Among the many other oddities in our financial world that are now accepted as “normal”, future historians will be left to pass judgment on how, here in 2010, U.S. monetary policy continues to punish the group that the nation needs most if it is to somehow restore balance to its money flows – savers. This New York Times story takes up the issue:
Perversely, coming after a devastating financial crisis caused by companies and households that feasted on borrowing, ultralow interest rates are penalizing people who have paid down their debt and are now trying to save. It is also punishing those who rely on the proceeds of their nest eggs to pay the bills.
“It’s the whole point of low rates, to entice borrowing and discourage saving, but it means a massive wealth transfer from savers to borrowers,” said Greg McBride, a senior financial analyst at Bankrate.com. “It is a trend on steroids now because interest rates have been cut to the bone.”
For example, anyone keeping $500,000 in a 12-month certificate of deposit earning a rate of 1.5 percent annually — one of the best savings rates available nationally these days — would earn $7,500 a year, hardly enough to live on. Just three years ago, that same investment would have generated $26,250.
“You have spent your life being prudent, building a nest egg for your retirement, and now the returns are terrible,” said Todd E. Petzel, chief investment adviser at Offit Capital Advisors, a wealth advisory company in New York. “I am 58 years old. I know lots of my peers who are thinking of retiring, and they are scared to death.”
I really feel for a lot of these fifty-somethings and their elders who are just now learning how central bankers have stacked the deck against them and are, unjustifiably, as scared of owning gold as they are of outlasting their meager savings, now earning one percent.