The FDIC imposes rate caps on member banks to prevent them from offering rates too high just to attract capital. The rate caps are published on the FDIC web site here.
With a maximum savings rate of 0.85% and official CPI-U inflation running at 2.7%, savers at FDIC banks are guaranteed to lose 1.85% of their purchasing power each year. The national average rate is 0.1% so the average saver is losing 2.6% of their purchasing power each year. That's some fine financial repression!
What if you go with a long dated CD, can you at least break even? Not even close. The rate cap on a 60 month CD is 1.86%, and even on jumbo CDs, the cap is 1.87%. So, the best you can possibly do at a bank is lose 0.83% of your purchasing power if you are willing to commit $100,000 to a bank for 5 years.
Despite forcing savers into negative real interest rates, the velocity of M1 money supply has been crashing since the 2008 financial crisis. This looks like a sure sign to me that we are still deeply in crisis, three years after the recession was declared over.
All this inflationary news is enough to get anyone depressed. But all is not lost. It is still possible to put your money to good use through trading stocks if you use the best stock picker services.
ReplyDeleteTami-Jo,
ReplyDeleteGood luck to you. That seems like a good use of your money for the services, but maybe not for you. They get a piece of your principal and you get the risk.
Too true. People seem not to understand the concept of "real returns", i.e. one's results taking inflation into account. Have tried to explain this concept to a number of people, resulting in much nodding of heads but little change in actions.
ReplyDeletereal asset investment,
ReplyDeleteWhat I try to get across to people is "real returns after tax" because that is the true purchasing power remaining. Navigating the tax web is a critical piece of the puzzle. I've spent significant effort to try to understand the tax consequences of any action, but the tax code is daunting. A never ending project it seems.
Yes tekewin, you are right. I got the "real returns" part right, but left out the "after tax"! I suppose it depends on if one has the investment in a tax free retirement account, but if its outside, tax treatment is just as important as the inflation rate. By the way, if you might be interested, actually started a new blog on inflation investing - www.inflation-hedge.blogspot.com We are a UK firm targeting Brits mostly, but the basic lessons of hedging against inflation are applicable everywhere I'd say. I like your concept of "real return AFTER taxes", and if you'd ever like to write a guest post with a link back to your website, would love to have you.
ReplyDeleteReal asset investment
real asset investment,
ReplyDeleteI appreciate the offer, but I can't take credit for the real return after taxes as my concept. I've learned too much from too many other people.