"Savers, Forgotten Americans"

Sydney M. Williams

Thought of the Day

“Savers, Forgotten Americans”

August 3, 2011

The unsung victims of the Federal Reserve’s aggressive monetary policy have been the nation’s savers – those who were truly innocent of the excesses that engulfed so many in our society and which led to the bubble that nearly brought down our nation’s capital markets. While profligate consumers have been chastened and are now pursuing more parsimonious ways, the frugal have had to venture into more speculative vehicles in order to maintain some reasonable semblance of the income they once enjoyed.

For two and a half years, full year returns on a million dollars invested in Three-Month Treasury Bills have averaged just over a thousand dollars annually, compared to an average of thirty to forty thousand dollars per annum in the two years leading up to the crisis – a 97% decline in income. Savers who have chosen to stay in Treasuries have had to extend maturities, assuming a risk on duration, or have had to invest in more speculative corporate bonds or stocks. The two and a half year rally in fixed income instruments reflects this trend.

The Fed’s policy to keep interest rates low is based on the need to reliquify the system, to encourage borrowing on the part of business and consumers. Businesses, however, remain dubious of the fiscal intentions of the Administration, and consumers are behaving skeptically because of a “once bitten, twice shy” mentality. Consumers face another dilemma. The population is aging. Seventy-five million people will enter retirement age over the next eighteen years. They know they have not saved enough, and doubts have been raised as to the viability of Social Security. They are worried, and returns on cash discourage savings.

The economic consequences, thus far, of the Administration’s monetary and fiscal policies (stimulus spending) have been the equivalent of “pushing on a string” and are clearly reflected in last week’s GDP revisions and second quarter report.

Low interest rates have not just affected Treasury Bills; today’s New York Times shows money market funds yielding 0.58%, down from 0.75% a year ago. The same table has six-month CDs providing 0.55% versus 0.78% one year earlier. One year rates are not much higher. One year CDs yield 0.88% and the return on the Treasury Two-Year Note is 0.32%. With CPI having averaged 3.6% over the past twelve months, the only reason for keeping money in cash is for the opportunity it affords – a viable option for the wealthy, but not a realistic alternative for the average person approaching retirement who is dependent on his savings and the interest it provides.

For the past twelve months, the negative impact of low returns for savers have been offset by principal returns in longer dated fixed income securities, and in equities – thus far the riskier the asset the higher the return. Over the past twelve months investment grade bonds have returned 5.76%, high yield bonds 8.8% and the total return for the S&P 500 has been 13.5%. The yield curve has been flattening, which is normally considered a positive economic sign, but, unusual at this point in a “recovery,” the curve is flattening with long rates declining, indicating that demand for money remains low.

At some point long rates will begin to rise, and when that does happen total returns in the corporate markets will decline, leaving savers with even fewer choices.

Stocks do provide something of an alternative, but equity investors must have comfort with volatility. Yesterday’s decline has meant that stocks are now down on the year. But stocks do provide the only opportunity for growth in income. Thus far this year the average yield on the S&P 500 has risen from 1.71% to 1.90% (with stock prices flat) – an increase of 11.1%.

What has been missing from all the discussion over the debt ceiling during the past few weeks in Washington has been any emphasis on economic growth. Opportunities for the Administration were provided – the Bowles-Simpson report which urged debt reduction and tax reform, as did the gang of six and so did Paul Ryan with his “Road Map for America’s Future.” The Administration chose to ignore the first two and trivialize the third. The losers have been all of us. One consequence of a stronger economy will be higher short term interest rates. That would be of help to those that have gone unheralded, and yet are the least responsible for any of the problems we have undergone over the past few years, the nation’s most prudent – America’s savers.