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    Ultra-low interest rates due to wealth accumulation, not Fed policy: Study

    Ultra-low interest rates due to wealth accumulation, not Fed policy: Study

    Ultra-low interest rates due to wealth accumulation, not Fed policy: Study
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    By CNBCTV18.com  IST (Published)

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    The near-zero rates have worsened inequality and helped the rich get richer. Consequently, the global glut of savings has led to the decline in the natural rate of interest.

    Advanced economies like the US have witnessed low interest rates for over a decade. Often viewed as an outcome of central bank policies, the downtrend is more a consequence of the rich accumulating more wealth, says a latest study.
    The ever-increasing income of the rich is responsible for the decade-long fall in interest rates in the US, economists Atif Mian, Ludwig Straub, and Amir Sufi said in a paper presented at the Jackson Hole economic symposium in August.
    Low interest rates make loans cheaper and boost the economy. They are responsible for boosting stocks that led to the recent rebound of the markets from the lows in 2020. The Federal Reserve has maintained low interest rates for a decade to maintain this economic stability.
    However, the near-zero rates have worsened inequality and helped the wealthy amass significant appreciation of their investments. Consequently, the global glut of savings has led to the decline in the natural rate of interest (denoted as r*), the paper said.
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    “As the rich get richer in terms of income, it creates a saving glut. The saving glut forces interest rates to fall, which makes the rich even wealthier. Inequality begets inequality. It is a vicious cycle, and we are stuck in it,” said Professor Atif Mian in a series of tweets recently.
    The rich have more propensity to save. The paper said by 2020 the top 10 percent of earners in the US took home about 45 percent of all US income as against 30 percent in the 1970s. The rise in earnings led to an increase in the cash pile. The country’s top earners held about 40 percent of private savings in 2019 as against 30 percent in 1995. The rich, therefore, hold the larger part of the savings glut that is dragging the natural rate lower.
    “Since it is the very rich who own most of the assets, a fall in interest rates makes them richer,” Mian said.
    This also limits the Fed’s ability to tighten monetary policies. If the Fed raises interest rates to counter the decline, it would discourage borrowing and drag the economy into a recession. On the other hand, if the rates remained at low levels, it would limit the Fed’s ability to stimulate the economy in times of crisis.
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