Wikinvest Wire

Is saving really for suckers?

Monday, October 19, 2009

It's hard to disagree with the basic premise of Jon Markman's commentary today over at MSN Money, one that casts a rather dim view on those who are content to settle for paltry returns on their savings accounts while enriching the banking sector in the process.

Your bank, with help from Uncle Sam, is making obscene profits at your expense. Instead of funding the fat cats, here's how to join them in the economic recovery.

If there's one thing that seems like it has to be a good idea, it is saving money. I mean, it's like walking grandmas across the street, eating hot dogs on the Fourth of July and rooting against the Yankees, right? A concept that seems above reproach.

Yet the reality is that in times of low interest rates, a credit bull market and a steadily advancing stock market, socking income away in a savings account may be the dumbest idea in the world.

In fact, I'll go one step further and say it flat out: Saving is for suckers.

The reason this is true explains a lot about where we are in the business cycle right now and how the banking establishment and government conspire to rip off the public at every turn.
Well stated and just what we need in a country that, over the last few decades, has been desperately short on domestic savings - another reason for Americans not to think about saving money the old fashioned way.

But, the story gets much worse and helps to explain the high demand for low yielding treasuries in a country that now runs a deficit of about 10 percent of GDP.
Here's the deal: When you put a portion of your income into a savings account, a money market fund or a certificate of deposit at a bank or brokerage, it appears from your perspective that you are placing it in a vault for safekeeping. But the truth is that you are lending your money to the bank at a rate of about 1%. The bank then laughs behind your back as it turns around and lends it to the government for 4%, to big companies at 6% or to smaller companies for 8% or more.

The difference between what the bank gives you for your cash and what it earns from lending it out at higher rates is called its "spread," and it amounts to the bank's profit margin. That spread right now is so large -- as wide as 8 percentage points -- that even many stupid bank executives could not avoid earning huge profits this year.

Mind you, there are some bankers who are so lame that they won't make money. But for the most part, the profitability of banks right now is so obscene that any tricks they pull in their earnings reports this month will be intended not to hide losses (as bears would have you think) but to hide their gains. A steep yield curve -- which occurs when short-term interest rates are very low relative to long-term interest rates -- is a direct pipeline from your savings account to bankers' bonuses.

There is a way for you to halt this robbery and redirect the process in your favor.
Naturally, the proposed solution to no longer being a sucker is to buy a stock fund, preferably one that has low expenses.

That strategy would have worked quite well this year. Last year - not so much.

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Anonymous said...

I'm in 30% and rest cash, and I've barely kept up with the dollar devaluation this year, so I'm about even if you look at net worth x dollar index.

It's really unclear what will happen in the future, but odds are that the dollar is going to devalue by another 80% in fairly short order (2-3 years). So if that's true, then I think assets like gold and cars and such.

It's like Argentina (government mis-management of the currency) + Japan (papering over insolvent banks) + Great Depression (housing crash).

Even though the stock market has rallied, the rally is somewhat offset by the devaluation of the dollar.

CS said...

It really torques me that the most you can get in a "risk free" short-term investment is about one percent. There is something fundamentally wrong about a system where this is more the rule than the exception.

John S said...

So do you suggest I instead give my life savings to Wall Street so they can give me a negative 90% return?

I have a lot of cash in CDs drawing about 2%. The money is there to pay the mortgage for up to4 years when I inevitably get laid off for the 7th time in my career. The thing is even after the dollar loses 99.9% of its value, my savings will still pay the mortgage for the same amount of years as before.

Anonymous said...

We may not make anything on savings, but, have you seen credit card interest rates? By, saving to buy, I save 500 dollars a year minimum.

Anonymous said...

Eliminating US savings is a deliberate policy on the part of Keynesians. China et al save too much, so Keynesians figure the US must compensate by saving nothing at all.

In the long run this will lower US productivity, but Keynesians don't care about the long run. They also don't care what happens to US retirees, figuring US citizens should just never retire because they have no savings to supplement Social Security.

Ted S. said...

It all seems immoral to me, as Tim noted a while back when applying that same label to the Federal Reserve for conducting a policy like this.

Tony S said...

I'm new here and no financial expert. But I see a larger reason for the powers that be to discourage savings (and, for that matter, to give us little reason to pay off mortgages early).

When you have a lot of money in savings, you are not beholden to large companies. A workforce with money in the bank is a workforce with some clout to negotiate salary and working conditions.

Yet workers who are deeply in debt have to take whatever lousy deals and working conditions companies dish out. Workers' productivity in the US has risen in the past decade, so companies are getting more bang for their buck and stories about people being overworked are legion. People's debt is the reason why, IMO.

Tim said...


I think they call that "The new road to serfdom" where people become "debt slaves". Sad, but true for many...

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