Monday, September 15, 2008

It's going to be tough...

To remold Americans into savers after this round of economic moves.
Indeed, a year ago, a six-month certificate of deposit earned, on average, 3.53%, according to (RATE). Today, that's down to 2.03%. A one-year CD that earned 3.75% at this point in 2007 was offered for as little as 1.92% in April, before inching up to its present 2.38%. It's hardly a secret that banks are only able to pay out such pittances thanks to depositors' knee-jerk desire for security: "Hey, I might be earning crumbs on my cash, but at least I'm not losing money."

Sure you are. Wholesale inflation has soared 9.8% in the past 12 months, the highest clip since 1981. The more widely cited consumer price index jumped to 5.6%. In other words, while your saved buck was adding 2 cents or so on one end (and even less after taxes), three times as much was getting singed off the other end of that dollar bill. "Inflation is just deadly to savings," says David Gitlitz, chief economist at TrendMacrolytics, an investment adviser. Gitlitz observes that, taking into account the hit from inflation, rates haven't been this negative since the dreary 1970s. (That, in turn, gave way to an early '80s that saw the worst inflation in U.S. history since the Civil War.) "It steals your purchasing power and sets less and less of an incentive to keep money in the bank." [More]
Despite the pounding savers have been taking it is being erroneously translated, I believe, into a moral tale  centered on the virtue of money as the ultimate asset.  Money, especially fiat money such as ours, is an odd choice for such adoration.  It's primary quality is liquidity, the ability to turn it into assets that actually are something well, real.  It is also easily evaluated - the appraisal value is right on the bill, of course.

The two characteristics make it the darling choice for wealth in the financial sector.  But those attributes don't mean the world has to share their high opinion.  Money will always possess an allure for those who are nervous about how to store wealth, but this apprehension, which mounts in uncertain times like this, often leads to less than optimal asset allocation.

Once again, for about the fortieth time in my life, the calls are out that cash is king.  Based on the rocky condition of alternative investments, pessimistic economic advisers are standing by the bunker door.  Meanwhile, I see all kinds of reasons why inflation and interest rates are pointing the other way.

My concern is the steps we are taking, and especially the debt we are generating will make cash the last place you want to store wealth.  Perhaps the inflation of the 70's has faded in memory, but the real return to cash is struggling to reach positive ground.

The money pouring into farmland is not a wild guess on the next windfall, but a reasonable choice to protect wealth.  Even if the return slows, as the cost squeeze intensifies for farmers, I don't see investors fleeing simply because other choices will be much worse.

To teach Americans to save would require a reversal of our consumerist training (note the monthly hype over retail sales and the urging to spend your tax rebate).  It will also need a huge benefit such as a sharply curtailed money supply and broad deflation. Again, I don't hear many policy makers mumbling about either.

We all have biases, and certainly mine is emotionally and perhaps irrationally against an essentially artificial form of wealth.  I'll stick with land.

1 comment:

Anonymous said...

I agree with your assesment but what to do with more modest amounts of money?