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Negative Interest Rates for Savers?

The Huffington Post The Huffington Post 9/02/2016 Terry Savage

The grandmas are getting restless -- along with all investors who would like to stash some money on the sidelines for safety, but suddenly realize that cash earns no interest! Retirees who counted on "living off their interest" have grown impatient with a long period of almost zero interest rates on safe savings like bank CDs and money market funds.
Suddenly the mantra of the "chicken money" investor has become painful: "I'm not so concerned about the return ON my money, as I am about the return OF my money!"

But it is precisely during these times that the self-discipline of keeping money safe is the most difficult choice. There's no doubt that the Fed has punished savers over the past decade, pressing interest rates downward in an attempt to stimulate investments in economic growth. Instead, though, money piled up in banks, as a sputtering economy created fewer attractive risk investments.
Now, savers are running out of patience. Every few days I receive a blog question (www.TerrySavage.com/askTerry) asking how to "safely earn more interest." There are plenty of firms out there trying to capitalize on this restlessness with bank deposits. From pools of commercial bridge loans to variable annuities to online lending schemes, the lure of higher returns encourages savers to "get higher returns." But at what risk?
Frequently, the risks are overlooked or underpriced. Pools of commercial loans say they "spread the risk" over a variety of loans. Same with online lending clubs. You're essentially lending money to those whom banks deem an unacceptable risk. Eventually, in an economic downturn, many will default. And it will take time to recoup the balances from others. Do you understand that risk? Are you getting paid enough to accept it?
Spreading risk is simply another word for sharing misery when times turn bad. And the current yields on those investments should be a lot higher to compensate for those risks. But naïve investors don't know they're getting short-changed, and ultimately might lose principal. They're just focused on the higher "current yield." And the organizers of these "opportunities" get their fees upfront!
Chicken Money Investments

Here's what we know about "chicken money investments" like bank CDs, money market deposit accounts, money market mutual funds and U.S. Treasury bills. There is no downside risk - except the loss of buying power to inflation over the long run. Yes, seniors note that their cost of living is rising every year - even though Social Security won't acknowledge it. But they are the ones who can least afford the loss of any principal.
Without the interest to scrape off the top of the account, many seniors are forced to dig into their principal merely to cover living expenses. Those declining account balances because of withdrawals are more of an immediate emotional challenge than the potential loss of principal that comes when risky investments go south. Until the moment comes to face the losses.
Negative Interest Rates?

Sorry to say, but American savers don't have it so bad off - even with today's low interest rates. Some investors around the world are actually paying the banks to hold their money and keep it safe! It started a couple of years ago in Switzerland, when so much money flowed into the safe haven of Swiss banks that the banks started charging "negative interest." That is, depositors paid the bank to hold their cash.
Oh well, we all know the presumed safety of a Swiss bank account might be attractive to the wealthy who live in risky places where their riches might be confiscated or their currency depreciated.
But it isn't only Switzerland anymore.
In fact, more than 15 percent of the economies in the world have allowed their central banks to move interest rates into negative territory! Japan became the latest, just last month, to bring rates below zero - as it tried to urge savers to spend their money and get their economy moving. But Sweden and Denmark are also offering negative interest rates. In fact, according to market guru Dennis Gartman, 24 percent of the world's GDP now has a central bank offering negative interest rates!
Could it happen here in America? That's what the Fed is trying desperately to avoid - an economic slowdown and a market crash that could happen if everyone decides to avoid ANY risk with their remaining capital. The Fed now has little chance of pushing rates higher. Now Fed Chairman Janet Yellen tacitly acknowledges they are worried about this global phenomenon of slowing growth, deflation, and negative interest rates.
Right now, America has the strongest economy in the world. And our relatively high interest rates are attracting money to our banks and our stock market. But if profits suffer because of the strong dollar, that money could search out the safety of other places - even at the cost of negative interest rates!
Savers need to look beyond their immediate complaints about "no interest." It could be a lot worse; you could be paying interest as the price of safety. That's something to keep in mind before you suddenly search out higher-yielding investments - while a good part of the world is fleeing from them.

As a wise investor once taught me: "Risk is the price you never though you would have to pay." And that's The Savage Truth.

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