When Debtors Win, Savers Lose

When the President meets with his “economic advisors”, it might be helpful to have one of them repeat an “economics 101” lesson about saving and lending. Borrowers are being encouraged to refinance whenever possible to get a reduction in their interest payments, thus having more money to spend. However, in simple terms, every dollar a debtor saves by refinancing reduces the interest income of a saver, leaving them less money to spend. The source of all funds for loans is saving. If consumers don’t put money in a “bank” (financial institution), “lending” cannot take place. Debtors who refinance can’t miraculously come up with extra cash to spend without an adverse impact on interest income for savers. Getting a loan at “abnormally low” or “historically low” interest rates simply guarantees “abnormally low” returns for savers over the period of the loan. Good for debtors, not so much for savers. Inflation, of course, is the long term enemy of savers who invest in bonds and mortgages.