2012 January 07 Saturday
Savings In A Low Interest Rate Environment
Ryan Avent has a post at The Economist about zero interest rates and whether the Federal Reserve faces political constraints or other constraints in its seeming inability to cause inflation. But I find the motives ascribed to savers as mistaken. In my view of interest rates are zero then savers have an incentive to save more (to make up for interest income not earned). Economists who expect savers will save less due to less reward from interest income when interest rates are low aren't considering the long term goals of savers. The lower interest rates go the more savers need to accumulate to pay for old age.
Also, if unemployment is high for an extended period with long term unemployment especially high (which it is) then why aren't the long term unemployed lowering the wages at which they'll accept jobs to levels sufficient to get jobs? Inflation is considered by many economists to be the preferred solution to high unemployment. But I'm left wondering why people don't get desperate and work for less. The extended term for unemployment benefits?
In the end, the looters will get the last laugh on foolish savers by confiscating our excess wealth. It's distressing to think about, but inevitable.
Now that's an interesting take: Low interest rates force people to save more. It could be true, at least since they are people who don't like to take on debt, so they would be forced to curtail spending. There may be truth to this, because due to economic uncertainty, I have delayed getting a new car for 2 or 3 years now. It's not exactly the same, but similar.
As for savers, diversity is probably your friend. Maybe a little (5% ?) in gold and silver, a little in stocks, a little in real estate (home) and the rest in cash that can be moved quick. That's the best way I can think of to be prepared for any eventuality. Not very helpful I know. Most likely, maximizing income and minimizing spending are your besat strategies. But while I think savers are getting screwed, I still think it's the best path to follow.
Sure, after all some people save for the future even at negative real interest by e.g. stuffing their money in a mattress. Now, whether the net effect is to increase saving when interest rates go down, that I don't know. It might depend on culture. I think Japan may have seen such a phenomenon over the past twenty years. Anyway I don't think you can look at current bond rates as evidence of such a phenomenon; we know that central banks are driving down the interest rates.
Economists, in general, have their heads up their arses. They come up with cute theories about how mild inflation and low interest rates will encourage people to spend more, thus boosting the economy. They do not understand that people who save, really do want to save, for retirement or any other reason, and will do so no matter what. They also do not realize that if prices go up, people will cut back in their spending for the simple reason that they have less to spend. It doesn't matter if a dollar today is worth more than a dollar next year. If prices increase, people will cut back.
I have to admit that you make an incredibly simple point that I have yet to hear before in all the talk about monetary expansion. And I say that as someone who generally favors monetary expansion right now.
Cash savings seems pointless, beyond enough for a rainy day. Invest in assets which you believe will continue to rise in value over the long term. Their worth can't be inflated away. Accelerate payments on debt, highest interest rate first (obviously): credit cards, car loans, mortgages, etc. Unless you think that the market's inflated, there doesn't seem to be a good reason to ever have a large pile of cash in the bank.
One animadversion we accept heard frequently from audience is that they are balked that their coffer accumulation annual rates and concise CD ante are around zero. As of this writing, a 1-year U.S. Treasury agenda is paying just 0.27%, while even a best ability 5-year Treasury agenda is acquiescent just 1.49%. As it has been for abundant of the endure 18 months, shortterm absorption ante are about aught and even the 5-year amount is abreast a actual low.
jogos do mario
The situation on the financial markets has also eased a little of late. It remains very
uncertain, however, whether the advances made in solving the European sovereign debt
crisis will succeed in defusing the situation permanently. Moreover, there is a risk that
geopolitical tensions will lead to a further rise in the price of oil.