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High inflation, low interest rates, and strong economic growth make this “a terrible time for savers,” a New York Times headline declared last week.
Because a savings account is now earning interest at a rate below the pace of inflation, money saved is losing purchasing power day by day.
The U.S. Federal Reserve has tied down short-term interest rates close to zero and has shown no interest in raising them until some time next year at the earliest. That bodes poorly for savings accounts for the next several months at least.
Even investing in the highest-earning bonds now fetches a little more than 1 percent annually, less than a fifth of inflation’s increase.
However, to earn higher rates, a person would have to venture into the economic unknown, with stock prices hovering at precipitous heights and a bumpy economy now beset by another surge in the COVID virus (see related stories).
“People who are risk-averse…have to get used to the worst of all possible worlds… watching their little pool of capital go down in real terms, year after year,” Sonal Desai, Franklin Templeton Fixed Income’s chief investment officer, told the NYT.
“Nominal yields are low because of how much the Fed is buying,” she said, referring to the Fed’s $120-billion monthly purchases of treasury, corporate, and mortgage bonds.
Considering inflation’s brisk pace and robust economic growth, “it’s ludicrous,” she said.
What about a Treasury Inflation Protected Security (TIPS), which is supposed to defend against rising prices?
Last week, a TIPS was yielding -1.83 percent. At July’s official inflation rate of 5.4 percent (see related story), your TIPS would fetch 5.4 percent minus 1.83 percent, or 3.57 percent—better than a savings account but still a third below inflation’s level.
“It’s hard to make an argument for fixed income [investments, such as bonds] at these levels,” Rob Daly, fixed income director for Glenmede Investment Management, said in an NYT interview.
Instead, Daly advises holding cash.
It will pay almost no interest and will lose value against inflation, he admits, but it will be ready and waiting when better opportunities come along.
In contrast, investors in bonds can be locked into their purchases until certain dates or periods of time have elapsed.
“This is one of those periods of time when fundamentals are completely detached from reality,” Rick Rieder, Blackrock’s chief investment officer for global fixed income, said to the NYT.
“Real rates…make no sense relative to the reality we live in,” he added, calling the savings environment “surreal.”
For the medium term, Rieder recommends a mix of stocks, to take advantage of any gains that might help negate inflation’s erosion, and cash.
From the mid-1970s into the early 1980s, inflation was out of control, exceeding 12 percent in 1974, 1979, and 1980.
However, at that time, the U.S. Federal Reserve ratcheted up interest rates to try to lasso price increases.
Now, the Fed is wedded to rock-bottom rates until the economy and job market have recovered to an extent that satisfies the central bank’s governors.
One of the few alternatives is to invest in something that will appreciate, such as improving a home in a desirable area or building a business in a growing economic niche, the NYT noted.
TRENDPOST: This may be a terrible time for savers, but Bigs continue to profit from artificially low interest rates, investors eager for high rates of return, and an economy toting both a horde of troubled companies and sectors ripe with merger and acquisition opportunities.
The “hourglass economy,” with a top and bottom but no middle, becomes more real day by day.
Indeed, although the plantation workers of Slavelandia get no credible interest for money they deposit in banks, the Banksters charge them interest rates when they borrow money that the banks got for free.