Interest rates on savings accounts are going down rather quickly. In the United States, a very interesting trend has become apparent over the past 200 years. Under the current circumstances, it seems unlikely the Fed will offer any real improvement until early 2040 at the earliest.
Historic US Interest Rates are Interesting
Most people don’t realize interest rates have been around for much longer than anticipated. In fact, they have existed in the US since the late 18th century. The banking system is also much older than most people give it credit for. It has undergone some changes, but overall, the same “issues” have persisted since day one.
Looking at the chart below, the overall “momentum’ is rather telling. In the early days, interest rates seemed like a good idea. As more time progresses, they have become virtually unsustainable. Banks don’t mind storing people’s finances, but paying them to effectively use those assets for a bank’s own gain may no longer be viable.
The chart also confirms it is not the first time interest rates drift lower over time. A gradual decline has been recorded between 1798 and 1945, with no improvements throughout this period to speak of. While all of those decreases are fueled by macroeconomic events of a completely different scale, today’s outcome – under completely different circumstances – will be virtually the same.
Back in 1981, bank interest rates suddenly surged to 15.8%. Many people look at this as an appealing figure, yet it’s crucial to understand the underlying reasons as well. Rampant inflation affected the US at the time, resulting in skyrocketing prices for goods and services, While that allowed interest rates to rise, it wasn’t sufficient to offset overall inflation rates.
What is Happening Today
Ever since that “peak” in interest rates, the decline has become more outspoken. Rates decreased by over 86% by the time the financial crisis of 2008 came around. Granted, that period saw the steepest decline in rates altogether, but it was merely a sign of things to come. In hindsight, it is no surprise that an asset like Bitcoin came to market shortly after this period.
Instead of learning from mistakes during the financial crisis, things have grown progressively worse. Banks eventually shifted to a “lower interest rates for longer periods of time” approach. It is the only solution that may have some longevity, yet even that concept is now coming under a lot of pressure. Various countries enforce negative interest rates, and the US is likely to follow that example.
Turning this situation around will not occur anytime soon. As the goal is now to keep rates lower for extended periods of time, banks can focus their attention elsewhere. For the Federal Reserve, the average interest rate “cycle” lasts roughly 25 years. Current measures have been implemented in 2016, indicating no real changes are expected before 2040-2041.
That leaves plenty of time for consumers and companies to rethink their strategy. Storing funds in a savings account will be less appealing for at least two more decades. Numerous alternative investments have popped up since. Bitcoin and precious metals continue to make a name for themselves. A major shift in wealth transfer seems inevitable at this point.