How the Federal Reserve Kills Free Market Interest Rates
The Federal Reserve has been dictating interest rates at the behest of the government and banking industry for so long that the US populace has adopted a business-as-usual attitude towards the practice. It's been almost a century since Congress codified the Federal Reserve System and effectively muffled the free market, following a meeting at Jekyll Island, Georgia, among the powerful American oil and banking interests.
Solely on the basis of fiat decree, the Federal Reserve has rendered the idea of savings moot. The combination of a dollar steadily eroding in the face of inflation and a pitifully low interest rate paid to lenders has turned saving for retirement via "safe" investments like money market funds and certificates of deposit a fool's game, to be blunt.
Why fool's game? Follow our logic and you'll come to realize why we invest in real estate almost exclusively. Le's say you put one thousand dollars into a money market fund at your local hometown bank. They're good people, right? Well, maybe they are and maybe they're not but that doesn't really matter. Any banker worth his salt will take your money and use it to buy short term government debt, which is usually another word for treasury bills. Your bank makes a little bit on the prevailing rate and a little more on fees. At the end of the year, he makes you feel good by paying you a whopping percentage that varies from almost nothing to maybe one percent or slightly above.
See what just happened? By depositing your money into the bank, you became a lender and received a paltry rate of return on your "investment" due to the whim of the Federal Reserve to declare what short term interest rates will be on the open market. Too many investors, indoctrinated by the savings mantra, operate under the assumption that something - even a pitiably low interest rate - is better than nothing.
Actually, it's not much better than nothing at all, especially when you take into account the fact that inflation in the United States can be relied upon to clock in at about 4% annually, using VERY conservative numbers. The bottom line is that, unless your investment is making more than 4%, you're losing money as your buying power erodes in the face of inflation.
Thanks to the Federal Reserve, there goes the incentive to save unless you're clever enough to discover the one asset and method of investing that actually works better under inflationary conditions - real estate.
The Creating Wealth Team
Tags: ben bernanke, buying power, certificates of deposit, Federal Reserve System, Inflation, interest rates, money market fund, t-bills, the gold standard