net interest income by the end of 2012. The authors note that some of those governmental profits fueled the automatic stabilizers, and broke out demographic groups by age, not income. The young were gainers and the old, losers. For households under age 35 who are net borrowers, the gain from lower rates has averaged $1,500 a year; for 35–44, $1,700. But older households with significant interest-bearing assets were losers. Those aged 65–74, -$1,900, and over 75, -$2,700. For the oldest group, that was a hit of 6% of income; for the youngest, a gain of almost 3%. 

They note that non-financial corporations also benefitted, by about $710B, but that had yet to translate into investment, probably because the recession lowered demand expectations. At the time they reckoned the benefit boosted profits by about 5%, one-fourth of the gain since 2007. McKinsey argues that effects of near-zero rates on asset prices were "ambiguous,” but at least in the recent U.S. instance, we’re not really convinced.

As logic would predict, they forecast a reversal of these benefits as interest rates rise. Even with large percentages of fixed-rate mortgages, the authors estimate that in the US household debt service could rise by about 7% for each 100-basis-point increase. The younger net debtors would lose the largest benefit, while the older asset holders gain share. The more capital-intensive industries, utilities, manufacturing, extraction, would take the biggest hit, and this was all before oil prices fell, but companies that “use capital productively,” will be rewarded. What a concept.

 And they forecast an increase in market volatility. No genius points for that, but a nice change.

The Federal Reserve’s most recent Survey of Consumer Finances, for 2013, tells us that increased interest income will be narrowly distributed across households. Although most recent data show that 13.8% of households own stocks directly—which rises to 48% if you include mutual funds and the like—only 1.4% of households own bonds directly. The SCF doesn’t report on bonds owned through mutual funds, but applying the indirect/direct ratio prevailing in stocks to bonds gets us only to 5% of households. About 2% of the middle decile owns bonds (9.2% own stocks), and 6.9% in the top decile. The Fed doesn’t even include a number for bond ownership for the lower decile because it’s very tiny, and the authors note that families in the highest 40% of the income distribution own bonds disproportionately, though much of that is savings bonds. “Ownership of any type of bond other than savings bonds is concentrated among the highest tiers of the income and wealth distributions,” they say.

Debts are more equally distributed. Half—52%—of the bottom 20% is in debt; 84% of the top decile. But the top has a leverage ratio (debt/income) of 8%, compared with 19% at the bottom. Leverage ratios are highest in the middle of the distribution.

Really, what jumps out at you putting this stuff together are the details, like the fact that the fraction of young families with education debt increased from 22.4% to 38.8% between 2001 and 2013, and the fraction of middle-income families who  saved fell significantly.