The Tragedy of Savings
Low interest rates are a boon to borrowers. Thus the Federal Reserve’s quest to hold interest rates artificially low during the current economic crisis. We’re told easy money will bolster the economy as consumers and businesses take advantage of low rates and spend.
But if you’re trying to save money, this anything but a boon. In fact, it’s nearly impossible to save for retirement in the current interest rate environment. Today, your average Joe is forced to invest in increasingly riskier assets in order to generate enough money to retire on.
This isn’t only a problem for people hoping to save enough money to live comfortably in their golden years. It also bodes poorly for the broader economy. Savings provide resources for capital investment and future economic growth. Lack of saving now could mean a weaker economy later.
How tough is it for savers?
The current interest rate on a 30-year Treasury is currently around 1.5%. Shorter-term yields are lower still. This is a great deal for Uncle Sam who is trying to borrow trillions of dollars to fund its massive budget deficits. But not so much for savers who depend on fixed income securities such as government bonds to protect the principal of their savings while also generating income.
This was an old-school savings model, but it is virtually impossible to employ this strategy in today’s interest rate environment.
Let’s say you wanted to maintain a retirement income of $30,000 per year. You would need to hold at least $2 million in Treasuries to generate that income. For the average working person, simply saving money and “putting it in the bank” or investing in low-risk bonds isn’t a viable strategy.
As a result, anybody who is serious about saving for retirement is forced to chase yield by investing in much riskier assets – i.e. stocks, junk bonds, mortgage-backed securities, real estate. It is certainly possible to find higher yield investing in these assets. But with risk comes – well – risk. You could end up losing a lot of money as well. Folks on the verge of retiring in 2008 with tens of thousands of dollars in the stock market or real estate know this pain well.
In an article published at the Mises Wire, Trevor Daher summarizes the dilemma facing savers.
In a bygone era, many people would not have worried so much about this problem. They could have held onto their cash, or put it in a savings account, a certificate of deposit, or some other banking product, and felt relatively confident that their money would retain its value and purchasing power over time. Today, though, this is no longer possible, even for the thrifty and prudent retirees … the ones who scrimped and saved all of their lives and achieved a great deal of financial success.”
This is because not only are savers fighting against low yield; they are also battling the inflation monster. Central banks intentionally devalue their currencies by at least 2% per year. That might not sound like a lot, but over time, that strips away a significant amount of spending power from your savings. And now the Federal Reserve has moved the inflation goalposts to allow your money to devalue even faster. Daher called it “the tragedy of our savings.”
If the Fed is successful in keeping the interest rates artificially low, and debasing the value of the US dollar with increasing rapidity, one might reasonably conclude that most people are going to suffer financial and economic hardship in the future. The value of people’s savings and fixed-income assets—generally viewed as the safest kind of assets—is going to decline, while their cost of living is going to rise. This is the expressly stated goal of the Federal Reserve.”
No wonder so many older Americans are drowning in debt. They simply can’t make ends meet.
This is one reason to include gold in your portfolio. Historically, gold has served as a hedge against inflation. As the value of fiat currency falls, the price of gold rises.