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Do Savers Need To Be Saved?

Sunday, August 25, 2013 - 5:16 AM
Many economists take Bernanke's side on the issue of savers and interest rates. In summary, their view is that the health of the economy takes precedence over fairness to retirees and savers. I've always thought it's a good idea to see what the other side is thinking. So I'm mentioning this article which looks into this issue of savers and interest rates. I don't agree with many of its points, but it's a well-written article on this topic.
Ken TuminKen Tumin5,471 posts since
Nov 29, 2009
Rep Points: 125,634
1. Sunday, August 25, 2013 - 8:34 AM
Ken, good article.  The comments at the end were worthwhile, as well.

As a saver, I would love to have higher rates.  However, as a borrower/saver, lower rates are an interesting tool.  For example, I have a couple of loans out for items I could have paid cash for.  BUT, I'm earning MORE interest through certain accounts than I am paying on the loans.  My own little carry trade.  Many of the savers on your site, are more creative savers, and are not leaving our cash in a bank paying .05 % interest or in a a bank that is actually charging fees to hold your money.

The questions of the direction of the economy are incredibly diverse.  Are we on the tipping point of hyper-inflation?  Stag-flation? Deflation?  Not knowing makes policy quite difficult.

Then there are all the rule changes, and their impact on the flow of money.  Banks have to hold a higher ammount of deposits to prevent another crisis.  I think it used to be every dollar on deposit was TEN lent out (IIRC).  What is that ratio now?  That makes every dollar on deposit LESS valuable, and more of a liability to the banks, as they have to be prepared to pass the FEDs "crash test."  Am I looking at that correctly?

Then we have the velocity of money.  Or the lack of it.  The FED "creates" money on digital spread sheets, but does not actually PRINT it.  So, somehow, it exists.  BUT it also DOES NOT EXIST.  Thus, inflation has not spiked.  And inflation exists, as in smaller consumer packaging and higher prices for less, but inflation is low, in the way the FED measures it.

Also, we speak of the "propped up" economy.  The FED "fake printing press" has propped up the consumer,  housing and the stock market, and the GOVT's lifeline -- spend, spend, spend.  Does anyone argue that?  If not, then wouldn't raising rates have a negative effect on the consumer, housing, stocks, and govt spending?  Where would that leave the economy?  Is there a case to be made that raising rates would introduce the next crisis (which may be inevitable, anyway) sooner?  And what of propping up unemployment checks and permanent welfare?  Mish had an article on how many states offer more money through welfare than a person could earn working:

What about retirees in the late 1960's, 70's, and 80's?  What might they have saved up in the bank to earn 16% on?  Was it not a small amount from an age of lower income from the 30's, 40's, and 50's?  So how did the rising rates position them for a new car, as it's price went from $2000 to $20,000?  Sure, if they owned a house, that had less impact.  But what if they retired as renters?  How did high CD rates on a small amount provide for rents that rose exponentially?

If somehow we had a repeat of the 70's now.  A $20,000 car would become a $100,000 car.  A $200,000 house would become a $1,000,000 house.  Gas would be $20 a gallon.  Food?  Rent?


Or what if we are on the verge of deflation?






MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
2. Sunday, August 25, 2013 - 8:57 AM
Mike:  I read the article too and as usual it seems to be a hint for savers to hold on to their seats if they are waiting for higher interest rates.  I lived in certain years when we got 12% and yes even 16% on certain Cds and I don't recall prices going astronomically high on other items.  The other side of the coin is that if one is making even 12% on savings, one can afford to pay the higher prices.  Nowadays getting less than 2% on savings does not allow one to spend very much.  I am just grateful for the days when we did get those great interest checks!  I don't see what is so wrong for savers to hope for even 2% on a 5 year CD.  We didn't cause the problem with the economy.  We are just trying to help ourselves and our children survive inspite of these problems.
paoli2paoli21,401 posts since
Aug 10, 2011
Rep Points: 6,135
3. Sunday, August 25, 2013 - 9:11 AM
Hi Paoli2.

Some of that depends upon where you lived.  

NYC/LI, NJ, CA, FL all saw housing rise at that rate.  I lived through it, so it's not just a theory of mine.  My family owned, so less of an impact.  And we weren't in the retired category.  So income rose, as well.  One house went from $40,000 in '77 to $215,000 by '87.  Sold.  Bought blocks away for $250,000 in '87.  Sold for $600,000 in '06 to downsize.  If you were a retired renter in the area, you were not ready, ever.

Same with autos.  The comparable car rose like that through the '70s and '80s.  If you weren't actively working as rates rose, you couldn't keep up.

In the 2000's, we have watched that exponential rise in oil.  From $20 a barrel, to $147 a barrel ('08), to $33 a barrel (01/09) to $110 a barrel currently.

And then there is food.

And food and oil rose exponentially as rates fell...  with no inflation.

What would happen if we experienced a 70s/80s style inflationary environment, now?
MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
4. Sunday, August 25, 2013 - 9:18 AM
The cause of the elevated yields of the late 1970s and early 80s was the high inflation of that era which led U.S. Federal Reserve Chairman Paul Volcker to begin raising short-term interest rates dramatically during the early 1980s. The result, for a brief time, was ultra-high yields on U.S. Treasuries. Keep in mind, however, that due to the high rate of inflation at the time, the real (or after-inflation) yield investors received was much lower than it appears.

Historical U.S. Treasury Yield Charts

Those were terrible times for those that were borrowing money to purchase homes, cars and big-ticket items. Inflation erodes one's savings and buying power.  However, investors that purchased very long-term Treasury Bonds during the two decade period of 1980-2000 did very well in the low inflation times.
ShorebreakShorebreak2,678 posts since
Apr 6, 2010
Rep Points: 14,534
5. Sunday, August 25, 2013 - 9:24 AM
Good points Shorebreak.  

18% for a $30,000 house.  As rates fell, the price rose to $300,000 or $600,000, depending on the location.  

What would a house be worth today, if rates went back to 18%?

Would they rise in an inflationary environment?  Along with wages, and gov't debt.

Or would they crash in a deflationay environment?  

Or stagflation?


I don't think the FED knows.




MikeMike327 posts since
Feb 22, 2010
Rep Points: 876
6. Sunday, August 25, 2013 - 10:43 AM
Not sure if paying income tax on your interest is smarter and then borrowing and maybe that interest you are paying is not tax deductible. I have a brother in law who had a 5% CD and borrowed at 4% for a $50,000 truck that gets 17 miles a gallon when he could have gotten a loan at .49% but to make matters worse  that 5% interest on that CD put him in a position where he and his wife paid income tax on 85% of his SS. Things have to be put on paper before making decisions. He was so excited to tell me that he was able to get a HE loan that was deductible and still get 5% on his CD.  When I told him that he was paying $2000 in interest and the gov gave him $12,000 already and that he needed to pay over $12,000 before any of that was deductible before he was in a better position he jaw dropped. If he had cashed in his CD he would have saved the $2,000 interest on that loan and he also would have not paid federal income tax on 85% of his SS. His brother told him to do it this way but then this was the brother who told him that he only went bankrupt because of the high property taxes in the school system he was in and if he lived 2 blocks south he would have not gone bankrupt. When I should my brother in law  that his brother paid $200 a year more in taxes in that school system and if he believed that $200 caused his brother to go bankrupt than he also had a problem. I said his brothers problem was building a $200,000 barn thinking he could board show horses and make a profit was the dumb businerss plan he had for retirement along with the large diamonds his wife bought, and the new 3 ATV's they purchased with their new home and new truck and new car and new mower etc. 
Ally6770Ally6770936 posts since
Jan 16, 2010
Rep Points: 2,723
7. Sunday, August 25, 2013 - 12:01 PM
Good points rosie43.  

You sound like a great saver/planner.  It all depends on a persons tax scenario, which depends upon many, many factors.  So, whether or not the "carry trade" plan is wise, may depend upon a person's own situation.  All of an individuals personal situation must be evaluated before making such a decision.

Sounds like your inlaws may consider consulting you for financial decisions, prior to making them. 
MikeMike327 posts since
Feb 22, 2010
Rep Points: 876