Punishing the Savers

There is something seriously wrong in the world when nations in dire need of domestic savings end up having to push interest rates to such ridiculously low levels that it makes earning any real money from a simple savings account nearly impossible.

Years ago, you could get at least five or six percent on your money without having to take any risk at all and, when the government reported inflation at three or four percent, you could not only believe them, but you could come out ahead on your savings account.

When inflation went to ten or 15 percent, then you could earn 15 or 20 percent at your local bank without ever having to open up a brokerage account or learn what a price-to-earnings multiple was.

But, since we entered the brave new world of rising asset prices which, just a couple of years ago, economists actually thought was a reasonable substitute for traditional savings, it's hard to earn any money on your money without going out on a limb somewhere, somehow.

In fact, over the last few years, many people were made to feel stupid if all they wanted was the safest, soundest investment where there was no chance of losing money.

"You should buy this municipal bond fund", the investment adviser said in 2006. "It's earned an average of eight percent over the last seven years and it's tax free. Of course, past performance is no guarantee of future returns..."

With many muni bond funds losing 20, 30, 40 percent or more last year, even the most conservative investors in this brave new world have now gotten the short-end of the stick.

So, it comes as no surprise, but is no less disheartening, to read that savers in the U.K. are now faced with the quandary of trying to find something that is safe that also pays some kind of interest.

This report in Times Online explains:

Banks cut savings rates to 0% for first time
Depositors are getting no reward for locking their cash away

Banks and building societies have slashed savings rates to 0% for the first time following the Bank of England’s historic series of interest-rate cuts.

West Bromwich, the country’s seventh-largest building society, slashed the underlying rate on its Bonus Saver account to 0% this month following December’s one percentage point reduction. Julian Hodge, the Welsh bank, also pays just 0% on its easy-access savings account.

Moneyfacts, the data firm, said the situation would only get worse following last week’s half-point reduction to 1.5%, the lowest for 315 years.

About 40% of accounts now pay 1% or less, with 26% below 0.5%, and this is expected to go up to 53% and 39% respectively if banks and building societies pass on the latest Bank rate cut in full.

Some now think that it's possible banks in the U.K. will start charging savers to keep their money on deposit.

A quick check of my credit union shows a 0.75 percent rate for a regular savings account. Some CDs are coming due later this month - I can't wait to see what the renewal rates are going to be.

Comments

[Tradememe:]

Extremely low rates have been the basis of the financial crisis and now we are trying to fix the problem with another round of extremely low rates. Does all this sound logical ?

Jan 13 04:54 AM

[Jan Rogozinski:]

Console yourself with this thought. According to the Jewish, Christian, and Muslim religious traditions (which together are followed by most folk in the world), taking or receiving interest on a totally risk-free "investment" is the deadly sin of usury. (Basically the idea is your demanding payment while doing nothing at all is the worst possible kind of gluttony.)

For further information there is a Muslim mutual fund called Amana, which follows the Jewish/Christian/Musli... rules, and which has done well during the last year compared to other funds.

For 2000 years the three traditions have considered usury to be much the same as sodomy. (Because your interest is the reward for a sterile investment in the same way that anal-genital intercourse is sterile and does not produce children.). So if they aren't paying you your "interest," that means that you temporarily are somewhat less of a pervert than usual.

Jan 13 10:27 AM

[prudentinve...:]

But when usury was banned it was on real money, in gold or silver, and without income tax. In deflating fiat money, the real return to savers becomes zero when the nominal interest earned, less the income tax paid is equal to inflation.

So, with 4% inflation and a 33% tax rate, a nominal interest rate of 6% actually gives the saver nothing, so she is not guilty of profiting from usury. Further, with a nominal interest rate less than 6%, the saver is being robbed, and the penalty for robbery is harsh in some cultures that ban ususry!



On Jan 13 10:27 AM jan814 wrote:

> Console yourself with this thought. According to the Jewish, Christian,
> and Muslim religious traditions (which together are followed by most
> folk in the world), taking or receiving interest on a totally risk-free
> "investment" is the deadly sin of usury. (Basically the idea is your
> demanding payment while doing nothing at all is the worst possible
> kind of gluttony.)
>
> For further information there is a Muslim mutual fund called Amana,
> which follows the Jewish/Christian/Musli... rules, and which has
> done well during the last year compared to other funds.
>
> For 2000 years the three traditions have considered usury to be much
> the same as sodomy. (Because your interest is the reward for a sterile
> investment in the same way that anal-genital intercourse is sterile
> and does not produce children.). So if they aren't paying you your
> "interest," that means that you temporarily are somewhat less of
> a pervert than usual.

Jan 13 10:55 AM

[bigmoney:]

its all relative. If all asset classes are sagging relative to the dollar, then 0% is a good deal.

I would never have thought it possible to see all asset classes sag relative to fiat currency. Very strange.

Jan 13 03:32 PM