Historically low interest rates on bank deposits dipped below inflation rates and eroded the buying power of consumer savings by nearly $600 billion since the beginning of the Great Recession.
This analysis shows that the average interest rate on bank deposits was lower than the average annual inflation rate in five of the last six years eroding consumers’ savings by $594 billion. During the six years since the beginning of the recession, the average annual inflation rate exceeded the average interest rates on deposits with the exception of 2009, which had an annual deflation rate of -0.40%.
The table shows the annual deposit balances and the average rates from the FDIC, and the average annual inflation rate from the Bureau of Labor Statistics for each of the six years since the beginning of the Great Recession:
The nearly $600 billion in buying power consumers lost from their bank deposits is mainly because they made an intuitive rather than analytical financial decision to shift deposits from term (certificate of deposits) to liquid accounts (checking, savings and money market) during t6he last six years due to high level of money anxiety. In the six years from 2008 to 2013, consumers increased their liquid accounts balances by 89%, yielding only an average annual return of 0.62%, while decreasing their term accounts balances by 37%, which could have yielded them a yearly average of 1.39% during each of the past six years.
The reason consumers shifted their bank-deposits from term to liquid accounts is based purely on their intuitive decision process. Research presented in the Money Anxiety book
clearly demonstrates how consumers tend to make an intuitive decision to hoard “Mattress Money” during times of high money anxiety. Mattress Money is a financial behavior phenomenon whereby consumers feel greater sense of security by shifting their money to liquid accounts thus feeling that their money is more attainable to them in times of need; much like placing their money under a real mattress.
Had consumers made an analytical decision to leave the money in term account during the past six years, they could have preserved the erosion in the buying power of their savings.