Thursday, December 9, 2010, AM | Leave Comment
Despite the fact that banks and credit unions pay a dismal interest rate – less than 1% – deposits at these financial institutions have increased by $1 trillion to a record level that has reached a total of $7.74 trillion since October 2007. Most checking accounts don’t even pay interest. These are the findings of Market Rate Insight.
Such almost nonexistent returns should encourage consumers to look for other kinds of investments such as stocks, bonds, and Treasury notes but most consumers are staying away from these kinds of investments.
At the same time, they are looking for ways to have a safety net around their disposable income. So most are shying away from investing their money in stock market and other such venue. When the spending gets tough, the savings obviously gets going.
Hit hard by the worst recession in memory, consumers’ savings rate has averaged 5.7 percent of disposable income this year, up from 3.1 percent in the prior decade, according to the Commerce Dept. In the coming years, it seems that consumers would be spending less and saving more.
These are considered as core deposits and as a stable source of funds for commercial banks to lend out to their customers. So what the banks have started doing is shift from raising funds in debt and securitization markets to increasing core deposits.
Consequently, borrowing by U.S. commercial banks fell 17 percent since July of last year, while core deposits increased 9 percent in the same period, according to the Fed. Core deposits are important because banks can easily lend the money at higher rates than they are paying depositors. They can also profit just by purchasing Treasuries.
What’s in it for consumers?
During the extended downturn, discounting became a norm for nearly every industry that depends on consumer dollars. Retailers continue to cut prices as they build up and strengthen their businesses for the post-recession holiday season.
The balance has tipped decidedly in favor of consumers, who had retreated to their equity-starved homes, coming out only for bargain-basement prices.
The trend is good for the consumers not only in savings but the retail discounts as well. Now with more savings in the banks, consumers are holding off their spending. The result is retailers catering to the consumers will have a hard time selling all sorts of their merchandise. During the current holiday season, more and more retailers are offering discounts. That can mean one thing and that is the discounts might get carried over into next year.
As long as consumers are not spending, these businesses will continue to offer deeply discounted merchandise. For consumers that is good news. For the national economy, that ain’t good because two-thirds of the economy is dependent on consumer spending.
In a Nutshell
Americans are saving much more than they were in the last decade, and at lower rates. Those savings are boosting deposits at U.S. banks. The less they spend, the more discounts the stores would offer turning into more savings for consumers.