A New Crisis For American Savers (Hint: It’s Not What You Think)
[Editor’s Note: This is Part I in our four-part series on a brand new income crisis in America. Make sure you tune in throughout the week to learn how to protect and grow your wealth despite the new challenges facing American retirees.]
There’s a brand new crisis brewing for American savers. And if you’re retired — or even thinking about retirement, this crisis could drastically change your quality of life during your golden years.
No, I’m not talking about Coronavirus — or even the market selloff that we’ve seen over the last few weeks.
This crisis will be as damaging to American’s financial health as coronavirus can be to your body.
But you may never see it coming!
I call this crisis the “silent wealth killer” because it can wreck your retirement plans without you even noticing.
While the market selloff is making headlines and sounding alarm bells around the world, this silent killer is quietly undermining the savings you have worked so hard to set aside.
This week, I want to spend a few days explaining this crisis, and more importantly how you can fight back against this silent wealth killer.
Let’s get started!
Negative Interest Rates In America
Last week as Congress worked on passing the new stimulus bill, and the Fed scrambled to lend money to banks and businesses, the stock market continued to gyrate.
I’m sure you saw some of the headlines about the big one-day gains as stocks began to rebound.
But you might not have seen the silent wealth killer coming into play for short-term Treasury bills.
During the week, the yield on the 1-month and 3-month Treasury bill actually turned negative.
In other words, we’re entering a period of negative interest rates here in America.
That’s frightening to me, because of the implications it can have on the savings you’ve worked so hard to set aside.
You see, if you’re borrowing money to buy a house or finance a car, low — or even negative — interest rates can be a great thing! It means you don’t have to pay as much in interest for financing whatever it is you buy.
But if you’re on the other side of that transaction — putting your wealth into a savings account or a money market fund — negative interest rates can be devastating.
Because negative rates can actually deplete your savings while you’re doing the “smart” thing and setting money aside for later.
Now to be clear, no one is intentionally stealing your savings.
But as investors scramble to take money out of the falling stock market, their panicked decisions are helping to drive interest rates into negative territory.
Herd Mentality Leads to Negative Rates
When you sell stocks in your brokerage account, your brokerage typically puts the cash from these sales into a money market fund.
These funds invest in short-term treasury bills. And during normal times, these treasury bills pay you interest on the extra cash in your account.
But in today’s environment many many people’s accounts are plowing more money into these money market funds. And institutional investors are also investing in short-term treasury bills. In some cases, these institutions are legally required to park their cash in these treasury bills, regardless of what price they have to pay for the bills.
When this happens, all the buying pressure pushes the price of these treasury bills higher.
And in a perverse twist of fate, prices for these bills actually rise above the amount that you’ll receive when the bill’s mature. In other words, you’re paying MORE to buy the bills than you’ll receive back from the government.
So you’re guaranteeing a loss when you invest in these bills — or when the money market funds that your brokerage puts your savings into.
Treasury bill rates also affect other interest rates that are important to savers, such as savings accounts and certificates of deposits (CDs).
That’s why I’m so worried about negative interest rates in the U.S..
We’ve seen this silent wealth killer in other parts of the world and the picture isn’t pretty! Savers are having to find creative ways to make sure they’re earning income from the wealth they’ve worked so hard to build.
Now that negative rates are showing up in America, I want to make sure that you’re prepared.
Combating Negative Rates With Income
If you want to protect your wealth against this income crisis, the first thing you need to do is figure out exactly how your savings are invested.
And that’s your homework for today.
Check through your brokerage accounts and bank statements to see what amount of cash is invested in short-term treasury bonds or treasury bills. Keep in mind, you may have funds that invest in these securities which is just as bad.
Tomorrow, I’ll be back with you for Part II of this series. We’ll talk about how to protect your wealth against this income crisis, and start paving the way for you to actually benefit from proactively fighting against these negative interest rates.
I look forward to speaking with you tomorrow!
Here’s to growing and protecting your wealth,
Editor, The Daily Edge