Your Cash Ain't Nothin' But Trash
(Family Math • Economy)
At least this time when it decided it was going to screw us, the Federal Reserve announced it first.
For those who somehow missed it, the Fed’s “Open Market Committee”
decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.
What this means to you and me and our families is that the real value of the cash we’ve been hoarding or are trying to save as a protection against layoff or other emergency is going to drain away if we just leave it sitting in a mayonnaise jar or, apparently, a bank.
Yes, the banking industry turned the mortgage business into a derivative-based craps game, the real estate bubble burst, the stock market has collapsed, we’re handing the bank officials who caused this mess billions of tax dollars with which to paper their vacation homes, and now the very best rate they’re willing to offer in Houston on a 12-month certificate of deposit is less than 2%.
So we’re faced with a situation demanding that the prudent family save the equivalent of at least several months’ worth of its net income, yet not only are the banks and markets not offering any liquid vehicle for making interest on the savings, now the government is going to start taxing it through (more) inflation.
In times like these, it’s tempting to listen to the siren songs of the gold bugs. Gold, silver and other precious metals are seen by many as a good hedge against inflation. We chose not to go that route. Gold is a commodity market, and it swings up and down based on some factors that have little or nothing to do with inflation.
For instance, this:
China’s gold industry has set the target to produce 290 tons of gold and add 800 tons of proven reserves this year, said vice minister of Industry and Information Technology Miao Wei at a recent meeting…China’s gold output and profits reached record high of 2.82 million tons and 12.4 billion yuan, respectively, last year, and presented average annual growth rate of 7.6 percent and 41 percent, from 2003 to 2008, Miao added.
Not having been in commodities before, and not having studied precious metals markets, we weren’t particulary comfortable with the idea of quickly sinking a significant portion of our meager savings into something so unfamiliar to us.
But we felt we couldn’t continue to do nothing. And unfortunately, putting money into CDs right now is pretty much the same thing as doing nothing. We expect the rate of inflation soon will exceed the rates being paid on CDs. Money market account rates are if anything worse, and most of them also aren’t insured. Does deposit insurance matter? It does to me, when I read statements from the Federal Deposit Insurance Corp. saying that unless it increases fees to member banks, its insurance fund could become insolvent.
We felt like we were faced with a definite lack of liquid choices for parking our cash. Then we looked at something called Treasury Inflation-Protected Securities. TIPS, as they are called, are U.S. Treasury bonds whose principal rises and falls based on the Consumer Price Index. Interest payments increase in times of inflation, and decrease in times of deflation. You aren’t going to get rich investing in TIPS; we think they may be the ultimate defensive investment.
Since we believe the future holds inflation, and the potential for serious inflation, we decided TIPS are as good a hedge against eroding cash value as we can find right now.
As you’ll see if you follow the link above, there are a few moving parts involved in the purchase of TIPS. We opted to simplify that process by purchasing TIPS through a mutual fund. Vanguard’s inflation-protected securities fund is highly rated, and we’re familiar with the company, so we went that route. Other similar funds are no doubt out there.
In the end, we put one-third of our cash into the fund, leaving probably a good bit more than we need in an (allegedly) interest-bearing checking account. For now, our intent is to add future savings to the TIPS fund in increments.
But for anyone who thinks they can beat government-backed inflation, through TIPS, gold, real estate or anything else, here’s the bummer du jour: the federal government is going to tax any success you have.
For instance, if you invest in gold and it increases in value due to heavy inflation, you will be taxed at a high capital gains rate when you cash in – even though you didn’t really “gain” anything, but only kept pace with the inflation foisted on you by the Federal Reserve.
Are these good times or what?
→ B.Dunn, Mar 21, 2009, 07 19 am
