Every so often, someone comments on a really old post and I start poking around the archives for old stuff. This time, someone commented on a post from August 2005 in which I suggest that ING Direct increase their rates to entice more customers. Their rate was a “meaningless 3.3%.” Getting 3% (or 2%), let along 3.3%, would be a significant jump from the best bank rates today, which currently sit around 1.0%. Heck, when Ally raised their rates a few weeks ago by a few fractions of a percentage point, it was big news.
But despite such low rates, Americans are saving more. The increase in savings is driven not by interest rates but fear of the future as a result of the recession. When things are good, the future is bright and people are comfortable spending like there’s no tomorrow. Pile on the debt because the good times are rolling, we can pay it off later. The unintended consequence of lowered spending, is a weaker economy. A larger percentage of our economic growth is driven by consumption. Say what you will about the implications, that’s the reality.
So the big question is, would a higher interest rate drive you to save more? Do you even look at the rate? I know I don’t. I save because I want to be able to spend it in the future. Whether I get 1% or 5% really doesn’t impact the decision. It’s like when politicians talk about lowering tax rates in order to spur job creation… that’s just not how I would think as a business owner. You hire when the person you’re hiring can earn your business more revenue than they cost. You hire a new employee when they take some of your workload so you can focus on projects that can generate more income for your business. The taxes, which affect take home income of the profits, matter later in the decision making process. (You could argue that given how small business is taxed, higher rates constrict cash flow. That is true, but it doesn’t necessarily directly impact hiring decisions, it just makes payroll harder to meet and that’s affected by plenty of external factors… anyway, beyond the scope)
A higher interest rate would be nice, especially one above inflation, but it just doesn’t change my choices. Does it affect you?