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Today we read an interesting article from Marketwatch titled, “The Fed is Deliberately Stealing from Savers”. Yes, that’s right. Janet Yellen and the rest of the Fed are thieves. You read it it first at Marketwatch. We’ll link to their post below. The author asserts that:
The academic name for the Fed’s current policy is financial repression. But a more apt name would be “Throw granny under the bus,” because the program boils down to taking from savers and fixed-income recipients and transferring that purchasing power to other entities.
It’s really easy to hop on this author’s bandwagon and say the Fed is deliberately hurting people who live on fixed income. Interest rates are absolutely too low to live off of. However, that’s nothing new!
In fact, we made a video about this not too long ago (https://mullooly.net/interest-rates-low/7635). Interest rates have been too low to live off since the late 1990’s. People haven’t been able to live off the interest of their investments in over a decade. We also made a video about the changes made to money market funds after 2008 (https://mullooly.net/money-market-fund-rates/7403). We discuss the unlikelihood of money market fund rates rising to pre-2008 levels again because of the new regulations enacted.
Since this has been an issue for about 14 years now, not something recent as Marketwatch will have you believe, what are income oriented investors supposed to do? Savers have been forced to find other things to do with their money. Some have chosen to tap principle because they just cannot handle market risk. Sometimes life’s biggest risk is not taking any risk at all. Others have turned to stocks, bonds and other investments.
One alternative that we highlight during the podcast is market linked CD’s. These investments are typically offered with a minimum rate (like 1%) and a maximum rate (say 6%). In the hypothetical situation we just described: if the market does great, the investor makes the 6% maximum rate; if the market does poorly, the investor makes the 1% minimum rate. For the right person these market linked CD’s might be an interesting option. The downside to market linked CD’s is that they are normally long term deals (often 7 years or so). They are not liquid investments, so selling one before the term is up would depend entirely on the secondary market. Investors should also consider opportunity cost as a downside to market linked CD’s. Sure you have that minimum rate guarantee, but could you invest on your own (or with an investment advisor) and do better? There are pros and cons to think about with these investments, as there are with any investment.
So is the Fed stealing from investors? If keeping interest rates low to help the economy hit their target growth numbers is theft…then yes. Another sensationalist headline from Marketwatch. Read at your own risk!
Sources:
http://www.marketwatch.com/story/the-fed-is-deliberately-stealing-from-savers-2014-10-22
http://www.bankrate.com/finance/cd-rates-history-0112.aspx