Interest Rates and Inequality: A Shift in Perspective
I have been thinking lately on how a high interest rate environment affects working class citizens and ultra-wealthy individuals differently. It started when I heard a quote from Warren Mosler, the founder of Modern Monetary Theory (MMT), describing a postitive interest rate policy as a “basic income for those that already have money”. I thought it was a pretty profound insight.
How I Was Taught to Think About Interest
Historically, I had been a fan of high interest rates. From a young age I was taught by my father to stay out of debt, pay off your credit card bill in full each month, and save your money, which is most certaintly solid financial advice. Because of that, I never feared high interest debt because I always knew to avoid it. And when it came to the other side of interest, the kind you earn, I was very excited by the idea of making a little extra just by letting my money sit.
Growing Up in a Low-Interest World
Having been born in the early 90’s, I turned 18 shortly after the Great Financial Crisis when interest rates were at historic lows. My first savings account at TD bank earned a measley .1% interest. With basically no money to my name, that amounted to maybe a dime a year.
By the time I graduated college and got a full-time job I opened up an account with Ally Bank and began earning 1% on my money. Even though it was 10 times more than before, it still dwarfed in comparison to the interest rates from before my time.
At the time, I wanted interest rates to go up so I could earn more money, (not realizing that I was missing out on huge stock market gains by not having my cash invested in the market, woops!). But now, a decade later, and my view on interest rates has done a complete 180.
Seeing the Bigger Picture
What changed? I stopped thinking only about how I could personally earn passive income and started paying more attention to how the broader economic machine works. I began to think about how interest rates affect people who have less than me and those who have much, much more.
Let’s take a closer look at how high interest rates affect people differently, depending on how much money they already have.
The Working Class: Burdened by Debt
As I got older, I quickly learned that the financial advice that my father gave me wasn’t something everyone grew up with. These teachings weren’t the rule, they were the exception.
When interest rates are high, your credit card rate rises, making it harder to pay off debt. In many cases, the interest paid ends up costing more than the original purchase. If you’re a college student or a first-time homebuyer, the system works against you as you try to secure basic needs like education and housing. And if you’re starting a small business, a loan might not even be worth it, you could fail before you even begin.
The Ultra-Wealthy: Paid to Sit Still
Now, for the ultra-wealthy, the story is much different. Unlike the middle class, who might earn enough in interest each month to treat themselves to a Chipotle burrito, someone with $10,000,000 in the bank earning a 5% rate receives a risk-free $500,000 annual income; without taking on any risk or lifting a finger. To be clear, this isn’t an “Eat the Rich” post. The ultra-wealthy can serve a real function in the economy by using their ability to take on greater risk and invest their wealth into new ventures, large-scale projects, or growing businesses. But when interest rates are high, they are no longer encouraged to pursue those goals. Instead, they get to collect easy money, often more than what a working-class household earns in a year.
A Policy That Increases Inequality
After considering how high interest rates affect the working class versus the ultra-wealthy, Warren Mossler’s comment begins to make a lot of sense. When interests rates are high, it is essentially a policy where everyone is given a basic income in proprtion to how much money they already have. The working class earns a few extra dollars each month while the ultra-wealthy receive hundreds of thousands of dollars a year to grow their estate. All this does is increase wealth inequality and this is why I am for a Zero Interest Rate Policy.