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Saving Money Will Once Again Be Rewarded

By: Steve Johnson

10/31/2008 - 57 Comments

The day is coming when interest rates will spike and saving money will once again be rewarded. 

The government is fighting like mad to unfreeze the credit markets and avoid a recession.  The savings of the world has been spent.  There is no more money and the world is going to be much less likely to borrow America more of their savings in the future without demanding much higher interest rates.  That is good news for savers who have money in the bank, after a decade of low interest rates to encourage spending to keep the economy going – which is 72% driven by consumption. 

The old economy, driven by consumption is now a part of history as we head into a recession.  Anyone that has cash will be able to get a good interest rate in return, because the demand for money is going to continue to increase.

A few days ago the Federal Reserve lowered the bank-to-bank interest rate to 1%.  The ½ point drop was a significant move, yet the market didn’t flinch.

Once the panic runs its course, foreign nations are not going to be investing in America anymore without asking for much higher interest rates to counter their inherent risk. Then, they are going to sell dollars like their is no tomorrow, once they realize that their best customer - America consumers - are no longer their customers at all. Without America consumers, there is little reason for China and other nations to hold their pegs to the dollar.

Most private-sector borrowing rates are higher now than at the start of the financial crisis in August 2007, despite some of the most momentous actions by the Fed since the last Great Depression.

The Fed cannot control the global economic market forces that are in control of the world markets.  The rules of economics are like the rules of gravity. 

Here are several reasons why interest rates are increasing;

  1. Banks have lost trillions of dollars and are trying to hold on to the few dollars they have left for operating capital.
  2. Foreign banks are reducing the amount of money they lend to US banks for three reasons; 1) They have lost trillions, 2) the risks are higher, 3) they don’t have any more money to lend. The savings of the world has been plundered.  It’s all gone.
  3. We are still in the middle of the largest housing market crash in history, which has drastically increased the risk of mortgage lending with foreclosures at record highs, causing banks to increase their interest rates to account for the additional risk. 
  4. Banks are not lending to each other because they don’t trust each other. This is creating more competition for cash deposits between banks and they are increasing their interest rates on savings accounts to lure customer.
  5. Credit card companies, who are seeing large increases in delinquent and late payments are forced to reduce their risks and lending.  This will drastically reduce the amount of money in the economy and increase the value of cash.

Inflation

From the direction of the economy, cash seems like the safest place to be – and it maybe for the next few months.  But sooner or later cash is going to be a liability as the wave of inflation hits the economy from the trillions of dollars the government is printing in an attempt to bailout the financial industry and avoid a recession.  The financial industry is just the beginning, as the economy continues into recession, industry after industry are going to lobby for a bailout.

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