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.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.
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.
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.Naturally, the proposed solution to no longer being a sucker is to buy a stock fund, preferably one that has low expenses.
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.
That strategy would have worked quite well this year. Last year - not so much.