The US Savings Bond Scam
Very insightful commentary has been made of late, much of it by fellows or fellow travelers of the Mises Institute, regarding the effects that monetary policy is having upon the lives of ordinary people and the potentially disastrous future consequences which may be wrought upon the same. This article will introduce, and lament, the reality of interest rates and inflation.
The interest rate on a thirty-year Treasury—a thirty-year loan to the US government—is 1.6 percent as of this writing. Shorter-term yields are far lower. Interest rates on savings accounts and certificates of deposit are so low that, for long-term holdings of US dollars, a mattress or an old coffee can might, for many people, constitute a satisfactory substitute for banking products.
Many individuals depend upon fixed-income securities as a means of nominally protecting the principal of their savings and wealth while also generating an income. This is particularly true of retirees or those nearing retirement. This is because fixed-income securities are generally viewed as among the safest income-producing assets, since the counterparty (the borrower) is contractually obligated to make the payments. This perception of safety and security is especially true for government-issued debts—bonds—from governments that are considered a good credit risk and whose currencies are widely accepted—such as the United States.
Consider that the individual or family in today’s interest rate environment would need to have millions of dollars saved or invested in fixed-income securities in order to generate enough income to sustain them in retirement. If we consider the case of US government debt securities, generally regarded as among the safest investments in the world, the thirty-year Treasury yields the highest interest rate, 1.6 percent as of this writing. In order to earn a retirement income in excess of, say, $30,000 per year, an individual or couple would need to hold at least $2 million dollars’ worth of Treasurys.
Lest we forget, $30,000 may not even afford a comfortable living for those individuals or couples who do not own their own homes, who live in high-tax jurisdictions, who have debt obligations such as car payments, who may have substantial medical expenses, or who might wish to provide some financial support for their children. In other words, those prudent and thrifty individuals who have arranged their affairs such that they can retire debt-free, in a low tax jurisdiction, and with more than $2 million dollars worth of fixed-income securities may get by with these interest rates, ceteris paribus. But, presumably, these people number very few. As for the rest, they would need substantially more than $2 million dollars’ worth of assets.
Low Interest Rates and Savings Rates
Consider this, too: that the problem of where to put one’s money and what to do with one’s savings affects us all—not just the retirees. Do you want to save up your money, say, to buy a car in the future? A house? To fund your children’s education? To start your own business? To have an emergency fund? Where can you put your money, with a reasonable degree of confidence in the safety of the principal and where it can also generate a positive return? We will return to this question in a few moments.
Many institutions rely on fixed-income securities for the same reasons as the individuals and the families aforementioned. One difference, though, is that these institutions use the fixed-income securities as a means to meet their future obligations. For instance, insurance companies often invest premium payments in fixed-income securities, because they are generally regarded as safe, income-producing assets, and the insurance companies can use the future returns of these investments to meet their future contractual obligations. The same is true of pension funds, endowments, charities and nonprofits, and other institutions. Consider, now, that these institutions also serve individuals: contributors, customers, communities, and constituents. Many ordinary people are
Article from Mises Wire