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Interest rates should reflect the increase in the cost of living. If the cost of living rises by 3% and the interest you can get on slavings is 3%, that equalizes the value of your money, so you can spend it today or later, and its value remains the same.
Interest on savings is a form of the citizenry loaning money to people who want to borrow it. Your bank borrows money from you at 3%, and uses it to cover whatever they want or need money for. You are the lender. If you refuse to loan money to your bank, they will have to offer you more. In an ideal economy, that would happen---circumstances of the market would dictate the rates. But the government instead uses the money supply to manipulate the market, but forcing interest rates that will achieve a desired objective. Desired by the government. Clearly, the govgernment desires wealth and prosperity for big business, not for the people. The government controls a large enough amount of money that they can turn the tap off and on, to regulate the flow.
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Those who diversified into other investments lost half their nestegg last October. Unless they had that cockatoo picking their portfolio, instead of analysts. AFP: Parrot beats punters in SKorean stocks flutter
Nice link!
Except that the parrot wasn't picking stocks last October, just over the last six weeks (July and August 2009).
I especially liked the last part...
Quote:
Our experiment proved that making long-term investments in blue chips is safe and effective.
Notice that the parrot was picking only blue chip stocks while the humans were picking small and medium-sized firms.
The parrot was only mimicking a stock index fund that was limited to blue chips. Anybody can invest in a stock index fund and get the same results as the parrot.
And yes, during the period between October 2008 and February 2009, investors lost half of their money in the stock market...if they sold out.
But if those same investors stood pat on sound investments, they'd be on average up about 45% since then. It's not a return to the stock market highs back in Spring of 2008, but then the stock market was a bubble waiting to burst.
And October 2008 to February 2009 would be the worst place to put your money. Yes, it would have been better to put it into CDs, even at low interest rates. And when things started picking up around March and April, that was the time to start investing cautiously in the stock market again.
Also, diversification means more than investing in stocks. There's other vehicles besides CDs and stocks traded on the US exchanges.
What type of investments would you recommend to, say, an 83-year-old?
Low interest rates hurt seniors because to get a certain amount of monthly income, they have to put more money into a low-yielding CD than they would into a higher-yielding CD. To take a simple example, let's say our 83-year-old needs $100 per month income to supplement his pension and SS.
CD @ 1%, requires an investment of $120,000
CD @ 5%, requires an investment of $24,000
That is a big difference.
Let's consider our 83 year old retiree...if this person has $24,000 on hand and only needs to supplement his social security check and pension check by $100, then he's got enough money on hand to last another 20 years by just putting the money in a simple savings account and withdrawing $100 each month.
It escapes my understanding why our 83 year old is entitled to keep his initial capital and earn a guaranteed liveable interest from it. It's not like this person's going to need $24,000 after he's dead.
And if this same person had taken just $1000 of his $24,000 and bought Ford stock when it was $1.26 on November 19, 2008, then sold it when it hit $8.00, he'd be $5,300 wealthier today.
Let's consider our 83 year old retiree...if this person has $24,000 on hand and only needs to supplement his social security check and pension check by $100, then he's got enough money on hand to last another 20 years by just putting the money in a simple savings account and withdrawing $100 each month.
It escapes my understanding why our 83 year old is entitled to keep his initial capital and earn a guaranteed liveable interest from it. It's not like this person's going to need $24,000 after he's dead.
And if this same person had taken just $1000 of his $24,000 and bought Ford stock when it was $1.26 on November 19, 2008, then sold it when it hit $8.00, he'd be $5,300 wealthier today.
Hahahaha....you are correct, he would do well to take out $100 per month for 20 years, but then the money would be gone. What if he wants an income-generating investment so that he can give the principal to his heirs?
BTW, this 83-year-old DID buy Ford stock at around $2 and $4 per share. But the principal invested was no large amount so the gain was mostly psychologically satisfying.
Just like the FED tries to get the inflation rate right: not too hot, not too cold; I think that they need a stable FED funds rate. One percent is not that figure.
Question for each poster. Would higher interest rates be good for YOU, or good for America, or good for the world and keep us out of WWIII? From whose standpoint do you judge the merit of your economic favoritism?
Question for each poster. Would higher interest rates be good for YOU, or good for America, or good for the world and keep us out of WWIII? From whose standpoint do you judge the merit of your economic favoritism?
Whether interest rates go up or down can be good or ill it depends upon the underlying economic conditions. Had Greenspan, and Bernanke for that matter, raised interest rates to defuse the rapid expansion of the housing market, we would all have been better off. On the other hand rapid increases in the rate of inflation can be very harmful as we say during the 70's and 80's. So it depends.
You made the point about an understanding of monetary policy, both monetary and fiscal manipulation are tools and like any other need to be applied to the correct job at hand, which is under neo-classical economics to smooth out the peaks and valleys of the economy.
What if he wants an income-generating investment so that he can give the principal to his heirs?
I'm having a hard time wrapping my head around the concept that it's the duty of the Federal Reserve Board to not only guarantee you an investment income but to also guarantee that your heirs receive your nest egg in its entirety.
It sounds like a 'have your cake and eat it too' situation.
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Originally Posted by Teak
Just like the FED tries to get the inflation rate right: not too hot, not too cold; I think that they need a stable FED funds rate. One percent is not that figure.
Here's the thing: the Federal Reserve Board is more concerned with whether deflation kicks in and sends the entire country into a depression. Its why the rate is currently so low.
And I doubt if there is such a thing as a stable rate; the economy isn't a stable system...its constantly in flux. The best the Fed can do is vary the rates and the money supply to mitigate the situation.
It's sort of like riding a bicycle; there's no one perfect balance point...you just keep shifting your weight to maintain your balance.
Question for each poster. Would higher interest rates be good for YOU, or good for America, or good for the world and keep us out of WWIII? From whose standpoint do you judge the merit of your economic favoritism?
I remember I had a CD account back in 2000 or 2001 in Etrade that has an interest rate of 7% for 3 months. I am so missing those good old days.
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