Today, columnist Allan Sloan laments that the "prudent saver" is getting screwed (to use the technical term) by what's going on in the financial markets these days. The government, he says, is spending billions to keep interest rates low; introducing new instruments like "Build America Bonds," which reduce the availability of municipal bonds, buying Treasury securities (which drives up prices and reduces yields). All of which, he claims, hurts the prudent savers, mainly the aged and those on fixed incomes. And he's absolutely correct.
My questions: Is this anything new? Is something different now?
It's not new. The kinds of instruments the prudent saver favors -- savings accounts, money management accounts, CDs, bonds, munis -- have always been the low end of the spectrum as far as returns are concerned. Traditionally, the tradeoff was lower but steady gains, and greater safety, than in riskier investments. But those days are long past, and any investor has to adapt to new conditions or go the way of the dinosaurs.
The "new conditions" include the ones Sloan talks about. We are all well-advised to keep a certain amount of cash in some form of "savings" account for emergencies, but when you look at your credit union's rates on certificates of deposit as I did recently, and find that rates even for tying up your money for two or three years are a dismal 1.5%, even though there's supposedly a shortage of lendable funds, it's time to move your money elsewhere. Elsewhere, these days, seems to be in such places as junk bonds (corporate paper) and in the especially attractive stocks of some major corporations that are selling at bargain-basement prices and (therefore) returning some pretty handsome dividends, as much as 5 and 6%.
Wherever you find your alternate investments, the point is to adapt and find them. In time some balance will probably be restored, as it has in the past. Americans are reportedly saving more now than at any time in the past two decades, and that money will demand returns. More important, foreign investors who have for many years financed our national lifestyle of living beyond our means, are not going to keep their money in low-interest U.S. investments forever. That means that unless we want a far more serious economic crisis on our hands, the government will need to alter its low-interest policies fairly soon.
Even if that occurs, though, trying to rescue the kind of "prudent saver" Sloan is talking about is like trying to save the dinosaurs from extinction.
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