by Bill Sardi
Recently by Bill Sardi: America Paying the Price for Ignoring Ron Paul-Type ForeignPolicy
Woe, is me. Hold your hands to your head as you read below that the value of your money is eroding rapidly. This is the worst Federal Reserve Bank headache ever created. A return to the gold standard may be the only pill that will make it go away. Despite many current opinions that a return to a gold standard is an archaic impossibility (some even say the very idea is ludicrous), in 1995 Bettina Bien Greaves said: "There is no reason, technically or economically, why the world today, even with its countless wide-ranging and complex commercial transactions, could not return to the gold standard and operate with gold money." If a gold standard is ludicrous, then what is current fiat money?
I've listed below the major places where Americans can invest their money and the kind of yield (interest) they can typically anticipate in each category. Obviously, individual rates of return will differ.
When it comes to investing your money, don't forget to calculate for inflation (loss of purchasing power of your money). The numerical figure in your accounts may be the same or rise slightly but actually lose value due to inflation.
Changes were made in the way inflation is calculated in 1980 and 1990 so that historical figures that compare yield to rate of inflation prior to 1990 are misleading. Therefore, historical rates of return on investment are off the table in such an environment. John Williams of ShadowStats.com shows the real inflation rate is currently 9.3%, not the oft-quoted 2.2%, which is the target rate of inflation established by the nation's central bank. Reference
From a net-income standpoint, you will have to pay special attention this upcoming year (2013) to rising income tax rates which increase the yield your investments must achieve to report any growth in your individual wealth (see chart at end of this report).
Make sure you are reading up-to-date projections on rate of return. In the past "cash typically had a return of 4 percent, putting bonds at 6 percent and stocks at 8 to 9 percent. With cash now yielding zero, that has lowered bonds' return to 2 to 2.5 percent and stocks to 5 percent. The problem is that too many people are stuck on the old numbers," says Jean L. P. Brunel, chief investment officer at GenSpring Family Offices. Reference
While investment counselors may inquire what your financial goals are, such a question is an oxymoron in today's economic environment. Your investments must achieve 9-10% return on your investment per year or else! In order to just maintain the value of your money you must either ask your employer for a 9-10% increase in pay or achieve the same via pay raises and investment returns.
TYPICAL RATES OF RETURN
Savings bonds (Series I): 2.2% Reference
Bank savings account: o.19% Reference (not even 1%)
Money market: 0.22% Reference
Bank savings account ($25,000 minimum deposit): CIT Bank 1.05% Reference
*Essentially savers are capitalizing banks for free while taking a loss on their banked money, all the while bankers enrich their stockholders with dividends.
401k Plan (held as cash): 0.05% yield. Reference
401k Plan: balance in 401k accounts with Fidelity declined from 2010-2011. Reference
Hidden fees in 401k plans: "An ordinary median-income, two-earner household will pay nearly $155,000 over the course of their lifetime in 401(k) fees." Reference
401k Plan: Average rate of return past 2 decades: 3.5%* (read why 401k plans don't work) Reference
Municipal bonds: 3.8% Reference
Mutual Fund (top-rated global fund): 5.7% Reference
Mutual Fund: "For the six months ended February 29, 2012, Vanguard Prime Money Market Fund earned a negligible return, and the Federal and Admiral Treasury Funds earned 0%." Reference
Read where the advertised 7-8% annual return may not be the rate of return on your specific investment. Reference
Read where CalPERS, the California State public employee retirement fund and the world's largest pension fund, with its cadre of professional investment counselors, could only produce a 1% return on its investments in the latest year, falling short of its 7.5% target return. In the past two decades CalPERS had achieved a 7.5% return on investment.
Stocks: Because the stock market has become a casino, artificially propped by free money pumped into the economy (largely to banks and investment houses that get to invest it first), distorted by fast electronic trades and after-hours trades to elite clients, the quoted average rates of return may not be what individual investors can achieve.
*Read a report by Bill Gross why the stock market is a Ponzi scheme and how profits have been skimmed by brokers. Reference
The stock market currently benefits from a bubble created by the Federal Reserve. When the economy improves, the stock market could predictably crash because investors will likely return to less risky investments.
"Harvard economist Martin Feldstein is concerned that the stock market might be in a bubble. The extremely low interest rates on long-term investments, such as treasuries, are forcing people to look to the stock market to get some yield. But those interest rates are likely to rise, so we've got a bubble in the long-term bond market," Feldstein says. At some point, he says, we'll return to normal rates, which will make equities less attractive. An improving economy could actually make the bubble worse because long-term interest rates on borrowed money could go up. "I don't think that an improving economy, per se, is going to help the stock market," Feldstein said. "It certainly won't help the bond market."
Did you hear that? An improving economy will crash the stock market! Maybe this is why the Federal Reserve Bank is so friendly to Wall Street and not to Main Street.
Real estate: A huge inventory of empty homes and a shadow inventory of 4 million non-performing home loans that lenders have been hiding, suggests residential real estate is still over-valued. Read why home prices are likely to decline by an additional 20%.
Stashed cash (coffee can, under mattress): losing value at 9.3% per year (real rate of inflation). Reference
How much of your income do you need to sock away in the bank to achieve a comfortable retirement? Answer: at 2-3% rate of return, you would need to save 40% of your income. Reference
RETURN TO A GOLD STANDARD:
Bob Murphy says: "there is a whole tradition of excellent academic scholarship touting the virtues of the gold standard."
Murray Rothbard wrote an excellent text on this subject. According to Murray Rothbard's theory of banking, the gold standard means banks would hold 100% reserves against demand deposits. "Under these conditions there is no necessity or even any purpose to having a central bank," says Robert Blumen writing at lewrockwell.com.
A book has even been written providing specifics on how to convert back from a paper money system to a gold-backed currency system (The True Gold Standard – A Monetary Reform Plan without Official Reserve Currencies by Lewis E. Lehrman).
With so many predictions that the price of gold will rise from its current $1700/oz. price ($2500, $2500, $3000, $5000, and the fact that there may be no telling how high gold can go (and thus, how far the value of paper money will decline) with the Federal Reserve pumping money into the system, this sends a signal to buy gold but also (sadly) sends a signal that paper money is confetti. To escape this crash, investors will have to be holding assets (fully-paid real estate, preferably agriculture land, gold, silver, and other tangible items).
A Reuters News report, quoting Dylan Grice, global strategist at the French bank Societe Generale, says $10,000 is the "fair value" of an ounce of gold. The same formula used during the Bretton Woods agreement in 1944, that established the current international financial system (agreed to by 44 allied nations), which pegged the dollar at $35 per ounce has been used to predict $10,000/oz. gold.
At a price of $2500-3000/oz., gold will begin to become the preferred form of money and there will be a predictable gold rush around the world.
If the price of gold rises to the heights some analysts predict, it will become the de-facto currency in the world. It will become THE desired currency. Recognize it is not just the U.S. Federal Reserve bank that is pumping money into the economy. Central banks worldwide are in working in a concerted effort to pump money into economies ahead of an impending collapse (fiscal cliff in USA), which is historically unprecedented.
Cast a gander at the upcoming tax increases and current rate of inflation in the graphic below. If that isn't impetus for the public to route out the central bankers and install a gold standard, nothing will be. Only misplaced trust in a bought-off government keeps central banking in place.