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The title of this thread is does "Low Rates Punish Savers"? It absolutely does. It is incontrovertible. No one denies this. 0% interest on savings has removed a low risk, adequate investment alternative from the table. It forces retirees to take unneeded and probably harmful risk.
But more than this, it destroys economies. Savers are the most reliable consumers. If they are not receiving income then they cannot spend, and if they do not spend then the economy goes into a long term contraction. This is what is exactly happening all around the world. The world is now in a long term contraction which means less jobs, less family income (that is what 99% of the families are experiencing), less tax revenue, and as a result much more risky investment options (how are governments going to pay back the mountainous debts in a declining economy ... print more money?).
So in answer to the thread's question:
1) Of course low interest hurts savers!
2) Of course, eliminating income to savers it is hurting the U.S. and the world's economies.
This is not the kind of retirement most people worked their whole life for.
explain to us how savers are spenders? you cant do both. your either a spender or a saver. in fact a nation of savers would collapse the economy
explain to us how savers are spenders? you cant do both. your either a spender or a saver. in fact a nation of savers would collapse the economy
I am not arguing against your basic point of view as expressed in this thread; I find it interesting and I'm still digesting it. However, the above quote is just semantic game-playing. Savers and spenders are on a continuum, they are not either/or entities. We are all spenders, unless we sleep on the sidewalk using scavenged cardboard and depend on dumpster diving and handouts for our food. So it is a matter of degree. Yes, of course, a nation of people who miminize their spending to an extreme degree would collapse the economy. While we are all spenders by definition (to a greater of lesser degree), we are not all savers. Some people are not savers at all, and we can agree that is not good. You say, "You can't do both" (apostrophe added), but in fact I would bet that you and I and 95% of the people posting here indeed do both.
I am relatively frugal but I allow myself some luxuries. I recently took a three-week, 5,000 mile road trip in my car, staying in motels and visiting various museums, sights, and friends and relatives. I spent for food, lodging, gas, and admissions. So I am a modest spender. Yet each month I spend less than my income, except for the month a little over five years ago when I wrote a check for $26,700 for the total price of a new car, representing about 10 or 12 months of surplus income over expenses. I will have that car for many years to come.
So I am a net saver. Is that what you meant? Net savers and net spenders? If so it would have been helpful for you to say so, as I am not the brightest one on this board.
Either at some point in these theoretical discussions common sense has to step in, or I am just too dense to grasp the meaning of your brief quote above.
Either at some point in these theoretical discussions common sense has to step in, or I am just too dense to grasp the meaning of your brief quote above.
This is not at all theoretical. It is the way economies and the world work.
When savers get less interest they spend less .. or they draw down on principle. This is very basic.
If they draw down on principle (as many retirees are doing) then the money will run out sooner and if, and when, interest ever returns, they will earn less interest because there is less principle. It is quite a disaster for retirees who were counting on a fair return on their savings.
This is not at all theoretical. It is the way economies and the world work.
When savers get less interest they spend less .. or they draw down on principle. This is very basic.
If they draw down on principle (as many retirees are doing) then the money will run out sooner and if, and when, interest ever returns, they will earn less interest because there is less principle. It is quite a disaster for retirees who were counting on a fair return on their savings.
If I have understood Mathjak's point of view, and he will certainly correct me, a response might be two-fold:
1. The form in which our savings are held can make quite a difference in the end result. We can hold savings (for example - not an exhaustive list) in bills in our mattress, in bank savings accounts and CD's, in equities, in bonds, in mutual funds of various kinds, in commodities futures (about which I know absolutely nothing), in gold, etc., or in any combination thereof. He and you agree (with great irony) in the disadvantage of holding most or all savings in bank savings accounts and CD's. You detail that in your post above.
2. In periods of high inflation, which means higher interest, the interest gains upon which one is living may be partly illusory in this sense: The continuing inflation is drawing down your principal (not "principle") in purchasing power if not in nominal dollar amounts. If I had $50,000 25 years ago and I still have it, I would be foolish to think, "Oh look how great this is - I still have all my money!" In terms of purchasing power, that is no longer the same $50,000 at all, and if that was and is the extent of my net worth, then I am actually much poorer now, after 25 years.
1. The form in which our savings are held can make quite a difference in the end result. We can hold savings (for example - not an exhaustive list) in bills in our mattress, in bank savings accounts and CD's, in equities, in bonds, in mutual funds of various kinds, in commodities futures (about which I know absolutely nothing), in gold, etc., or in any combination thereof. He and you agree (with great irony) in the disadvantage of holding most or all savings in bank savings accounts and CD's. You detail that in your post above.
In most discussions, (e.g. here, newspapers, TV, etc.), savers are usually those who invest in fixed income instruments, e.g., money markets, bank accounts, bonds, in order to receive a guaranteed return on their savings. All other types of investments are considered speculative with a varying amount of risk. Retirees in particular do shun and should shun speculative investments since there is no way to replenish losses once incurred. During a crash, speculative investments that lose substantial value must be turned into cash in order to survive. What is left, cannot be reinvested because it is gone.
Quote:
2. In periods of high inflation, which means higher interest, the interest gains upon which one is living may be partly illusory in this sense: The continuing inflation is drawing down your principal (not "principle") in purchasing power if not in nominal dollar amounts. If I had $50,000 25 years ago and I still have it, I would be foolish to think, "Oh look how great this is - I still have all my money!" In terms of purchasing power, that is no longer the same $50,000 at all, and if that was and is the extent of my net worth, then I am actually much poorer now, after 25 years.
I agree. We are talking about real returns, i.e. interest - inflation.
What is important to understand is that real inflation is no longer the inflation that is reported by the government. Most people who pay bills know this. What happened during the Greenspan era was that the manner in which inflation is calculated changed. The government now does two things that it did not do during the pre-Greenspan era:
1) It changes the composition of the basket: if something gets too expensive (goes up to much in price) the government substitutes something cheaper. Yes, inflation is kept steady in this manner, but for all intents and purposes it is measuring a lower standard of living. That is, for the same amount of money we are buying less quantity and quality. (As an aside, the stock market indexes, e.g. the Dow Jones, do the same thing. Whenever there is a weak stock, they drop it from the list and add a strong stock. This keeps the index going up and provides an illusory sense of stock indexes rising at a rate which they really aren't).
2) It changes the weighting of goods and services: if something gets too expensive, it is just weighted less and thus appears as a less expensive component of the CPI (there are actually multiple CPIs).
It should also be noted that there are different CPIs that the BLS keeps and the one that more accurately reflects the costs of retirements (e.g. higher medical costs) is not the one that is used for soc sec payments and such.
If we measured real inflation in the same manner that we use to measure inflation (pre-Greenspan) real inflation would now be more like 5% (some estimates by various research bureaus). This would more accurately reflect the real price rises we are seeing in foods, rents, medical expenses, energy, etc. Under this scenario, a fair return on savings (and CPI increases in soc sec) would be about 6.5%, more than enough for most retirees to meet their retirement investment goals without the speculative risks associated with speculative asset investment.
Retirees use the interest on their savings to purchase things (goods and services) while preserving principle. This is absolutely basic.
Of course, this also applies to every saver. They take a portion of the interest earned as spend it.
This is fundamental to every stable economy. This IS an economy.
you better take this up with john maynard keynes... as the father of modern day economics said
"The problem, , is that saving is 'non-spending' and if people do not spend all the extra income they earn, businessmen may not have the incentive to invest enough to employ all those who want to work .An economy of all savers would soon collapse""
you better take this up with john maynard keynes... as the father of modern day economics said
"The problem, , is that saving is 'non-spending' and if people do not spend all the extra income they earn, businessmen may not have the incentive to invest enough to employ all those who want to work .An economy of all savers would soon collapse""
Saver do two things with their money:
1) Spend it.
2) Loan it out for a few return.
Some put it in their mattress but that is few and far between nowadays. The problem is that the Federal Reserve has totally distorted the economy by simply printing free money for any large bank that wants it. As a result the average saver is punished because he/she does not get a fair return. In other words, the average saver is competing against a free printing press. Try loaning out money in a game of Monopoly if all the other players can get it for free just by sticking their hands in the Bank. You will get my point.
As an aside, the strongest economies in the world are those made up of nations of savers, e.g. Finland, Germany, Netherlands, China. Throughout history a strong economy is one that is moved by an notion to save money for the future and loan it out at a fair rate to borrowers who can pay it back.
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