For generations, we’ve been taught by our parents to save. Save for a bicycle. Save for college. Save for retirement. And then, in retirement, you could count on this savings to earn interest. Millions of Americans used Certificates of Deposits (CDs) and low-risk bonds to ensure they could retire without worry. Think about this…$50,000 in CDs in 1990 earned 8% interest, or $4,164, each year. And a $10,000 balance in your savings account earned 5.5% interest, or $565, each year.
Today that $50,000 earns 0.6% interest, or $301. The other $3,863 is no longer yours! And your bank now only needs $50 to pay you for the use of the $10,000 in your savings account. Where did that money go? Who took it, and why aren’t you upset about it?
Your interest income now benefits someone else
The simple truth is your savings interest is being given to those borrowing money in the form of lower interest rates on their loans. You lose your interest income and pave the way so someone can buy a home for lower interest, a business can buy equipment at lower financing rates or so the government can pay low interest rates on their spending in excess of their tax revenue.
In fact, the government’s spending is the elephant in the room. The government cannot afford to pay high interest on their excess spending, so there is tremendous pressure to keep interest rates on these borrowings as low as possible. This policy reverberates through the banks, who price their lending on low fed rates.
The message being given
The inadvertent message to savers? Stop saving! Yes, we are taking your money and lending it to someone else. But since our loan rates are so low, we cannot pay you much of anything for the use of your money. So stop saving and go into debt. The interest is so low!
Yes, you are a victim of interest income theft. It is being given to borrowers, especially the government. Here are some ideas to reduce the cost of being a victim of this theft:
- Fight the debt urge. While the message is screaming to borrow money and go into debt, only do so if it makes financial sense.
- Hunt for returns. While savings rates are all below the rate of inflation, you still need to work to find the best rate for your money. Fight the urge to be passive with your savings, and constantly shop for better rates. Also look to lower your own debt costs, so explore refinancing your mortgage or other loans.
- Become a direct lender. There are now services that let you lend money directly to borrowers. If exploring this route, do your homework and diversify as much as possible as there is additional risk to this approach.
- Find other uses for your money. The value of your cash is actually losing money against inflation. Consider moving some of your savings into assets that appreciate in value. This could be a home, a business, or yourself!
- Be vocal. It is one thing to spend more than you earn or receive. But it is quite another to overspend with no regard of the impact. So lend your voice to bring back some common sense to the government’s spending habits. Money does not grow on trees. It needs to come from someplace. That place, however, should not be from savers.
Source: Bankrate historic rates for CD’s and deposit account in 1990 and in August 2021, as well as The Buffalo News, April 11, 1990.
— By Nancy J. Ekrem, CPA
DME CPA Group PC
Certified Public Accountants & Business Consultants
Thank you for saying the quiet part outloud. Getting a return on your savings requires more risk nowadays talk to your financial advisor.
I doubt you will have any Bankers refute the article.
Thank you for being honest it’s refreshing.
This is probably the best tutorial I’ve read on MEN, and I’ve been reading MEN since day one. Like most others I’m aware of the facts presented here, but I never thought about them in quite the same way they’ve been explained – our federal government has been ripping off savers. Thank you very much Ms. Ekrem.
Thanks for the information Nancy. It definitely makes me ponder what my next Financial step should be.
I agree with the assessment of the problem. Artificially low interest rates are a type of theft. However, some of the advise given here is not good. The government cannot raise interest rates at all without exploding the economy. Look at the gray bars in this graph and see what direction interest rates were going leading into each recession in the last 30 years:
The whole economy is the interest rate. Easy money.
The government is in debt. The government is in trade deficit as well. The government is going to keep existing and keep spending even if we are all on the streets begging. Low interest rates encourage lending, which encourages an increase in the money supply. New money only favors who spends it first. New money causes inflation. This is the most important part of what I am saying… Your savings is worth less after a period of inflation (that’s bad). Your debt is also worth less after a period of inflation (that’s good). So, if you anticipate an inflationary period, do you save or get into debt? You’d obviously want to borrow money and spend it on something else, like durable goods, a house, a business, etc. Get into debt. Borrow strong money, pay back weak money. The government doesn’t have huge savings. The government is in debt. The government isn’t going to do anything that hurts their ability to keep kicking the can down the road. “If you are not in debt, you are not playing the game.”
There may likely be stark, short-term period of deflation following the Fed Balancesheet reductions and interest rate hikes (if one could call 0.25% a hike), but it will most likely be undone by the digital money printing press. Republicans might take the House in Nov, but a new, prolonged gray bar will on that graph before then.
Get into dollar debt. Save in assets like Silver.
People need to be skeptical before taking your advice. Aren’t you the Matt Richardson who was repeatedly recommending a few years ago for people to sell their homes as the bubble of high prices was about to burst? That burst has yet to occur so anyone who listened to you, and did not immediately repurchase real estate, is almost certainly not as wealthy as they could have been.
Ron, yes. I was right initially, then I was wrong. The Fed ended the taper, which caused a precipitous decline in housing prices (I was right). Then the Federal Reserve went back to more asset purchases and pseudo-QE (housing boomed again after that). The Federal Reserve holds about one-third of all mortgages. What could possibly go wrong?
https://www.pionline.com/economy/feds-mortgage-buying-spree-1-trillion-no-end-sight <- wow
China couldn't sustain it:
Three months ago the Fed announced rate hikes and a deleveraging of the balance sheet. This is what immediately happened:
I just saved people hundreds of thousands of dollars by advising them not to buy Bitcoin a couple months ago. I'm able to sleep at night. I love you Ron. Do the opposite of what I'm saying. Buy some rental properties.
I guess this discussion could have some real meaning if the author could tell us just what interest rates should be for the saver and the borrower to create the perfect economy in our world. So Ms. Ekrem, what are those “Goldilock’s” numbers?
When CD’s were paying 8 to 10% interest small investors were avoiding the stock market like the plague (or Covid 19) to get the sure returns of expensive money. The result was the stock market investment was generally low and only used by large investors and major risk takers. It was expensive to buy real estate then with 11 to 18% borrowing rates but as a result home prices were fairly reasonable, even dirt cheap by today’s standards.
All kinds of things have gotten us to the point we are at today. We have thrown numerous useless small wars encouraged by the ultra Right without bothering to figure out a way to pay for them. We have given the richest among us huge tax cuts which they were not even asking for, while at the same time creating ever more taxes and fees heaped on those least able to pay them. Programs to protect the poor and elderly have been starved of funds or not kept up to date to keep them solvent in the long term.
Mr. Fairchild gives the best advice here. If you don’t have an honest fiduciary financial adviser, you are at great risk in this economic mess. And no, buying silver and gold to put under your mattress is not a real good recommendation. Our entire economy is based on at least 80% of the populace being totally ignorant of how our economy is designed and manipulated by the wealthy to control the not so wealthy. If you do not have a reasonable amount of home equity, some investment capital generating savings and a sure income, you are in fact desperate right now and need to do something about it. Politicians aren’t apt to do anything that will save you.
Ms. Ekrem, thank you for this information. I found it very well written, helpful and enlightening.
The Fed is going ahead with the [draconian, cough] 0.25% rate hike and balance sheet reductions. A 0.25% hike caused a red flag reduction in real estate and stock markets back in 2018-ish.
It might be inevitable to see a full reverse of all interest rate raises (again), more Quantitative Easing (again). Policies like Negative Interest rates and even stimulus checks to prevent Strategic Abandonment of mortgages are on the table. There is so much roll-over of debt in the system (taking out loans to pay loans) that the only solution is to bail out debt at the expense of the savers. When the government is on the debt side of the equation and also makes the rules, saving in dollars will be punished. This is why I say being in debt is a good thing. The government isn’t going to do anything that hurts itself. Buy assets. Take a loan out ot buy a business that has good books. Pay the least you can structurally.
Fed says they are going forward with poison pill (the right thing to, but it is too bitter):
This will make the dollar strong at first, as even FOREX investors are looking for economies whose currency is backed by Austerity.
This, unlike every other recession/depression is unprecedented. Banks are flush with cash. If there is a tangible interest rate, they will loan out this money and it will be hyper-inflation.
Since 2008 banks have been paid to NOT make loans under a program called Interest On Excess Reserves:
Something big and un-fundamental is getting ready to happen. Fundamentally the economy is broken. The economy is the interest rate:
Matt Richardson I largely agree if you can borrow on non inflated assets it is probably a good investment like I don’t know property in Aberdeen or Hoquiam. Or a good business. Let your money work for you. This has been the case largely since 9-11. Rich people getting richer. For us laymen our homes have been our best return. But with over inflated prices buying a home in Edmonds probably won’t return much more than a inflation for a while. Ours economy is standing on a house of cards we sent our businesses overseas what we do produce needs far less labor than it once did and what we have left with is largely a service economy for those few with money to spend. Europe has the same problem but just for longer. Can you say the fall of the western world? Yes we need higher interest to keep from falling off the cliff. My suggestion is to prosper we need 2 things. Bring back industry and manufacturing and buy American. This doesn’t solve the global problem but will define our future. Build the future here. The rest of the equation will take care of itself. Clinton has some good points too. Although his bias is showing. Short term stocks are down interest increases hopefully to a reasonable level and our leaders pull their heads out of their ass. Heaven help us.
Jim, I’m not quite sure what you are referring to as my bias in your comment. If my bias is that the Neoconservative Right likes to start wars without paying for them, I guess that means I’m biased. If my bias is that the Right is trying to destroy things like the government supported postal service and Social Security, then I guess I’m biased. Correct me if I’m wrong that George Bush Jr. said his election was a referendum on privatizing Social Security because elections have consequences. (An election so close he could only claim it with the help of the SCOTUS). I think I’m stating facts, not bias,’ but we can agree to disagree.
I think you are absolutely right about exporting our industry and good jobs. We’ve also crippled the labor movement thanks to the Right Wing God Ronald Reagon and failed to enforce or even recognize that we have anti-trust laws that could be used to discourage monopoly, price fixing, and stifling competition.
In short everything is designed to make the rich richer in America since the election of Ronald Reagon. That is what we are all about. The rich people screaming the most about making America Great Again and being patriotic are the people who could really care less about the success of the average American. If you don’t think like a rich person here, it’s for double damn sure you will end up being a poor person here. But you have to understand the rich don’t view things in terms of an American economy. It is purely a world economy for them. That’s why you need to be in the stock market, even if it crashes in the short term. That’s where the inflated money will come from in the long term. That and the equity in our over priced real estate. I’ve been thru two major market crashes and still been better off by being invested. I’ll stay in the market because that’s where the rich folks hang out.
Clinton the bias I perceive is that all of our problems are the result of conservatives. I tend to think both sides have got us to where we are today that’s all. I like real estate but not a fan of having to service the debt unless it is your home. I agree the stock market is something everyone should be in. I haven’t sold the down turns either but I do buy them it has worked out pretty good so far. I think we may have a good buying opportunity in the coming months. You are right that the average person that doesn’t invest isn’t likely to succeed not that they would get rich by investing but at least keep them out of the poor house. I have never made the big money but saving and investing has at least got me a home and a couple of nickels to run together.
We are pretty much on the same page Jim. The extreme Left is just as bad as the extreme Right in my opinion. “Defund the police” and “Cancel eviction” is about as dumb as it gets. I don’t give any money to either major party or candidates anymore. I just try to understand, navigate and outwit the screwed up world they give us.
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