Punishing the Savers in a Savings Poor Country

One of the things that has always bothered me about this brave new world of serial asset bubbles, where freakishly low interest rates are simultaneously the cure for the bubble that just burst and the fuel for the bubble about to inflate, is that a nation in dire need of savings unnecessarily punishes its savers.

Up until the current decade, with few exceptions, such as in 1992-1993 when the Fed's short term lending rate dropped to just three percent, you could pretty much count on getting at least five or six percent interest at just about any bank.

Well, not any more.

Rates for certificates of deposit are now at once unthinkable levels as shown above according to Bankrate.com and there is a disturbing new trend in recent years where the banks paying the highest interest rates seem to go belly-up shortly after you open an account.

GMAC is the latest example of this, offering over two percent for a savings account and closer to three percent on one-year CDs when most banks pay only a fraction of that amount. You may even be able to see this for yourself as ads for their products are likely to have popped up above and/or to the right as a result of this little rant.

In something of a cruel April Fools' joke, it's part of a long-standing routine of mine during the first couple days of the month to update my Quicken personal finance records with monthly interest earned as reported by the bank. These lower interest rates are hard to ignore.

Unfortunately, in preparation for the possible purchase of a house this year (now put off for at least another year) a bunch of our CDs have recently expired and where you used to be able to get over four percent, you can't even get two percent now.

It really is disgusting.

While it doesn't impose a hardship on us (it's more an annoyance than anything else), the worst part about this development is that you've got senior citizens out there who, during just about any other period in American history could be assured of getting a decent return on their savings, are now getting the short end of the stick - first from Greenspan and now from Bernanke.

For as long as I can remember from being a kid, you could always get five or six percent on a safe and sound investment at the local bank - no risk, no big upside, just a steady stream of interest payments for letting them use your money.

A half million dollars should be able to generate at least $25,000 or $30,000 a year in absolutely risk free income, an idea that was once at the very heart of the U.S. banking system.

Today, you'd be lucky to get $10,000 a year from that same pile of savings. That's probably not even enough to cover routine medical expenses for your typical retired couple.

There is something seriously wrong with a savings-short American financial system that, since about 2002, has punished its savers.

Comments

[The Hammer:]

The gov't and fed have been pushing their agenda the last 2 decades of making the American public a debt zombie. They have convinced the public that going to work just to amke the monthly payments is the AMerican Dream. The public bought into it.
Now this is rapidly changing as asset bubbles unwind and the mirage of an economy fades. The reality that many are broke is hitting hard. Just look at consumer confidence numbers.
The economy the last 2 decades was built on excessive lax lending and excessive consumption. A massive misallocation of capital again everything consumer related, housing or finance. This will take a number of years to delever. Where will the new demand come from to make up for the evaporating consumer demand?
The country needs to invest heavily in long term new energy projects (nuclear, wind solar, wave), mass transportation, railroads and R&D.

Apr 02 09:27 AM

[The Simple ...:]

traden4alpha has it right in pointing out that the real rate of return, net of inflation, taxes, and transaction fees, is what we should be examining. Nominal return is quite misleading. Tim does, however, correctly point out the current cash flow problem of fixed income investors. It's little comfort knowing that your 2% yield is producing the same real return it did in the 1970s, when that 2% doesn't cover your living expenses and you have to draw down principal.

This is why, from my perspective, even the risk averse retiree still needs to take some risk by moving part of the portfolio to investment grade corporate bonds, quality high yielding equities, and foreign currency denominated income producing securities.

Although the debate is ongoing and the jury is still out, my position is that inflation will return as an outcome of current policy decisions, and we will be return to a situation where near zero real rates of return will produce adequate current cash flows. Even in that case, however, I still think diversification in an income oriented portfolio is a good idea.

Apr 02 09:28 AM

[scootie2008:]

living off the fat of the land is over.

boo hoo, rich people cannot live off their "savings" anymore.

inflation is caused by credit expansion that is fueled by "letting them use your money" to "seek alpha".

Apr 02 09:40 AM

[SW Richmond:]

As I pointed out here:
seekingalpha.com/artic...

The pool of real capital is depleted and must be replenished. The only way to do that is to encourage savings with high interest rates. The government's actions to lower interest rates and encourage consumption are exactly wrong.


MinAkkar20,

The liberty that is our birthright is closer within our grasp than at any time in my 51 years of life. Critical decisions are being made right now by the government in a last-ditch effort to maintain the status quo and keep their boot on our necks. I strongly urge you to read the writings of vonMises, Hayek and others of the Austrian School. Economic liberty and political liberty ARE THE SAME THING. Liberty is the liberty to act to improve one's lot in life without interference, as long as one is not engaging in force or fraud. Since most of the interactions we all have with others in life are economic in nature and in pursuit of improving our own lot in life, restraining economic liberty is despotism. The government has become the largest purveyor of force (the police state) and fraud (Congress, Wall Street, and the Federal Reserve).

Apr 02 09:55 AM

[scootie2008:]

the people and the government ARE THE SAME THING.

It is YOUR boot

Apr 02 10:16 AM

[robert.b.fe...:]

Is that real inflation or post Clinton inflation? Yes there is a difference.


On Apr 02 07:35 AM traden4alpha wrote:

> Sadly, that 5%-6% was always an illusion because that interest rate
> included 3%-4% inflation while the taxman was taking about 1/4 to
> 1/3 of the interest (about 1.5% to 2%). After taxes and after inflation,
> savers have little or nothing added to there wealth. At the moment,
> inflation is virtually nil, the saver gets 2%, and the taxman only
> gets about 0.5% so the saver is actually doing better these days
> than when inflation was higher.

Apr 02 10:16 AM

[robert.b.fe...:]

Market forces have been forced into capitulation by government intrusion. Just as exorbitantly high yields on corporate bonds are a red flag artificialy low interest on savings is as well. Simply put why should banks or other institutions pay you for loaning them money when uncle sugar is giving it to them for free? However there are always consequences for chicanery. How long can Ford compete with GM and Chrisler when they are government sponsered entities? By proping those bad players up FED action is garaunteeing the failure of of the one that was best postioned to succeed with out help.

Apr 02 10:32 AM

[MinAkkar20:]

I am already a believer in the Austrian school and member of Mises as you might assume by my post. My post is a digression from savings rates, but is at the root of that issue.

I wish I could agree with you that liberty is closer than ever, but I am not so optimistic. This entire fiasco has been constructed by the government and media as a failure of capitalism. And the rhetoric and response is a remedy of heavy socialism and government "protection". As I'm sure you agree, the recent events are the result of government action to begin with. Without the government backing of GSE debt, the market would never have purchased crappy MBS to begin with. But how can you blame someone for buying and selling those MBS when the government has been telling you if it defaults they will back it? The government created the malinvestment, and are now promoting more government as the answer. The lone voice of reason in our representation (Ron Paul) is labeled crazy by the media. Everything Jefferson warned of when this country was founded has been realized.


On Apr 02 09:55 AM SW Richmond wrote:

> As I pointed out here:
> seekingalpha.com/artic...
>
>
> The pool of real capital is depleted and must be replenished. The
> only way to do that is to encourage savings with high interest rates.
> The government's actions to lower interest rates and encourage consumption
> are exactly wrong.
>
>
> MinAkkar20,
>
> The liberty that is our birthright is closer within our grasp than
> at any time in my 51 years of life. Critical decisions are being
> made right now by the government in a last-ditch effort to maintain
> the status quo and keep their boot on our necks. I strongly urge
> you to read the writings of vonMises, Hayek and others of the Austrian
> School. Economic liberty and political liberty ARE THE SAME THING.
> Liberty is the liberty to act to improve one's lot in life without
> interference, as long as one is not engaging in force or fraud. Since
> most of the interactions we all have with others in life are economic
> in nature and in pursuit of improving our own lot in life, restraining
> economic liberty is despotism. The government has become the largest
> purveyor of force (the police state) and fraud (Congress, Wall Street,
> and the Federal Reserve).

Apr 02 10:51 AM

[fireball:]

it isn't ideal but i keep my savings in gold and silver and my working capitol in frns. this is the best i have come up with to protect my value.
because i was hard nosed on my last housing puchase it will still actually sell for a profit-for now at least.

huskerbob
that was funny.

scootie2008
go crawl back under your rock.

Apr 02 10:58 AM

[SW Richmond:]

MinAkkar20,

thetradinggang.com/for...

Leviathan is killing itself, I believe we are watching its death throes. When it finally dies we must be ready to ensure that the welfare-warfare Leviathan is not replaced by its warfare-only cousin.


Denninger has this piece
market-ticker.denninge...

in which he points out that AIG was dead years ago when it began trading CDS and was merely using CDS to prop itself up. Well, so IMO was the rest of the financial system. The quadrillion-dollar derivative mess is the final Ponzi scheme, and when it crashes everything else crashes too. Eventually the lies MUST be revealed by reality.

You have to be ready and willing to reclaim your liberty. No shots will need to be fired, though there will be casualties.

You can see why SA has stopped printing my articles.

Apr 02 11:45 AM

[Jason Rines...:]

If your pissed now watch as necessary commodities such as energy and food with decreasing wages mean you can no longer earn a living. Eventually, you will be going to local food distribution center for supplies. At that point, the American people will revolt. The decisions made already have guaranteed the outcome. But there is money to be made for America's final bubble and opportunity to make sure you and your wife are not one of the ones in line at the food distribution center.


On Apr 02 04:39 AM Hillsfar wrote:

> Government has been bending the American people over for quite some
> time now, but it has been getting worse. We are truly in the financial
> end times, because more people are fighting for fewer jobs, natural
> resources are depleting, there's an enormous entitlement class that's
> growing every year, and our nation's debt is beyond ridiculous, it's
> ludicrous. Forget the bullshit blame games about Bush and Greenspan
> and Paulson versus Obama and Bernanke and Geithner. It's the whole
> freakin' system.
>
> Honestly, I don't know what ordinary Americans can do about this.
> People say vote and contact your elected representative. Look, I've
> already voted in every election since I was eligible (I didn't vote
> for Bush). I've already written my senators and my congressman and
> my local state legislators and even others numerous times. But we
> all know it's bullshit.
>
> My wife and I are young but we live frugally. We completely pay off
> our credit card purchases every month, we save for retirement and
> we save for emergencies, etc. We haven't bought a home because we
> know prices are stupendous. We both drive old cars (mine is 9 years
> old and was paid off 7 years ago). We live frugally. But honestly,
> we know this country is going to shit.
>
> www.chrismartenson.com...

Apr 02 12:14 PM

[Sonia:]

Yes, savers are getting hit. Consider tax free municipals as an alternative. I've had GO and A+ or better munis for thirty years, on the theory that if they're good enough for rich people they're good enough for us. While the rates paid aren't outstanding, taking the nontaxable total off the top of taxable dividends and other income has saved us from going into a higher tax bracket and handing more money to the government to misuse. A couple of bonds have gone sour over the years, but overall have been a far better investment than supposedly "safe" blue chip stocks. Inflation is a worry, but bank interest today is a sick joke. It's wrong that people who worked all their lives are shutting off the heat they can't afford while fat cats are getting rich -- what executive is worth 3 million or more a year?

Apr 02 12:35 PM

[Fabien Hug:]

It only shows that we are getting poorer and poorer.

Apr 02 12:53 PM

[Allan Frain:]

In a system of debt-based (as opposed to commodity-based) money--debt must be increased to keep the money supply growing. The disciples of Keynes have set policy since FDR and the system has rewarded debtors at the expense of savers toward this end. Real after-tax return on savings has been absent since the early 1980s.

What we are seeing now is an acceleration of a trend that began with the Federal Reserve Act. The distortion has grown to the extent that the democratic process has been swept into the vortex. Perhaps 80% of the voting population are debtors and 20% are savers. Tax and interest policy will not be made more favorable to savers under such circumstances.

The debt pyramid has past the rubicon. Collapse is the only way out. We can delay the collapse, but only by making it either more dramatic or more protracted.

Apr 02 01:35 PM

[henarl:]

Keeping your savings in currency (any currency) is now a losing bet with the ridiculous low interest rates, inflation losses, and tax on interest. If you believe that we will have a working economy in the future, put your savings into those things that will increase in price over the long term - such as energy and other commodities and commodity companies, some of which pay decent (6% or higher) dividends. Also possibly into low cost residential income property while prices are depressed. Society will always need shelter and energy.
If believe that the economy, and society as we've known it, will completely collapse, buy small silver coins, food, guns and ammo. Even if you don't expect use the guns and ammo yourself, they will be (and already are) a great speculation.

Apr 02 01:40 PM

[Tim Iacono:]

Countrywide, Wachovia to name two. I have an account at ING Direct and their rates are quite low - 12 month CD at 1.5%.


On Apr 02 08:11 AM elcopone wrote:

> The one part that falls apart for me is when you say "banks paying
> the highest interest rates seem to go belly-up." Could you site
> some examples besides GMAC, which had other problems that did them
> in?
>
> I can name 4 banks off the top of my head that have been offering
> high-yields saving accounts for many years already...HSBC, ETrade,
> Emigrant Direct, ING. None of these banks have gone "belly-up."

Apr 02 02:13 PM

[PainfullyAware:]

You obviously have no understanding of what Government has become in America.

I know of no one that feels represented by the Fools In DC. It Is Blatantly Obvious Whom They Serve.


On Apr 02 10:16 AM scootie2008 wrote:

> the people and the government ARE THE SAME THING.
>
> It is YOUR boot
>

Apr 02 03:30 PM

[scootie2008:]

Who? The wealthy? what is the solution to dismantle the US government? This country of laws is the best tool we have, can't you see that? don't you vote? maybe you should run for office and put us back on track?

Pining for a gold standard or some Mises-ian ideal is not productive. the world has real inequalities and I am not talking about 'liberties' squashed by the government boot in the form of low yielding CDs.


On Apr 02 03:30 PM PainfullyAware wrote:

> You obviously have no understanding of what Government has become
> in America.
>
> I know of no one that feels represented by the Fools In DC. It Is
> Blatantly Obvious Whom They Serve.

Apr 02 05:38 PM

[PainfullyAware:]

I think you need to do some "Que Bono and Follow The Money" analysis.

The complexity of corruption is vast.

With the influence of "Electronic Voting" there is little chance of changing the system from within the system. Yes, I Vote; I Vote On Principle And Character. I Voted For Ron Paul. He was the only candidate that did not have platitudes or superficial statements to real issues.

I am not Pining for a Gold Standard. I want No Special Case Legislation And Full ACCOUNTABILITY - No Off Book ASSETS.

Complexity Favors The Sinister.

Who knows What The Future Holds? Since we no longer have to deal with "Market Valuation" and the fact that we have spent the Next Year's Total GDP on filling the money hole fraud created - Lets all pretend that it is all ok and that the "Creative Taxes" that are to come will not destroy the producers or curtail their efforts due to lack of incentive.

I am involved in attempting to educate and make a difference locally - I suggest you do the same.

Lament the Constitution And Its Lack Of Influence In The Land It Created.

Liberty Is The Root Of All Good; Mandated Morality Never Works.


On Apr 02 05:38 PM scootie2008 wrote:

> Who? The wealthy? what is the solution to dismantle the US government?
> This country of laws is the best tool we have, can't you see that?
> don't you vote? maybe you should run for office and put us back
> on track?
>
> Pining for a gold standard or some Mises-ian ideal is not productive.
> the world has real inequalities and I am not talking about 'liberties'
> squashed by the government boot in the form of low yielding CDs.
>

Apr 02 08:38 PM

[Dr. O:]

Totally agree. People wise enough to side-step the stock market collapse in cash or bonds or CDs have been punished with rock bottom interest rates. If the US Dollar continues its decline then we'll be left with cash losing value to inflation and losing value relative to other currencies. There are ways to offset this, but it sucks.

Apr 02 11:56 PM