From the desk of Peter Blatt
April 19, 2012
This article continues from Part I of my installment on the War on Seniors, Savers, and Planners, found here.
Why the Government isn’t pulling out of this War
The US Central Bank will be unable to pull back from the War on Seniors, Savers and Retirees for a number of years. The Chairman of our own Federal Reserve has voiced his opinion that interest rates will stay low until 2014 – even after he leaves office!
Cost of Government Debt
Interest rate on government debt is the cost of borrowing for that government. If a 10-year government bond is currently yielding 3.5%, that’s the approximate rate the government will have to pay when issuing new bonds. If the rate rises to 7%, the cost of borrowing will double.
Multiply these simple interest rates by the massive amount of government debt that has been issued recently and it’s easy to see why the Government will need low interest rates for a long time if they stand any chance of managing their deficits.
Just take a look at the current Treasury yields to demonstrate this example.
Yields and economic growth
There is an economic principle that holds that low interest rates stimulate economic growth. Conversely, high interest rates stifle growth and activity.
One reason why this economic principle works is that low interest rates encourage spending, borrowing and investment in risk assets (all of which can boost the economy) whilst discouraging savers.
This doesn’t help those who have already accumulated capital and might not benefit from low borrowing costs. But that doesn’t change the fact that Governments needs economic growth with the increased revenues and employment it usually brings, and low interest rates are one of the monetary policies they enact in the pursuit of this goal.
How long can the War Last?
The US Government cannot seem to land on a clear path to prosperity. The only hope that the Government is holding onto is that low interest rates keep money in the economy. This leads to companies holding their cash and waiting for better times. Only time will tell how long the War lasts. The key is to understand that it will be with us for some time.
How to Survive the War
The first step in survival is to avoid putting your money into “safe” zones like zero interest bonds, cash accounts and money markets because you will spend down your principal and decrease your chance of having money throughout your retirement. Since the War still has a few years to run its course, investors must ask themselves how long can they suffer not even keeping up with inflation!
The old method which only works during Accumulation stage of investing is to become all aggressive and chase capital growth in the wild stock market ride. Even if this works for a while, it will certainly be a volatile ride. Remember when the market “couldn’t fail”, according to many professional investors? But then 2008 came, and the world collapsed in mere months.
In order to make a steady flow of income you need to keep an active eye towards income-generating zones. At the same time, you need to keep a watchful eye open for danger so we can protect capital.
This approach is known in the institutional investing world as a conservative income-generating portfolio. Conservative income is an institutional way of investing where you seek attractive income opportunities but are always looking out for volatility.
If markets are quiet we may get a little adventurous; if markets are choppy, we do not participate in them.
Ask about Conservative Income investing in order to decrease risk to principal and increase sustainable income.
Until next time,