Friday, June 22, 2012

Savers and Low Interest Rates

My view is that deflation and not inflation will be our biggest concern for the next few years. The Fed has indicated it will maintain a near zero short term borrowing rate until 2014. I think it may last a year or two longer than that.

In any event, for individuals it turns the whole idea of investing in money market funds, bonds and other fixed income savings vehicles upside down. On the other hand, people are afraid of investing in stocks, too. I believe stocks are better income vehicles than anything else, assuming we own a safe, strong and well diversified portfolio of blue chip equities.

That said, as individuals we will need to pursue a well thought through approach, and one which will differ materially from what worked in the past.

Fed Helping Borrowers, Clobbering Savers says the following about the Fed's policy:

"During his press conference Wednesday, Federal Reserve Chairman Ben Bernanke said monetary policy had been helping the general public. In particular, borrowers are benefiting from extremely low interest rates.
When signs of economic collapse appeared in 2008, the Fed cut short-term rates to zero, and Wednesday’s policy statement reiterated that rates would stay there until at least 2014. Policy makers hope cheap borrowing will spur businesses and consumers to finance big purchases to boost demand.

What tends to be glossed over is the flip side to the Fed’s zero-rate strategy: Savers are getting whacked. And while some portion of interest earned is left to accumulate in savings accounts, any loss of income is a drag on consumer spending and consumers’ sense of financial well-being.

Saving had gone out of style during the housing boom, when many families looked at their homes as giant piggy banks. The recession quickly turned shoppers into savers. Fed data show interest-related financial assets (including bank saving accounts, money-market funds and government securities) held by households increased by about 20% from the end of 2007 until the first quarter of 2012.

Yet even with a larger nest egg, savers are falling behind, according to Bureau of Economic Analysis data. At the end of 2007, savers earned $1.3 trillion in interest, at an annual rate. In the first quarter of 2012, the sum had dwindled $986.2 billion.

Less income, of course, means less money for spending, and the hit has been especially hard on retirees who are living off past investments. And since the Fed plans to keep rates low for at least another 2 1/2 years (and some economists think into 2015), savers will continue to suffer."

My Take

This low-no interest rate policy is, of course, due to the lousy economy. Risks abound.

Commodities, including oil, are declining in price and the stock market is highly volatile, as evidenced by yesterday's steep decline.

So while lower gas prices will be welcome at the pump, it's really a reflection of how bad things are --- globally. Still, we'll have some more money available to spend or save --- or pay off debt.

In any case, herein we'll try to deal with today's reality and offer up our views on what this means for our near and longer term future. The views expressed herein may prove to be wrong, of course, but they will be sincere and not based on what the "experts" are saying.

Later today we'll go deeper into the worldwide and U.S. debt-deflation debacle and the inability of monetary authorities to do much about it.

Finally, people always like to believe that "this time is different," but it hardly ever is.

My view is that this time really is different, at least in my lifetime, so let's keep an open mind and try to sort all this out.

Thanks. Bob.

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