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The tragedy of savings – Dateway

Low interest rates are a boon to borrowers.

Hence the Federal Reserve’s desire to keep interest rates artificially low during the current economic crisis.

We are told that easy money will strengthen the economy, as consumers and businesses will take advantage of low rates and spend.

But if you’re trying to save money, it’s anything but a godsend. In fact, saving for retirement is almost impossible in today’s interest rate environment. Today, your average Joe is forced to invest in increasingly risky assets in order to generate enough money to retire.

This is not just a problem for people who hope to save enough money to live comfortably into their golden years. It also does not bode well for the economy as a whole. Savings provide resources for capital investment and future economic growth. Lack of savings now could mean a weaker economy later.

Is it difficult for savers?

The current interest rate on a 30-year Treasury is currently around 1.5%. Short-term yields are even lower. That’s a lot for Uncle Sam who is trying to borrow trillions of dollars to finance his massive budget deficits. But not so much for savers who depend on fixed income securities such as government bonds to protect their savings principal while generating income.

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This was an old fashioned savings model, but it is virtually impossible to use 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 treasury bills to generate this income. For the average worker, saving money and “putting it in the bank” or investing in low risk bonds is not a viable strategy.

As a result, anyone serious about saving for retirement is forced to seek return by investing in much riskier assets – i.e. stocks, crappy bonds, mortgage-backed securities, real estate. It is certainly possible to find a higher return investment in these assets. But with risk comes – well – risk. You could also lose a lot of money. People who are about to retire in 2008 with tens of thousands of dollars in the stock market or real estate know this pain well.

In an article published in Betting Thread, Trevor Daher summarizes the dilemma faced by savers.

In times gone by, many people would not have cared so much about this problem. They could have kept their money or put it in a savings account, certificate of deposit, or other banking product, and felt relatively confident that their money would retain its value and purchasing power over time. Today, however, this is no longer possible, even for thrifty and prudent retirees… those who have scrimped and saved their entire lives and achieved great financial success.

Indeed, not only are savers struggling with low returns; they are also fighting the inflation monster. Central banks intentionally devalue their currencies by at least 2% per year. It may not seem like a lot, but over time it removes a significant portion of the purchasing power from your savings. And now the Federal Reserve has shifted the inflation targets to allow your money to devalue even faster. Daher called it “the tragedy of our economies”.

If the Fed is successful in keeping interest rates artificially low and debasing the value of the US dollar with increasing speed, one could reasonably conclude that most people will suffer financial and economic hardship in the future. The value of people’s savings and fixed income assets – generally considered the safest types of assets – will go down, while their cost of living will rise. This is the expressly stated goal of the Federal Reserve. “

No wonder so many older Americans are drowning in debt. They just can’t make ends meet.

This is one of the reasons for including gold in your portfolio. Historically, gold has served as a hedge against inflation. As the value of fiat money decreases, the price of gold increases.


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