Money, money, money
It is funny how the mind sometimes works and connects events in the most surprising way. We went to see the ‘Mamma Mia (Here we go again)’ movie a few weeks ago which led me to start watching some Abba videos on YouTube. The ‘Money, Money, Money’ video set me thinking that it really is a rich man’s world.
Money was not discussed in our house, it was considered vaguely embarrassing and dirty to talk about it. My father never told me about how much he paid in bills each month or how much had made in his real estate business that month, but he did dispense this one nugget of wisdom – save money. Wishing in turn to be a good father, I decided I would try to teach my daughter about managing and saving money by opening a bank account for her.
We went to my local PNC bank where I maintain checking accounts for the family. The helpful young representative, fresh out of college with a degree in marketing, showed me brochures for the ‘S Is For Savings’ children’s savings account. They have a website with videos of colorful Sesame Street characters and a Savings jar, a Spending jar and a Sharing jar for charitable causes which teaches your child all about saving and spending and giving. I asked him what interest rate they paid. He replied that we would earn 0.01%. I lost interest (excuse the pun) at that point.
They call this ‘financial repression’. Wikipedia crisply defines financial repression as, ‘policies that result in savers earning returns below the rate of inflation’. The official government rate of inflation is 1.9% . PNC currently offers a whopping 0.1% if you deposit more than $2,500 and you have a checking account with them. A quick check around with other banks reveals that you may get up to 0.2% if you deposit enough and have an active checking account with them.
The best savings rate (0.2%) is less than the official government inflation rate (1.9%) so, yes, money in a savings account is ‘earning returns below the rate of inflation’. There is more. The official government rate of inflation grossly underestimates true inflation. The shadowstats.com web site publishes economic data based on the methodologies used in 1980. These methodologies have since been massaged beyond recognition to make the numbers look better. These show the current inflation rate to be around 10%. This will not come as a surprise to anybody who needs to eat and frequents grocery stores. My eldest son has been in Europe for the last 4 years. When he came to visit here in the United States at Christmas, after a trip to his favorite store, Whole Foods, he said that food prices have roughly doubled since he left.
Why is this happening? The government needs to keep interest rates artificially low so that they can pay debt (they have so much of it) and enable growth in the economy. Organizations and people with the right connections can borrow larger sums of money than they otherwise would. Their access to cheap money allows them to buy up assets such as real estate and stocks and make them more expensive and beyond the reach of people like you and me. It seems that this cheap money does not often go into buying capital goods which could be used to create jobs and boost productivity.
Savers are punished because they cannot earn anything on their money. My grandfather and father could put money in a bank and it would be safe and earn a decent amount of interest to make it worth keeping there. Not anymore. Forget the stories of the Grasshopper and the Ant or the Rich Man of Babylon.
Abba’s Anni-Frid Lyngstad, sang about marrying a rich man in ‘Money, Money, Money’ but that option is not available to most of us. If you want to rise up against financial repression then financial knowledge and financial weapons are essential. We will explore what these might be next.