Is Saving Really for Suckers?

It's hard to disagree with the basic premise of Jon Markman's commentary over at MSN Money, one that casts a rather dim view on those who are content to settle for paltry returns on their savings accounts while enriching the banking sector in the process.

Your bank, with help from Uncle Sam, is making obscene profits at your expense. Instead of funding the fat cats, here's how to join them in the economic recovery.

If there's one thing that seems like it has to be a good idea, it is saving money. I mean, it's like walking grandmas across the street, eating hot dogs on the Fourth of July and rooting against the Yankees, right? A concept that seems above reproach.

Yet the reality is that in times of low interest rates, a credit bull market and a steadily advancing stock market, socking income away in a savings account may be the dumbest idea in the world.

In fact, I'll go one step further and say it flat out: Saving is for suckers.

The reason this is true explains a lot about where we are in the business cycle right now and how the banking establishment and government conspire to rip off the public at every turn.

Well stated and just what we need in a country that, over the last few decades, has been desperately short on domestic savings - another reason for Americans not to think about saving money the old fashioned way.

But, the story gets much worse and helps to explain the high demand for low yielding treasuries in a country that now runs a deficit of about 10 percent of GDP.

Here's the deal: When you put a portion of your income into a savings account, a money market fund or a certificate of deposit at a bank or brokerage, it appears from your perspective that you are placing it in a vault for safekeeping. But the truth is that you are lending your money to the bank at a rate of about 1%. The bank then laughs behind your back as it turns around and lends it to the government for 4%, to big companies at 6% or to smaller companies for 8% or more.

The difference between what the bank gives you for your cash and what it earns from lending it out at higher rates is called its "spread," and it amounts to the bank's profit margin. That spread right now is so large -- as wide as 8 percentage points -- that even many stupid bank executives could not avoid earning huge profits this year.

Mind you, there are some bankers who are so lame that they won't make money. But for the most part, the profitability of banks right now is so obscene that any tricks they pull in their earnings reports this month will be intended not to hide losses (as bears would have you think) but to hide their gains. A steep yield curve -- which occurs when short-term interest rates are very low relative to long-term interest rates -- is a direct pipeline from your savings account to bankers' bonuses.

There is a way for you to halt this robbery and redirect the process in your favor.

Naturally, the proposed solution to no longer being a sucker is to buy a stock fund, preferably one that has low expenses.

That strategy would have worked quite well this year. Last year - not so much.

Comments

[gmwright:]

I would say you make the banks even more money by putting your money into equities. Just look at how much of their income came from FICC and how much came from trading.

Plus I would argue a "savings account" is not equivalent to saving, which is somewhat insinuated in this article. What I mean is that "Saving is for suckers" is definitely not the same statement as "Savings accounts are for suckers". Overall his comments come across as reckless to me. As you quite accurately mention at the end, one can't just ignore the risk factors in owning equity. You would think people would've learned this lesson now, but still there are those who preach to just put it all in stocks and let the historical trend take over.

Oct 20 08:37 AM

[Steve in Gr...:]

Thanks, Mr. Iacono, for another helpful note. But the irony and perversity of this whole situation is pretty thick.

America's problems are excess consumption, excess debt accumulation and insufficient saving. The current administration's solution is to massively increase the country's debt load (their first year deficit of $1.84t is over four times bigger than the next largest) and subsidize consumption (cash for clunkers, homebuyer's credit, non-COLA COLA, etc.).

In addition, the administration debases the currency and drops short term interest rates, punishing savers and rewarding debtors. (I suppose this makes sense if you are the biggest debtor on the planet.) The USD being created ex nihilo is lent at 0.25% interest to banks which use it to trade (not invest in) the U.S. stock market. Note the low and declining volumes throughout this rally.

But I'm not sure who the sucker is in this scenario: the guy with cash in money market funds or the guy long SPY. Watch out when the banks decide to get out. They will get out way before you can.

Oct 20 08:48 AM

[rporter1@fu...:]

We need to differentiate between types of banks here. The consumer end of banking is making their money from fees, not lending. 60% of fee profit (widely publicized) from insufficient funds fees on checking accounts alone and massive dollar amounts from credit cards.
>
For stodgy savers? Avoid the fuss - buy a gold brick. It'll be a safe choice.

Oct 20 10:28 AM

[battman:]

Many people don't have the kind of time needed or experience to properly invest their money and help it grow. This Jon Markman clown is only hyping what he knows what ultimately put money into HIS pocket by promoting stock funds.
Besides, the best investment you can make is real estate, but you need to have enough money to do it wisely.

Oct 20 10:59 AM

[a. palmer jr.:]

If even "stupid bank executives" can't help but make a killing, why are so many going broke right now? Are they beyond just plain "stupid"?
I have to disagree about savers being stupid also. Where you save your money might be stupid, but not the idea of saving. America is in a financial crisis right now because people didn't save, rather they, including our government, spent money they didn't have. Even with low interest rates I suspect the lenders want repaid at some point in time. With unemployment as it is, much of the money isn't being repaid. We'd be much better off if we saved our money to buy what we want rather than borrow for it.

Oct 20 11:22 AM

[Stimpy:]

The lesson of the last 50 years of financial history in this country is that saving of any kind is fa suckaas.

Buy that big screen, rent that beachouse and put the rest in your nose.

The only people who make money in the markets are the guys who WORK in the markets.

Oct 20 01:02 PM