Savings and Deposits and the Zero Percent Bank Account – Punishing the Saver for a Nation Fueled by Debt Consumption.

The current financial system is designed to punish savers.  The Federal Reserve by cutting the Fed funds rate to virtually zero has made it a disincentive for people to store any of their wealth and get any acceptable return.  If we look at savings account rates you will find that many banks are offering from 0 to 1 percent for these accounts.  At the same time these banks are turning around and offering credit cards with rates of 24.99 percent or mortgages at 6 percent.  The spread banks are getting is enormous because they are borrowing at rates that are near zero so any margin is profit.  I pause when I see the current structure because it sets up a system where those trying to save have few avenues for any real return.  Sure, they can put their money into Wall Street but this has now become a large casino where companies that should fail are rewarded and prudent companies that run efficient businesses are punished for not taking outrageous risks.

I wanted to look at some rates offered during the last time rates were generous in the early 1980s just to get a sense of what was occurring during that time since we are so removed from anything sensible at this point:

“(TIME – 1980) The inflation outlook has grown bleaker, and the Carter Administration has prepared a budget-swelling 5.4% rise, above and beyond inflation, in defense spending for the fiscal year beginning in October. Largely because investors expect more inflation, Wall Street’s trillion-dollar corporate and Government bond market last week took its biggest pummeling in years. Investors buy bonds to collect interest, but when the inflation rate is higher than the interest rate, the resale value of the bonds goes down. During the week, bond prices plunged through the floor, and interest rates rose to an unprecedented level of nearly 12% for U.S. Treasury bonds and more than 13% for Triple-A issues; many of those securities do not expire until well into the 21st century. The bond slump hurt not only substantial investors but also millions of members of pension plans and profit-sharing funds that hold bonds or other debt-related investments.”

Good luck trying to find any double-digit savings accounts especially in U.S. Treasuries.  You’d be lucky to find an account offering you 3 percent.  This has to do with the Federal Reserve flooding the banking system with easy money:
fed funds

Is it any wonder why we are now having the deep financial issues in our banking system?  People borrowed money they didn’t have to spend on things they could not afford.  We mortgaged our future decades ago and the bill is coming due.  Anyone understands that building wealth means spending less than you earn and spending wisely.  Yet the current system is making saving any money pointless because of the abysmal returns.  So people are left with the option of spending their money today or funneling it into the stock market hoping to get better returns.  Yet the middle of the road option has been taken out.  That is why the savings rate since the 1970s has collapsed:
savings rate

Now people might be asking, why did the savings rate spike up recently?  That is actually a reflection of the fear in the current financial system.  People started saving money because they feared the actions in the stock market and they just wanted to make sure their money wasn’t lost.  This has nothing to do with market rates or competitive savings account rates.  If you doubt this, just take a look at what JP Morgan Chase is offering as their savings rate:

chase rates

You are basically paying for the privilege of keeping your money in their bank.  That is it.  You will get no returns at these abysmal rates.  And keep in mind these are the banks that got bailed out and are now charging 24.99 percent rates on credit cards.  So if you are prudent and only want a 5 percent return, where can you turn?  You don’t have many places actually because of the way the current system is setup.

I’m reminded of what happened in Venezuela with the current devaluation of their currency:

CARACAS (Dow Jones)–President Hugo Chavez bowed to economic reality and after nearly five years of standing firm devalued the Venezuelan bolivar in hopes of safeguarding the government’s depleted oil income and curing some of the symptoms of stagflation in the economy.”

After the devaluation it was reported that people were lined up in lines at stores trying to spend their money because as one shopper stated, “why save money when it is falling in value every year?”  Now mind you we are in a different market but keep in mind that the U.S. dollar has been declining for years and this is supposedly the path of choice for many.

Savings are incredibly important.  Many people are now saving merely because of the economic tough times and want to have an emergency fund to help them out if the economy hits a rough patch.  Yet what use is it if you have a banking system that at its core, has a desire to destroy the actual currency?  It would be easy to increase the savings rate.  Increase the Fed funds rate.  But this would also increase mortgage rates which depend on this rate and right now the banking industry is governing policy even though it is counter to what is good for the overall economy.  It should be obvious.  Not saving money is bad.  Any wealthy person can tell you this.  After all, if you spend more than you earn then you would not be wealthy or even financially secure.  Yet this is somehow the desirable path forward.

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