Saving Despite Zero Yield

Maybe some day
Saved by zero
I'll be more together
--The Fixx

Although the unhampered free market ideal seemingly grows more distant by the day, forces that government free markets are still at work. This is because free market forces are grounded in natural laws that cannot be eliminated by edict.

Recent behavior of individuals to save more in the face of near zero interest rates provides an example. Policymakers have driven down rates in hopes that people will seek more risk and borrow. But multi-decade orgies of borrowing and spending facilitated by past low interest rate regimes have saddled many individuals with excessive debt and low savings.

As such, people are now feeling the urge (market forces) to spend less and save more despite low yields on savings instruments. Indeed, the above graph shows that savings rates have ticked up since the onset of the recession--which perplexes some policymakers to no end because they have been pressing interest rates lower during this period. Falling money velocities, at multi-decade lows, corroborate greater propensity to hoard cash.

When people feel the need to save more resources for a rainy day, there is perhaps no minimum interest rate that deters individuals from doing things that improve their capacities to survive and prosper (the law of purposeful self-interested behavior).

Markets perpetually seek proper balance between risk and reward. When policymakers detour this journey off its natural path, market forces intensify to move the relationship back into natural balance. The more extreme the excursion, the greater the influence of market forces to rebalance the system.