To quote Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” But there is one caveat, only as long as the return rate is reasonable. As interest rates approach zero, there is less and less incentive to save for the future.
Banks can’t really function at very low interest rates, most of their borrowers are short term and most of their loans are long term. In the early 1980’s the Savings and Loan industry wrote 30 year loans at 6% and saw all of their short term depositors withdraw their money and put it in the money market funds at 9%. Old Bill Seidman got the S&L’s out of trouble at a cost of several billion to the taxpayer.
It becomes extremely difficult for insurance companies and retirement plans to fulfill promises made to people 20 years ago. Their projected income streams from anticipated rates have dropped drastically. If you examine the rule of 72 where one divides the interest rate into 72, the resulting number is the number of years it takes to double the principle. CalPERS is still claiming an 8.5% return on their investments which would indicate that the funds principle would double every 8.4 years if left untouched. Of course if we assumed a 3% return, that would be 24 years and if we went to 2% figure 36 years. So it isn’t hard to figure out that CalPERS is probably miss stating their returns on equity, hoping that interest rates begin to rise drastically. At the current interest rate returns, their past funding projections made 20 years ago will leave them broke inside of 12 years.
What are we left with? Retirement plans that won’t even be able to pay back what the retirees put into them and a national debt payment that will consume all of our income taxes paid-- just to cover the interest.
The real issue with very low interest rates, is that there is no incentive to save money for retirement, especially if there is inflation. In fact low interest rates will probably stimulate the average person to consume beyond their means and pay the money back with inflated dollars later.
One peculiar thing is that gold and silver are no longer just commodities. The person who chooses to possess gold and silver coins, is not losing much in interest. Short term bank deposits are paying ½ of 1 percent a year—the interest on 50k for a year won’t even buy lunch.
The stock market seems to be the last game in town to play right now. Where else can you put your money and make a dollar? Of course, at one time a dollar would buy 4 packs of cigarettes but I digress. There doesn’t seem to be any risk, the DOW continues to surge higher. Everybody is going to get rich, Oh goodie, I can hardly wait!
Compound interest was a tool used by private citizens to enhance their retirement years. The present interest rates sound very depressing to people about to retire, but let’s play the government game. Reduce your registered cash in the bank. Keep it in a safety deposit box and have a couple of co-owners (like your kids) who can empty it out if you check out early. File for disability before you retire, it increases your Social Security benefits. If you “deplete” your savings, you probably qualify for SSI in California. If you’re married and can get better benefits being single, claim being single, the bureaucrats only want proof of a marriage license if you want spousal benefits. It’s no crime to “think” that your husband is dead and you don’t know who the new guy in the house is. That’s an extra $40 of food stamps a month right there.
Right now, even Suzi Orman is suggesting ways seniors invest more aggressively for retirement. They need to take more risk to avoid losing their principle. I tend to agree with her, but I think the logic is flawed. The government is our biggest risk. This Ponzi scheme cannot continue forever.
I’m suggesting that silver and gold need to be considered as options in any retirement plan, and I am not selling a newsletter. I believe that silver is a better buy right now and I like it because 1000 ounces is kind of heavy about 70 lbs., so it is rather awkward to steal. But gold and platinum are other options of purchase.
The thing I like, is that the government can’t print gold and silver, so if they need more money, they can print it (debauch the currency) or tax your earnings or tax your home, but precious metals are invisible.
So here we are with a very realistic bit of theory from Einstein about compound interest. It kind of makes you wonder, who’s in charge? We know who gets to pay the bills.