Low (less than 1%) and Zero interest rates are a good thing aren’t they? They make it possible to borrow money very cheaply to buy a new house or car. Those low interest rates also make it easier for banks to loan each other money to keep the wheels of the economy turning.
How Low Interest Rates Affect Savings
What you seldom hear about is the other side of the coin. We all know that if you have money deposited in a bank that that money is losing value (purchasing power) every year. That’s simply because the rate of interest a bank pays on a deposit account is typically 1% or less. Inflation runs at about 1.1% in the USA if you believe the official figures. I don’t because I think they’re massaged and real inflation is higher. This article explains the controversy over how the USA calculates the rate of inflation.
In the EU, the rate of inflation is currently 2.03%. The Rabodirect Bank (Dutch bank) pays one of the highest interest rates on deposits – 1%. A few years ago, they used to pay 2.4% but that value has been steadily reduced over time. So they pay a rate of interest that’s half the inflation rate. A depositor is losing 1% per year on the purchasing power of money held at the bank.
In fact it’s worse in countries like Ireland where the government imposes a tax called the Deposit Interest Retention Tax. This is a tax on money earned as interest from deposits. It’s 41%. So a depositor only get 0.59% interest in real terms. Inflation is outpacing the purchasing power of a depositor’s savings by 1.44% each year.
€1,000 deposited today would be worth €1060.59 in 10 years. But that €1060.59 would only have the purchasing power of €919.30 in today’s money (that’s a 13% drop in purchasing power over 10 years).
Just to keep pace with inflation, and to cover taxes, a saver in Ireland would need a bank to pay a 3.44% interest rate.
In April 2016, the UK abolished the deposit interest tax it used to levy on interest earned from a savings account. Other countries may implement such taxes at various rates.
The USA isn’t alone in manipulating the rate of inflation reported to a county’s citizens. No government wants to look like they’re doing a bad job so they’ll manipulate how rates are calculated so as to get good numbers. They hope people will take the figures at face value. Unfortunately, many do.
But simply leaving your money on deposit in a bank means the value of your money will be chipped away over succeeding years.
There was a time when banks paid a higher interest rate than inflation. That’s no longer the case. Gold and silver do hold their purchasing power over time so owning some of these precious metals is a very wise decision. These assets are also outside of the banking system so if it should collapse, you’ll have some protection against that. If you only have money on deposit, you could lose it all.
How Low Interest Rates Affect Pensions
The other major fallout from low/zero interest rates is the impact on pension schemes. These rely hugely on an 8% annual return from banks to stay afloat and to be able to provide pensioners with the payouts they expect. Except we haven’t had rates of return like that in almost a decade.
Add to that that there are fewer young people joining the workforce than are needed to prop up the Pension Ponzi scheme. The whole pyramid scheme is starting to topple in slow motion.
One action various governments have taken to stall this crisis is to raise the pension age. People will be claiming a pension for a shorter period before they die and a percentage of people will die before they get to the higher pension age.
As I mentioned in my previous post, the Baby Boomers are now becoming retirees and they expect a certain level of pension payment. The bottom line is that the money to cover those payments just isn’t there. So retirees will be getting a fraction of what they expect. It may even be a large fraction, but it won’t be 100% of what they expect.
Pensions in the USA, the EU and internationally will go bankrupt as this long awaited “pensions time bomb” detonates in slow motion. The Teamsters Union Pension Fund is one casualty of this – read about it here.
In the above video, Max Keiser and Stacy Herbert discuss the end of retirement which many Americans, Europeans and others will suffer as their pensions are decimated in the coming years due to zero percent interest rates and ultra loose monetary policies pursued for the benefit of banks and corporations.
Governments and central banks bailed out the banks at the expense of pensioners who have been essentially “thrown under the bus”.
In the second segment, Keiser interviews Constantin Gurdgiev, Professor of Finance at Middlebury Institute of International Studies, about the debt situation in Europe and, particularly for any Irish readers, the NAMA and Irish water debacles.
Gurdgiev points out how the economic recovery in Ireland (the EU’s poster-boy for recovery) is tentative at best and based on less than sound fundamentals.
How Do You Protect Yourself?
Diversification remains the key to weathering the impact of the ‘pensions time bomb’. The traditional and typical retirement or pension fund of simply owning a balanced portfolio of just paper assets – equities, bonds and a small allocation to cash – is now a recipe for financial disaster.
This is especially the case given the rich valuations seen in stock indices globally but also the fact that global bond markets are at all time record highs due to Quantitative Easing and central bank’s ultra loose monetary policies.
Having a pension without an allocation to gold today is extremely risky and gold has never been more important as a hedging instrument, safe haven asset and pension portfolio insurance.
Owning gold coins and bars will again protect and grow wealth in the coming years. I recommend BitGold and BullionVault for buying and storing gold and silver in allocated, segregated vaults around the world and SDBullion for to buy gold and silver coins and bars you want to hold yourself.