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August 3, 2004

When Saving Really Isn't

Now here is a pretty good article on MSN Money.

For a while now, I've been trying to get people around me to understand an interesting concept. Thanks to historically low interest rates, our economic panorama is set up such that borrowers are being rewarded, while savers are being punished. The author of the MSN article, Scott Burns, does a much better job explaining this than I can.

The gist of the problem (well, I consider it a problem) is this:   According to the Bureau of Labor Statistics (BLS), from June 2003 to June 2004, consumer prices were subject to inflation of about 3.3 percent. Listen around, and you'll hear analysts spouting that consumer inflation historically averages around 3 to 4 percent per year. So the latest figures aren't outside normal realms at all. (Actually, quite a few economist types think that the BLS regularly understates its CPI figures to suit prevailing government policy, and honestly, I've had my suspicions, too. But I will spare discussion of that topic here.)

The "problem" part of this comes in when you consider what's happening to hard-earned funds dutifully put aside by people trying to save money and take responsibility for their futures. At ING Direct, whose guaranteed-savings rates typically hover near the highest rates available, their Orange Savings account currently pays interest of 2.2 percent per year. That's a pretty nice rate when you consider that ING has (1) no minimum deposit requirements, (2) no fees, (3) no penalties for withdrawal, and (4) rapid availability of funds. Oh — there's also point (5), which is that most other banks are offering 1-year CD rates (which WILL have minimum deposits, as well as penalties for early withdrawal) anywhere from 1.5 to 2 percent. Hmmm . . . lock up my money for one year and get 1.75 percent for it, or keep it readily available and get 2.2 percent. Tough call.

Anyway, if the BLS statistics are right, then we have prices of consumer items rising by 3.3 percent per year. But the money we somehow manage to save, presumably to buy said "consumer items" at some point in the future, earns only 2.2 percent per year . . . at best. That paints a dark and nasty picture for savers. And unfortunately, it gets worse:   The 2.2 percent interest earned by your savings is probably taxed at both federal and state levels — perhaps at a rate of anywhere from 15 to 25 percent. So we savers are not even netting that 2.2 percent when all is said and done. We are losing not just to inflation, but to inflation and taxes.

The longer the situation remains like this, the worse it is. Things get even more yucky if you're utilizing guaranteed-return (read: low return) investments such as CDs for your savings in long-term accounts (IRAs or Roth IRAs, for instance).

According to Burns, if we want to give savers an even break, we'd need guaranteed savings rates somewhere in the area of 4.4 percent. Such a rate would effectively cover inflation (at least as it stands now), as well as the taxes on the interest earned.

"For most people," says Burns, "if you earned less than 4.4% on your savings in the last year, you were losing purchasing power. You would have been better off to buy canned goods and put them in your kitchen closet."

What do these numbers tell us? Mostly that the U.S. government wants no part of promoting saving on the part of consumers. No, they want spending, spending, and more spending. If you're on the way home from work, find a way to spend. At lunch? See if you can't spend a little extra. Sitting at home? Spend on the internet. Spend on QVC. Don't have any of your own money? Ah, no problem. Operators are standing by. You, Valued Consumer, are pre-approved not only for any one of these five extra-shiny credit cards, but as an added bonus, we'll allow you to slice up and collateralize whatever home equity you might have accidentally accumulated over the last couple of years. We'll show you how to use that "spendable equity" to quell those darn pent-up materialistic desires of yours, and do it on a grand scale. Everything is possible with fluffy loans of one sort or another. And they're dirt cheap. Practically free.

The Feds are making their point:   Saving money? Bah. That's a loser's game.

I would be remiss if I did not add that whether they want it or not, the folks in charge of setting interest-rate policy are also encouraging asset speculation. With savings rates so low, people are forced to go looking for returns that will match or beat inflation, and so they have no choice but to either (1) spend money now, trying to "beat inflation to the punch," or (2) consider stocks (as an example) and other risk-laden investments . . . and hope that the risk pays off in larger returns.

So what's a saver to do when saving really isn't?

I wish I had the answer.

Michael | August 3, 2004

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