Dear Friends,
It seems to me the governments of the World have declared war on retirees and savers. With World interest rates at or near zero the return on investment income is negative. This is a strong disincentive to save money and puts a strain on people who rely on fixed incomes. The unremitting printing of new money to buy sovereign debt is one of the primary driver of this. The disincentive to save foreshadows a bleak economic future for us and our children.
Those that save money are extremely important to the economy. It is our combined capital that provides the money for companies to upgrade their plant and equipment. The savings of the people are an intrinsic part of the money flow in an economy. Firms demand capital to upgrade their equipment or expand their operations, the workers that are hired buy the products of the market and save some money for the future, the banks aggregate the savings and lend to the firms. The circle is simple and fundamental to a market economy.
I say they have declared war because the policies of our leaders are destroying the economic well being of our seniors. Not only them but of us, and more importantly, our children. The equities markets have not advanced for a decade so they are not producing income for savers. The bond market is in a bubble due to excessive risk avoidance and national bank purchases of sovereign bonds, so is returning a negative rate of return. Lets look at the bond market for US treasuries. First if you buy a US bond you are competing with the FED. They simply print the money they need to buy as much as they see fit driving down interest rates. The Fed has purchased sixty percent of the bonds issued by the US government in the last three years, to try to balance the other disincentives Obama’s regulation, healthcare and tax policies, have created.
The interest rate you will get is, lately, under two percent. Even the under reported rate of inflation is over two percent, therefore, people who are buying bonds are realizing a negative rate of return. This is exacerbated by the printing of money to buy the bonds, because every dollar printed, steals a little piece of the dollars, savers have saved. This lowers the purchasing power of money saved and is a further disincentive to eschew immediate gratification. The result is, that the Fed is using savers own money to lower the rate of return on savings, or in other words is a double whammy to the savers.
If a saver looses his or her money in the equities market the money is lost. If a saver invests in bonds the rate of return is negative, but the, (less than two percent interest), is taxed as capital gains, further lowering the rate of return. The saver is placed in a loose loose situation, because of government policies to counter the other negative incentives the government is creating, with it’s regulation, healthcare and tax policies.
For those people who have done the right thing, went without that vacation, bought a smaller more affordable home, saved for their children’s education, drove more fuel efficient cars and all the other things the working class have to do to save money, are being punished for their virtuous actions. While those that have not saved, have spent every dime on luxury vacations, lived large in giant homes that are now in foreclosure, tossed their children on the State for their educations, and basically lived decadent lives, are being rewarded by government policies.
As negative behaviors are rewarded and positive ones are punished by government policies, we can expect more decadence, and less virtue in our societies. This can only lead to an increase in crime, increasing unemployment, more crony capitalism, more dependence on government, and a lower material standard of living for everyone… except the Elite. The old saying is; reward that which you want more of and punish that which you want less of… Apparently our leaders want more bad and less good. Judging by their policies and actions.
Sincerely,
John Pepin
