I got a notice from one of my credit cards a bit ago, announcing that they were raising the interest rate. It's only of theoretical interest to me, of course--I use credit cards for transactions, not to borrow money--but looking at the rate they're charging reminded me that there are really three interest rates.

Of course there are an infinity of different interest rates, but I find I think of them in three broad categories:

• The rate you have to pay
• The rate the big boys have to pay
• The rate you can earn on your savings

These rates used to have a particular relationship to one another. (People used to talk about bankers following the 3-6-3 rule: Take deposits at 3%, make loans at 6%, and hit the golf course by 3 PM.) Things haven't been that way in a long time--and it really bugs me.

Rates you have to pay

The credit card I just got new rate terms for has a variable rate. I don't know what the old rate was, but the new rate will be prime plus 9.74%, which currently works out to 12.99%. That's better than a lot of credit cards, but it's still a terrible way to borrow money.

The banks, of course, claim that they need to charge these high rates to cover the costs of running a whole transaction system, and to make up for all the people who don't pay their loans off. Personally, I'd find that a lot more convincing if I didn't know that they covered the cost of the transaction system by charging the merchants transaction fees and if they didn't load up even higher rates (along with a bunch of fees) on everyone who began to look like they might default.

Still--it's a free market and all that. If you don't want to pay those interest rates, you're free not to borrow money.  That's what I do.

Rates the big institutions pay

The news often reports the rates that big institutions pay. The prime rate used to be big, although it's become less important of late. The US treasury has to pay just a fraction over 3% to borrow for 10 years. The Fed Funds rate (the rate banks pay each other when they lend/borrow overnight) is around zero (0.17% on July 29th), down from over 5% before the economic crisis hit and the Fed hit the panic button. During the crisis the Fed has been making money available via a temporary program called the Term Auction Facility. They just lent out $82 billion for four weeks at 0.25%.

Understand: the Fed has done this on purpose. A big part of the reason things are like this is that after the big financial institutions trashed their balance sheets by lending huge amounts of money to people who would never be able to pay it back, it became necessary to recapitalize the banks. The Fed and the Treasury lent them billions to keep them together during the crisis, but the only hope for the banks ever paying that money back is for the banks to be hugely profitable.

If you could borrow at 0.25% and lend at 12.99% you could be hugely profitable too. Of course, that's not going to happen.

Rates you can earn

For a decade or two, back in the 1980s and 1990s, savers had a pretty sweet deal. Savings accounts, CDs, treasury paper, even savings bonds paid great rates. Through most of the 1980s it was possible for ordinary savers to get 5 percentage points over inflation. That gradually narrowed--through the 1990s the difference was down to about 2.5 percentage points, but it was still pretty sweet.

Then, in 2001, rates that savers could earn collapsed.  From a very satisfactory after-inflation return of over 3% in 2000, rates fell almost to zero. In fact, the after-inflation return to savers has often been negative, starting in 2002.

The fraction of their income that American's saved collapsed to around zero in 2005 or so. There's plenty of blame to go around for that, but you have to figure that an absence of any real return on savings didn't help. Savings have spiked up now, because everyone is afraid, but they won't stay up if savers can't earn anything.

What to do?

First of all, unless you can borrow at 0.25% or so, don't borrow any money. That's the easy part.

There's really no solution for the way savers are getting screwed. Reported inflation is momentarily low, but that's about to change (once last fall's big declines in fuel prices drop out of the year-ago calculations). I'll be very interested to see if savers put up with negative real returns, once the reported inflation rate surges.

Until rates for savers move up, about all you can do is shop around for the best returns on savings accounts and CDs, and invest some of your money in non-financial investments (such as stocking your pantry with stuff you're going to use anyway, and putting cash into things like better insulation and weather stripping that'll pay a return in the form of reduced future expenses).