Benson's Economic & Market Trends
"Winning the War Against Savers"
September 17, 2003
There is a battle being fought to try and keep spending in the economy as high as possible. The Federal Reserve, under Greenspan, believes (for the long-term, wrongly so) that every trick in the book for a central bank must be used to get Americans to spend now, rather than wait and spend later.
The first step they have taken is to drop the rate on Fed Funds and hold it down. The Fed has now lowered the best possible rate of return that can be earned on cash to 1% or less - clearly below the rate of inflation. So, anyone holding cash is a guaranteed loser! The Fed has stated a clear policy to keep the "real rate" of interest negative until a clear economic recovery is in place.
Moreover, the Fed has gone even farther and specifically targeted retired seniors on fixed incomes, as well as the unemployed, for the rapid liquidation of their savings - yields on Bank CD's and bond funds could never possibly provide the income needed to live off their savings, particularly since their cost of living is skyrocketing upward. Just look at the eye-popping increases in health care, auto and homeowners insurance, property taxes, prescription drugs, gasoline, natural gas, etc. The only hope for those who must live off their savings is to step up and take some real risk. Since the Fed has really goosed the money supply and inflated stock and bond prices, in order to achieve any return at all, savers must buy S&P stocks at over a 30 times PE multiple, and NASDAQ stocks at over a 100 times PE multiple. This offers stock buyers the opportunity to lose 30% - 50% of their investment and still risk not finding buyers of their stocks who would like to invest in companies "because they are cheap and offer value".
In addition, desperate savers have no choice but to buy long dated bonds or junk bonds with high credit risk, to get any coupon at all. Since service inflation is running at over 3.5% a year, all the US would need to get inflation up to 4%+ would be a devaluation of the dollar against the Asian countries that produce our goods. Since the Fed is valiantly trying to reflate the economy, and debase the dollar, buying long-term bonds now will almost certainly guarantee that a saver will suffer massive losses in both purchasing power and in the bond price, if sold prior to maturity.
In either case, savers lose. If the average saver can be persuaded that saving causes losses, they can be trained to stop saving and spend. Indeed, they can be trained to spend their past savings now, rather than risk being robbed tomorrow.
If you are a saver, there are a few ways that you can outsmart the government even though you may be labeled "un-American". They are:
1) Money placed under your mattress can now be used to purchase I-Bonds. Currently they pay 1.1% plus the inflation rate, and the current yield is 4.66%; much better than cash in the bank for a US Treasury guarantee. Also, with an I-Bond you don't pay tax on the earned interest until the day they are redeemed. Unfortunately, an individual can only purchase $30,000 worth of I-Bonds a year.
2) For the intelligent rich, there are inflation indexed bonds.
3) For those who prefer FDIC insured deposits, they can go to Everbank and get foreign currency denominated FDIC Insured CD's. If you pick good countries that sell real resources (such as Australia, New Zealand, Canada, etc.) or Euro CD's, you can achieve a higher rate of inflation and possibly make a bonus 20% - 30% over the next few years as the value of the dollar continues its big slide.
4) For those who prefer mutual funds in cash, try the Prudent Global Income Fund (formerly Prudent Safe Harbor Fund) as they buy the foreign currency instruments direct.
We happen to believe that the Fed will be so successful robbing savers and bringing inflation back that with a $500 Billion Federal Deficit, and a $500 Billion Trade Deficit, gold and silver must do better. So, we currently hold I-Bonds, American Eagles, Silver Dollars, and top-quality Gold and Silver Mining stocks. The prices fluctuate, but we don't see much risk.
In today's world, many retired seniors are forced to dip into their principal balances, sell assets, and rob their piggybanks to keep the wolf from the door. Over 30,000 unemployed people are forced to file bankruptcy each week, and many others have to borrow against their homes to pay normal household expenses.
There will be many casualties in this war so it is up to you to decide if you want to "Join the War and contribute your savings". You can continue to listen to those who urge you to buy risky stocks or lock in low yields on bonds that will wipe you out, or you can listen to common sense and move your money to where it is safe against the government printing press.
The Fed may be winning the war against savers, but only you have control over how you spend, or lose, your hard earned "lucky bucks".