Questioning Lagarde as Gross Interest Income in Germany Heads Towards Zero


Thanks to negative interest rates, Germans interest income has plunged towards zero.

Counterproductive Interest Rate Policy

Eric Dor, Director of Economic Studies at the IESEG School of Management in Paris emailed an article with some interesting charts regarding the Counterproductive Interest Rate Policy of the ECB.

What follows is a guest post by Dor, with my comments at the end. I added or changed some subtitles.

Collapse of Interest Income in Germany

The extremely accommodating monetary policy of the ECB has had huge redistributive consequences. The disposable income of savers has been hit by the collapse of the average return on their accumulated wealth invested in interest products. Low interest rates have benefited borrowers. By boosting asset prices, the decline of interest rates has also favoured the small segment of wealthy households who own securities, potentially increasing inequality.

ECB Monetary Policy

The ECB has used various instruments to push down market and bank interest rates in the euro area. The instruments used by the ECB are its traditional key interest rates, hereafter summarized by the deposit facility interest rate, recent unconventional tools like massive asset purchases known as QE, and forward guidance about the expected path of its policy. All these instruments have a decisive impact on market short term and long term interest rates, as shown on the following chart.

Money Lost and Gained

It is interesting to compute what German savers have lost by comparing their effective interest income to a hypothetical situation where they would have remained at their level of 2012. It is easily computed by adding up the difference between effective gross interest income and their level of 2012.

The monetary policy conducted after 2012 has implied a cumulative loss of gross interest income of euro 158 billion for German households until 2019.

Of course, the monetary policy has benefited German borrowing households. After 2012 and until 2019, German borrowing households “saved” a cumulative 99 billion of interest expenses. It is computed by adding up, for all the years after 2012, the difference between effective interest expenses and their initial level.

The net result is a loss of euro 58 billion to German households.

Counterproductive Policy

The ECB has been engineering an overall decrease of interest rates hoping that cheap credit opportunities would lead households and companies to increase their spending. The problem is that this policy may lead to the opposite result, if households decide to offset declining returns on savings by saving more.

Evidence shows that it is what happens in Germany. The saving rate of households has been continuously increasing since 2014.

German Savings Rate

Banks Harmed

Low or negative interest rates are also decreasing the net interest income of banks. It threatens their profitability perhaps decreasing their supply of loans to the private sector.

End Dor Article

On August 30, I commented Lagarde Praises Negative Rates, Study Shows They Reduce Lending

This common-sense report by Dor also strongly disputes Lagarde's view.

Twilight Zone

Fed vs ECB

Whereas the Fed bailed out US banks by paying interest on excess reserves, the ECB charged banks interest on excess reserves draining bank profits.

Negative interest rates unquestionably hurt EU banks and there is no evidence of Lagarde's proposed counter-benefits.

A European banking crisis awaits.

Mike "Mish" Shedlock

Comments (28)
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There was an interesting interview last year between Gordon T Long and Lacy Hunt - Financial Repression Authority. On youtube. Worth a listen, covers rates, devaluations etc and gives a good idea of the past consequences. Mentions the French 1927 actions post WW2 of competitive devaluation finally leading to the US 1933 actions.

Devaluation of the Euro has a part to play in this.


Question - has Lagarde been successful at anything much positive? Serious question.

Outside of occupying her post, being a woman & French, what's so special about her achievements in her role at the IMF?

Note EU President is German woman, ECB French woman. ECB now purely politically driven? Wheres this going?


When that lower monthly payment achieved through lower rates fails to stimulate purchases, what to do? Extend loan durations. Lower lending standards. Increase incomes. Tase anyone with cash.

Country Bob
Country Bob

It is one thing to say zero interest rates were necessary right after the credit bubble popped. Its dishonest for central bankers to say that, since it omits that they themselves created the emergency (their failure to exercise regulatory duties created the bubble).

For any central bank to suggest that this emergency situation needs to continue indefinitely is essentially an admission of total failure. Not just failure to regulate, but failure to address the problems even after those problems are obvious to the common man on the street.

Its one thing for GM or Kodak to fail to see their market changing and prepare -- and most people view the management of those companies as failtures. Its another thing when the central bankers still can't see the disaster more than a decade after it hits.

Lagarde made a complete mess of Argentina, her "signature" action as head of the IMF. One has to wonder how brain dead the EU is to even consider her for the ECB. I think the EU is already bankrupt, and already circling the drain... but any doubt in my mind vanished when they hired Lagarde even when they saw the Argentina mess.

They are appointing a proven failure. They know she is a failure. But she is part of their little clique. Better qualified people are available, but not part of the clique.

The EU is dead.


"failure to address the problems even after those problems are obvious to the common man on the street." You are making projections, maybe because of people you know. I can assure you, the people on the street have no idea who does what to them. Their state of mind can be described as...mysticism. The EU will be dead when the elites say it's dead.

3 Replies

Country Bob
Country Bob

I think the common man on the street recognizes there is a problem, even if he/she can't articulate exactly what it is, nor how to solve it. The list of misfits being elected all over the G7, the election losses of career politicians -- Joe Average does know there is a problem.

The political class (I find your label "elites" to be offensive and misleading) still seems to think their debt binge of the last decade worked. I would expect a competent group of kleptocrats to state that it didn't work, and to immediately blame "the other guy" (pick your favorite evil doer here).

Both answers are deceptive and manipulative modus operandi of the political class.... but claiming the debt binge worked makes them look inept and out of touch. If they can't point the finger of blame somewhere else, better to remain silent than to appear weak and clueless.


What's wrong with calling the bankers elites? I find the term "political class" to be unhelpful because modern politicians are puppets. People are finally finding out that the political process was usurped some time ago.

We have a small number of people who own most of the assets in society, and central bankers have encouraged this wealth concentration. Elite seems to describe them as well as any other label.

Country Bob
Country Bob

Elite usually means they are the best of the best. They most assuredly do not meet that description.

Elitist means they are pompous a?ses.

The latter fits them a lot better