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How Uncle Sam is killing your savings

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October 21, 2009 – Comments (6)

Despite what the idiotic article in this week's Barron's says, I realize that the government has little choice but to keep interest rates as low as possible for the foreseeable or risk the economy completely falling off of a cliff.  However, as a yield-hound who likes to invest in dividend-paying stocks and bonds that obviously pay interest this article struck a chord with me:

How Uncle Sam is killing your savings

This is a quiz. What do the record-high Wall Street bonuses have in common with the record-low yields for savers?

Answer: They show yet another way that prudent people, especially those living on fixed incomes, are being screwed by the government's bailout of the imprudent.

Here's the deal. The government is spending trillions to keep interest rates down in order to support the economy and prop up housing prices, and those low rates have inflicted collateral damage on savers' incomes.

"It's a direct wealth transfer from savers and retirees to overly indebted borrowers," says Greg McBride, senior financil analyst at Bankrate.com...

But until rates go up, Wall Street will be chowing down on essentially free money, while fixed-income people living off their investments will have to eat into their capital, take more risk, or reduce their standard of living. A nice reward from their government for a lifetime of saving. Thanks for nothing, guys. 

Deej

6 Comments – Post Your Own

#1) On October 21, 2009 at 7:39 AM, Gemini846 (46.67) wrote:

My grandmother has been feeling this pinch. They sold thier farm in the early stages of the boom and retired with a sizeable nest egg that ended up (mostly as a result of fear and previous poor choices) in a CD ladder. These things have been demolished lately. With just under 5% yields they could bring in about $1200 a month without affecting the principal, now the longer term stuff they can buy is hovering around 2% so thier choices are either increase risk, or buy shorter term hoping that rates will go up. Either way if they end up needing the money they'll have to reduce thier principal. It's messy.

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#2) On October 21, 2009 at 8:25 AM, russiangambit (29.38) wrote:

Let's take a bird view - I think US is not only addicted to foreign oil ( to borrow from Bush, urgghh), but is also now addicted to low interest rates and cheap money, I mean businesses are. Given the power of coporations in politics when compared to individual savers, I foresee pretty much impossibility of rates going higher than 3-4% in forseseable future. That is a big boon for growing businesses.

So, basically we take from savers and take it to businesnesses by intervening into the natural interest rates processes.

If ou are playing God (that would be FED), you need to follow the rules of nature, such as keeping things balanced. Which FED never does, thus the bubbles. In this case, you should compensate savers somehow for the loss. Because corporations get the spoils they should be compensating savers. Why people save - mostly for old age, i.e. retirement. So, to compensate corporations should be providing pensions system for the whole US population. That is not free market, but that is the closests to free market you can get when you start meddling with it in the first place.

Instead of providing pensions funds , what corporations do - they got 401K plan, where the benefits go to whom  - again the businesses, in this case financial firms (various advisors, mutual funds, brokers )b etc. So, savers not only subsidise US businesses as a whole they also subsidise financial industry and then we wonder why the middle class is broke.

Keeping interest rates this low is  - 1. breakes free market balances 2. creates wealth destroying bubbles 3. bunkrupts the population.

I keep asking myself - given this reality how I can preseve my capital? People have already figured out over the years  - stocks, real estate, foreign currencies,  but for this very reason they are bubble-prone and chances are I won't come out ahead because of bubble/bust cycle. 

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#3) On October 21, 2009 at 8:53 AM, AbstractMotion (52.03) wrote:

Deej, this is much bigger problem then you're making it out to be.  We live in a country with a very elaborate safety net for retirees that has been underfunded and borrowed against for quite some time now.  As more and more people are forced to rely heavily upon it from their savings being eroded by bad monetary and fiscal policy, everyone will have to pay for it.  The company that you're getting dividends from and anyone working is likely to see their FICA taxes rise within the next 10 years.  While I'm not a huge fan of these programs, I do feel badly for anyone who attempts to responsibly save money and ultimately fails because our fiscal and monetary policy penalizes such actions.

 

As usual we're trying to trade short term prosperity for longer term drags on the economy as a whole.   Russiangambit has it right, we've broken the free market and it's internal balancing mechanisms through Fed inventions over pretty much all of this century so far.  Rates should never be as low as they are today and risk is not priced being priced properly because of it.  It's nice to see the market rallying, but it'd be a lot nicer if it was doing so while the bond market wasn't lying prostrate from Fed intervention.

 

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#4) On October 21, 2009 at 11:01 AM, StatsGeek (29.37) wrote:

That hits the nail on the head.

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#5) On October 21, 2009 at 11:56 AM, jesusfreakinco (28.98) wrote:

Gemini846

Have granny move some of her savings to foreign currencies.  I am invested in foreign currency CDs at Everbank and getting a much better yield and significant price appreciation as the USD declines.

You may also want to fire her financial advisor.

My two cents...

JFC

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#6) On October 22, 2009 at 1:23 AM, DarthMaul09 (29.77) wrote:

If I was an older person who owned a home and didn't have much money saved, I would try to get the lowest rate reverse mortgage from my property and put the money into CEF.  Hope that the bank that bought the mortgage goes under then buy the house back for pennies on the dollar.  Just another thought.

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