THE BLOG
05/01/2013 12:47 pm ET Updated Jul 01, 2013

The War Against Savers

There's no mystery about why the Fed wants to keep interest rates low. They say low interest rates will create economic growth, though there's not much evidence of that in recent years. Sure, low rates have helped the mortgage market, but they haven't triggered a boom in housing. And low rates haven't encouraged small business to borrow so they can expand and create jobs.

The real reason the Fed needs to keep interest rates low is to help disguise the bill for interest on the ever-growing national debt. In 2012, it's estimated that the United States spent about $220 billion paying interest on our $16.7 trillion dollar national debt.

In fact, interest on the national debt is the third largest category of government spending -- after Defense and social programs such as Medicare and Medicaid. And you can't "sequester" interest payments to those who buy our debt.

But with 90-day T-bills yielding 0.06 percent, and 2-year Treasuries paying 0.23 percent, and 10 year government IOUs at 1.7 percent, you can see how a slight increase in rates could quickly send the interest bill soaring.

Those interest payments go to holders of debt ranging from grandma buying Treasury bills, to money funds, to foreigners who -- according to the Treasury department -- include China with $1.2 trillion of Treasury securities, and Japan with $1.1 trillion. Even at today's low interest rates, they view U. S. Treasury securities as the safest and best place to park their reserves.

And that's a good thing. Because if these investors grow wary of the future value of their wealth invested in dollars, the first thing they would do is demand higher interest rates to offset those fears. Few other alternatives, including gold and other foreign currencies could serve as a repository for this global wealth.

The United States government is the biggest beneficiary of low interest rates, because it is the largest borrower. But turning to the other side of the coin, who is the biggest loser when the Fed keeps rates artificially low by purchasing $85 billion of securities with newly-created credit every month?

Taking Care of Mom

Savers are the big losers in this rigged game. And most domestic savers are seniors and those approaching retirement, who planned to live on the income generated by their savings. Today, that's simply not possible -- unless they are willing to take on a lot more risk.

Seniors are told that interest rates are low because inflation is low. And, indeed, the Bureau of Labor Statistics' Consumer Price Index says that inflation is currently running at only 1.5 percent annually, as of March, 2013.

But if you put your money in the bank in a one-year CD, you'll earn only about 0.25 percent, according to Bankrate.com. That's the national average, and while you can search out higher rates, few FDIC-insured, 1-year deposits come close to matching inflation. The average 5-year CD rate is only 0.79 percent.

Even before taxes, this safe, "chicken money" is a loser for seniors. And then there's the question of whether the measures of inflation actually reflect the kind of price pressures that seniors find themselves paying.

Most seniors aren't interested in, or can't afford, the latest smart phones -- which reflect the lowered cost of technology. But they find themselves paying more for uncovered medical expenses including custodial care -- costs that are rising far faster than 1.5 percent annually. Similarly, property taxes and state fees for everything from drivers' licenses to picnic permits, are rising faster than reported inflation as states try to improve their budget crunch.

Seniors on fixed incomes who planned to supplement their retirement needs by using interest on their savings are now forced to dip into principal. Or else, they must find riskier, higher-yielding investments. Or, as a last resort, they may turn to you -- their children -- for support.

Don't Fight the Fed

There's an old Wall Street saying: Don't fight the Fed. It's a recognition that the all-powerful central bank has ultimate control over the global $16+ trillion marketplace for U.S. Treasury securities. After all, they can "print" the money -- which is exactly what they've been doing for the past five years.

All that money creation has kept interest rates low in recent years. And it looks like the Fed will continue that credit-creation trend as economic growth continues to disappoint.

It's possible that restored economic growth will push rates higher in the future. And it's also possible that somewhere down the line the global markets will take a look at all that money creation and demand higher rates to compensate for the dilution in value of the money -- inflation.

In the mean time, seniors and other savers must be careful about taking more risks -- either by purchasing riskier securities or by extending maturities to capture higher rates. Remember the mantra of the chicken money saver: "I'm not so concerned about the return on my money, as I am about the return OF my money! And that's The Savage Truth.