The world is watching the Fed, wondering whether the slowing global economy and weak U.S. jobs performance will allow them to raise interest rates. It's a trading game for some, but American savers are the ones on the losing side. With rates kept artificially low, savers have been subsidizing borrowers. And the biggest borrower of all is the U.S. Treasury.
For the year just ending, the federal government will have overspent its budget, creating a deficit estimated $426 billion. That's horrible, but not as bad as last year's $483 billion -- or previous years, where annual budget deficits have reached $1,000 trillion. It's tough to forecast the deficit for the federal fiscal year that starts on November 1st because, of course, the government hasn't even passed a budget for the coming year!
When you add up all those annual budget deficits, the United States has now borrowed more than $18 trillion to cover all those deficits - our National Debt. The government borrows by selling Treasury bills, notes, and bonds - all IOUs of differing maturities. And for the first time in history, the Treasury just sold 90 day Treasury bills at a ZERO percent interest rate!
In other words, thanks to the Fed, the U.S. government is borrowing for 3 months at such a low rate the money's almost free - while if you carry a balance on your credit card, you are likely paying 19.8 percent interest for that three-month period!
Global buyers accept those low yields, feeling America is a safe haven for their wealth, compared to their own countries. But American savers should be screaming.
American Savers Get the Worst Deal
Americans who saved for the future - for college, for a down payment, for retirement - and who want the safest place for their money are subsidizing the growing debt of the federal government, allowing the government to borrow at below-market rates.
It's not just the low current level of interest rates that should concern savers. It's the fact that "real" rates are actually negative. If you earn 0.25 percent on a savings account or CD, and inflation is eating into your principal at a 2 percent annual rate, then you are surely in a losing position.
That situation has been true even at higher rates. Back in the early 1980s savers were in roughly the same situation. They were thrilled to earn 13 percent on 6-month CDs - but inflation was running at a higher rate. All the interest they were earning didn't make up for the decline in the value of their money.
Negative "real" interest rates are a stealthy tax on savers. The government borrows, pays a low rate to buyers, and counts on "printing" money or borrowing more to repay its debt when the IOU comes due.
In fiscal year 2015, even at record low rates, the government has paid $229 billion in interest (7 percent of the budget) on the national debt. Think of what the government (we, the taxpayers) would have paid in interest if rates were "normal" - about three times the current level. Interest payments would have swamped our federal budget, adding far more to the national debt.
The Saver's Alternatives
People with "chicken money" - money they can't afford to lose - are searching for higher returns than they can get in the bank. They intuitively understand that they're actually losing money by putting their cash away in the bank, since even at low inflation rates, the ultra-low rates aren't keeping up with inflation .
But anything that yields a higher return involves higher risk. Consider these risks that are not always so apparent:
• Liquidity risk - There are penalties for getting out early (think most annuities).
• Credit risk It's not the return ON your money, but the return OF your money that counts. (Think of junk bonds or commercial mortgage notes being marketed at higher yields, with very little backing and no government guarantees in case of a negative economic event).
• Maturity risk. Tying your money up for a long period has its own risks, even with highest quality bonds. (Think of being stuck for 10 years in a 2 percent Treasury bond if rates happen to rise -- or being forced to sell at a loss if you need the cash.)
• Complexity Risk You may not understand the caveats behind the attractive higher yields. (Think of an annuity that promises 4 percent compounding on your "base" - but only lets you withdraw the balance over a long period of time.)
Some risks might be worth taking - with a portion of your investment money. Dividend-yielding stocks could go down in price, or could fail to pay the full dividend, but at least the risk to this income is obvious.
None of the above qualify as "chicken money" - strictly "safe" investments that promise return of principal and immediate liquidity. Then again, these days even traditional "chicken money" investments such as short-term CDs aren't "safe" because they don't give savers the real return they deserve. And that's The Savage Truth.