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Record Low Interest Rates Stiff Savers and the Economy

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Fearing the European debt crisis will continue to deteriorate, investors have piled into U.S. Treasuries in a flight for safety. The yield on the benchmark U.S. 10-year (^TNX) has fallen to 1.55 percent, a record low.

From businesses to individuals to governments looking to borrow money, low interest rates are typically great news. A low interest rate environment is typically great for economic growth because it usually leads to business expansion. When businesses expand, they hire more people. When businesses hire more people, more people have money to spend on goods and services, leading to increased sales and more business expansion. And so the cycle goes.

But at the current pace of economic growth, it is apparent that consumer demand is low and businesses are not growing despite such low interest rates. First quarter gross domestic product (GDP) was revised down from 2.2 percent to 1.9 percent Thursday, which is much lower than the 3 percent growth seen during the last quarter of 2011.

Despite a common perception, business borrowing has has not lagged because credit is tight. Businesses have plenty of access to capital these days, they just don't want it, says Lance Roberts, CEO of Streettalk Advisors. He cites a recent survey from the National Federation of Independent Business, which indicates 92 percent of businesses feel all their credit needs have been met or they just are not interested in borrowing.

The problem is the consumer, says Roberts. "The people that are spending the money and buying the products, they are strapped," he tells The Daily Ticker's Aaron Task in the accompanying interview. "They are running out of savings."

Consumer spending, which accounts for 70 percent of economic activity, will remain low unless and until the job market improves dramatically. Ahead of Friday's May U.S. jobs report, retailers generally reported solid sales for May but the ADP employment data and weekly jobless claims both came in weaker-than-expected.

"Today's ADP report absolutely reinforces the idea that for whatever reason, employment growth has decelerated of late, likely due to uncertainty over the path of economic growth in the United States in light of growing issues in Europe," writes Dan Greenhaus, chief global strategist at BTIG.

Herein lies a huge conundrum facing Federal Reserve Chairman Ben Bernanke: Is there anything else he can do to keep the economy from falling back in to recession?

"He doesn't have much of a choice except to do more action here until we start to see things turn around," says Roberts, who believes rates will continue to fall due in large part the flight to safety trade gripping the globe. If Bernanke undergoes another round of stimulus, that will push rates even lower.

Roberts' target for the U.S. 10-year is 1 percent and 2 percent for the 30-year.

Not only are low interest rates bad for the overall economy, they are crushing investors and savers. If rates continue on their downward trajectory, people are going to have to look harder and harder for a return, which will likely push savers and investors into dangerous territory (i.e. riskier investments).

The biggest group at risk of falling into the hunt for yield trap are baby boomers. "Seventy-five million retirees are moving through the system now…[and] they are looking for income and they are not getting it from their banks," says Roberts. "They are being forced into taking risky bets with retirement money."

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Editors note: The blog has been updated to reflect the new 1.55% low for the U.S. 1o-year.