U.S. interest rates have soared everywhere but savings accounts
bloomberg.com
bloomberg.com
There are two major catches: you have to wait at least 1 year before you cash them out, and a person can only buy 10k in I-bonds per year.
After the first year is over, selling I-bonds and getting access to the cash takes a few business days.
I've been tiering my emergency savings based on how many redeemable I-bonds I have. I have enough money in the bank to cover emergencies I might need to pay for very quickly -- things like plumbing problems, car repair, etc. The rest of my emergency fund is going into I-bonds. If I have a longer-term need for savings, like losing my job, I don't need all of my savings right away and I can wait for the amount of time it takes to cash out I-bonds.
If you're using TurboTax, the necessary checkbox is well hidden. Look for a "more options" tab or some such, IIRC.
A 4868 is a request for an extension. So those people still have time.
For example, if you buy them when you are between 40 and 50 years old, you will have $200K of risk free money by age 70.
Also, both I bonds and EE bonds are tied to the individual. If you are married your spouse can also buy $20K in bonds per year as well.
It's not that great an investment, but it does make sense to use it as a portion of your portfolio for retirement. I would imagine you'd put around 5-10% of your total networth in this form - may be even stagger it over time (e.g., put in 1% every year starting from 40). This can exist in lieu of bonds in your portfolio - though i would perhaps split it 50/50 with your bond allocation (which gives you some liquidity early if you truly need it).
I would want to have more invested in equities as their potential for growth is much higher, and over the long term, ought to beat inflation (as long as you purchase a market weighted index).
I guess cool that it's guaranteed, though, and might make sense as part of a diversified retirement account.
it's not that the risk is low - it's just that you cannot know if the equities wouldn't fall at the 20 yr mark, just you need to liquidate it to retire. You have to slowly decrease your % of equities the closer you are to retirement.
You can create a trust and buy an additional 10k/year.
and folks wonder why banks are so strictly regulated... no, banks are never sitting on too much cash unless they've made a marketing and/or an operational error. most banks are highly levered, meaning they're lending out, say, 10× the cash they hold, so they never "have too much cash on hand". quite the opposite. banks continually lobby regulatory agencies to raise their leverage thresholds so they can lever up even more and rake in more of that sweet, nearly risk-free[0] cash flow.
that they don't raise savings rates is purely out of greed, not necessity. they're also under no competitive pressure to do so, which indicates a malfunctioning market (functioning markets are by definition competitive). and more galling, they charge you hidden fees out the wazoo for the "privilege" of banking in a mine field.
banks are core infrastructure, much like roads and housing. i'd rather go back to a simpler form where banks were only allowed to make money on the spread between lending and savings rates, making them boring and having to compete (with higher savings rates, for example) for your business. all the risk-taking extensions to banking can still exist, just in a separate, firewalled entity with no access to that (nearly) risk-free cash flow.
[0]: risk-free in the finance sense of being free of idiosyncratic risk, not systemic risk.
It was created in response to the Great Depression, then repealed by the Gramm-Leach-Bliley act because money. Then the Dodd-Frank act tried to have it reinstated but failed, also because money.
You may already be familiar with all of this but mentioning in case you’re not.
(https://en.m.wikipedia.org/wiki/Glass–Steagall_legislation)
There’s a quite brilliant documentary that came out in 2010, Inside Job, that covers this, but which was completely overshadowed by the much less informative The Big Short which came out 5 years later.
Glass–Steagall in post-financial crisis reform debate: https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_in_post...
(Edit: Monetary policy / Monetarism > Current State , Liquidity trap > Global financial crises of 2008 and 2020: https://en.wikipedia.org/wiki/Liquidity_trap )
How do microlending and DeFi rates democratize subsidized capital availability?
From IL-RFC-1 Interledger Architecture https://interledger.org/rfcs/0001-interledger-architecture/ :
> Settlement for one account MUST NOT depend on the status of any other accounts.
> If settlement of one account in the Interledger is contingent on the status of another account or relationship, this could create the threat of cascading risks and failures, similar to problems that occurred during the 2008 global financial crisis. Nodes can protect themselves from such risks by choosing to use settlement technologies such as collateralized payment channels where available. These types of arrangements can provide high-speed settlement without a risk that the other side may not pay. For more information on different ledger types and settlement strategies, see IL-RFC-22: Hashed Timelock Agreements.
> Nodes can also choose never to settle their obligations. This configuration may be useful when several nodes representing different pieces of software or devices are all owned by the same person or business, and all their traffic with the outside world goes through a single “home router” connector. This is the model of `moneyd`, one of the current implementations of Interledger.
Reconsider what your stating here. If I have 10$, and I can therefore lend out 100$, but I only have requests to borrow 50$, then I have "too much cash". If I however had requests to borrow 200$, the I would need to find another 10$, for instance by promising someone a higher interest rate on their accounts. The fact that banks do fractional reserve does in no way guarantee that they do not end up having more cash on hand than they need to cover the demand for loans.
Banks that have too much cash on hand go out of business. If a bank ends up being near this it just reduces its loan rates and loans the money out for slightly less, but still better than sitting on cash.
Right.. The bank can increase its level of leverage principally by:
* Decreasing loan interest rates to encourage people to take loans
* and/or decreasing savings interest rates to discourage people from keeping deposits.
Of course, real banks do both based on market conditions and capital requirements. And, of course, there's not an implausibly thin level of reserves like you imply to pedantically harass the prior commenter: you must have at least the required reserves, and certainly having way too much cash is toxic to profitability.
https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...
People want to collect interest on their bank deposits purely out of greed, too.
I think "greed" is an unhelpful term as it is too emotionally charged for what is really just rational behaviour given economic incentives. So I would avoid calling banks greedy for trying to maximize profit by offering low interest rates just as I would avoid calling consumers greedy for choosing the bank that gives them the highest interest rate.
Banks are awash in reserves and in the basel3 regime these reserves fulfill a similar role to cash in fulfilling bank balance sheet construction requirements. so the banks are not constrained from a lending perspective by a lack of cash and therefore have no incentive to raise rates to attract new deposits to create a base to lend off of.
so from the perspective of why rates are low, it's absolutely because banks are sitting on a lot of cash.
So I don’t know how you’re claiming that banks aren’t sitting on too much cash?
I'm truly interested in what's happening now and why this _is not_ the case. Can you elaborate on what they're doing now to make now, rather than making on the spread?
Depending on your definition of 'competition' and 'functioning'. There are markets that aren't competitive but are functioning, and markets that are competitive but aren't functioning.
Banks are discount houses. They create their own money against financial assets they buy from you with that money.
They are factories, not warehouses.
Deposit interest rates aren’t going up because there’s nowhere else the money can go. Nobody wants be the retail to wholesale middleman at present.
Banks don't take deposits and they don't lend money. Banks create money.
When they "lend," what they are legally doing is purchasing a newly issued security for your home. And they are doing so with created money, that money is not transferred from some other account.
Similarly when you "deposit," the money is legally now the bank's. The bank now has a liability to you, but it is not a custodial intermediary "holding" your money for you.
It is poorly understood that banks are in fact creating credit. Most people believe in either the fractional reserve model of banking or in the financial intermediary model.
This is a real problem, because as they create credit to finance existing asset purchases (as opposed to financing new investment) they create asset price inflation & bubbles and foster inequality.
Read anything by the brilliant Richard Werner who writes about this extensively, this interview has a short summary of how banks actually work in law: https://youtu.be/EC0G7pY4wRE https://professorwerner.org/shifting-from-central-planning-t...
the seller of that purchase transaction will have received the financing credit as cash.
This cash is, in most cases, invested. If the seller had a loan, they might've repaid the loan - but then this repayment would in part, cancel out the credit creation the buyer's bank did. The net outcome, if it was positive, is the profit that the seller obtained, and this is real wealth created.
This wealth is often reinvested somewhere - either to purchase existing assets (in which case, this cycle repeats), or to finance a new asset/investment (like a startup).
However, the purchasing of existing assets is required for this system to work - like an exit strategy for the initial investors of that asset.
Banks doing lending _could_ cause a bubble, if the rate of interest is too low compared to the growth in the economy (the assumption is that there's a limit to how fast you can grow new assets). Whether the past decade since the GFC had too low an interest rate, is up for debate.
This is eerily similar to the common crypto exchanges that take your fiat and sell you their exchange tokens they are minting out of thin air. The market decides the value of these made up exchange tokens e.g. Binance Bnb tokens
I’m sure there are many other interesting crypto parallels to what banks do with money behind closed doors. Anyone else got some good examples to share?
It's a (granted, well deserved) PR piece for Goldman Sachs. Their "popular consumer bank Marcus" is called out early for "offering individuals a yield in excess of 2%" in 2019. Its 50 bps is then compared to "Bank of America Corp.’s 0.04% or JPMorgan Chase & Co.’s 0.02%."
A - Attention: This piece highlights the context and problem at hand to the general population. Priming them with major player's brands is key to awareness.
I - Interest: Will follow up with a piece titled "Marcus considers rising interest rates amid inflation" comparing the highest interest rates with competitors. This anticipation and speculation creates further interest.
D - Desire: Finalize with "Marcus decides to raise interest rates to 1.3%" higher than other competitors to "stay competitive".
A - Action: Announce a "limited time offer" to further entice people to open an account - ex: $100 cash for new accounts.
This rate applies to anyone who takes "too long" to claim a refund or pay a tax liability, so it is basically a zero-risk rate that applies to everyone regardless of their credit status.
[0]https://www.dol.gov/agencies/ebsa/employers-and-advisers/pla...
Yeah but you're severely limited in how much money you can "save" in this account. Similarly, it's like arguing that rates are super high because you can get I-bonds at 7.12%, but neglecting to mention the most you can buy per year is 10k.
That’s where I’ll be keeping cash I’d otherwise keep at the bank, for now.
so although overall rates are still low, I think it's pretty fair to say they have exploded
People are running around like chickens about inflation this and inflation that. The only meaningful metric is gas prices.
It's double the previous rate.
I don't understand why central banks always use fixed increment sizes.
Or maybe for ease of predictability? After all it is much easier to make a binary choice between two numbers with a fixed interval between them, than to choose an intermediate value to the Nth degree.
That's a 100% rise in interest rates, which many people would call "soaring".
> Is it possible to hedge your investments against different levels of inflation? This is the question we ask in today's episode, as we run through a variety of different investment approaches and commodities. While the answer may not come as a huge surprise, it is definitely worth the walk-through and getting to grips with what the literature can tell us in each scenario. After rounding up some news and a few reviews relevant to our usual subject matter, we dive straight into this topic, tackling the performance of stocks and bonds, gold, international stocks, value stocks, and more! We also share some general thoughts and questions to ask during periods where inflation is high, before positing our view that there is no single successful hedge against inflation, but rather our usual position of an adjusted and diversified portfolio will serve you as well in this regard as in others. We finish off this episode with a few of our usual quick cards, and this week's disturbing bad advice! So tune in to hear all about what you should know about expected and unexpected inflation and a whole lot more!
* https://rationalreminder.ca/podcast/150
Stocks generally bounce back, them going down isn't a big deal given the idea of 'buying low'.
I've made judicious purchases in sealed Magic: The Gathering product. In just under 3 years, my initial 6-digit investment is up over 200%. Some purchases are wildly up and nothing so far has been a losing bet.
Other areas in collectibles I am also doing really well, like statues, classic cars, etc. Obviously a limiting factor is storage space.
I've lucked out due to some black swan type events but I can't see anywhere else where my investments are performing nearly as well.
It's been known that trying to pick individual stocks is generally a sucker's bet since (at least) 1973, but people still try to do it:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
You will never get really rich (100M+) without stock picking but you’re going to be better off in the average case by sticking to the index.
Similar to working for a startup vs working for a large corporation - working at a startup is like stock picking:)
Otherwise, monopolies still seem strong for now with pricing power. Areas the government will print money to fund also seem like a decent bet: defense, climate, …? And you can try to maintain purchasing power with gold or crypto or real estate (in non-bubble areas). But we may be entering some challenging times for those with assets.
1. https://www.wiley.com/en-us/The+Asset+Economy-p-978150954345...
For me the obvious answer is, if the fed actions means it's more expensive to borrow now, then lend your money. The question is how and where. Bonds? Which bonds? TIPS don't seem to have a rate that would protect me from inflation.
Gold? There's enough volatility there to lose more than 2 years worth of inflation with a badly timed entry, and I if I have to time my entry I'm trading, and I'm not a trader so I don't like it.
I know mentioning cryptos is sometimes taboo on HN, but if I lived in the US/EU I would convert a some portion of my savings into stablecoins and spread them out into some interest accounts to try to minimize counterparty risk. Their APY is running along inflation for the time being. At least until the dust settles and it's clear where to put your money.
The TIP yield is a real yield. It's indexed to CPI-U, same as Series I bonds. (TIPs adjust monthly; Series I bonds semiannually.)
> would convert a some portion of my savings into stablecoins
This is probably the worst choice one can make. It's accepting a 0% nominal yield against an unregulated counterparty. A Bank of America savings account is literally a better choice.
> This is probably the worst choice one can make. It's accepting a 0% nominal yield against an unregulated counterparty. A Bank of America savings account is literally a better choice.
you clipped out half the sentence:
> I would convert a some portion of my savings into stablecoins and spread them out into some interest accounts to try to minimize counterparty risk.
interest accounts. i.e. non-0% nominal yields.
With demurrage currencies, everything works like TIPS. Yields may be negative but they are free from inflation and deflation.
It's kind of weird that people are choosing the money illusion over a negative yield/interest rate. I would rather have no inflation and see that the yield is negative than unpredictable inflation where the yield could be absolutely anything and I simply won't know.
I honestly have the same questions as you though, I feel like if I was 100% sure of big inflation coming, all I'd know I want to do is get out of cash, but I don't know where to put my money. Part of me says Walmart, Dollar stores, and other inelastic merchants, but idk. Physical gold seems ok, but you're right in that if you overpay, you're overpaying for an asset that doesn't return anything.
Don't make the mistake of increasing your risk appetite to chase perceive erosion of value from inflation. Inflation happen regardless, everyone wishes they could find a 8% risk free investment, they do not exist. If you're not a trader stick to an allocation you're comfortable with. The worst outcome is you try to trade in a bearish market and end up down, while inflation is still going.
The bond market doesn't seem to believe it. The managing director of the IMF just publicly stated that the central banks screwed up and act like "8 year olds playing soccer" who don't anticipate the 2nd order effects of their actions.
20% of shipping is tied up in traffic jams. We're in a economic war with a major commodity producer. It is daft to believe inflation is peaking. Even if that assumption is right, we will end up with inflation well above the fed target rate, so instead of 8%(CP 'lie' bullshit inflation) we get 5% persistent inflation.
There's not (yet) been a market crash ... If you look back a month or a year, it's been mostly sideways too.
It may be the beginning of a horrible market crash ... But it may not ;). Trying to time the market, you're just as likely to lose as to win. Diversifying is always good; the stock market has usually provided the most growth long term. Unless you need the money soon, close your eyes and keep your money in the market.
You think this is a crash?!
Maybe look into interest protected bonds? https://www.treasurydirect.gov/indiv/products/prod_ibonds_gl...
Personally I have been just spending what I make assuming saving is moot right now (besides 401k and espp)
I fear we're gonna move to an Australian-style real estate market. Never-ending boom, impossibly high prices for first-time buyers. People have predicted its collapse for 40 years or so, to no avail.
Weird timeframe to claim nothing happened. They collapsed twice since then: 35 years ago and 13 years ago.
Some markets will likely see a bear market. Real estate is local. Location matters.
The future is very uncertain right now. I could see a scenario where China moves on Taiwan and we suddenly have 5+ million people looking for asylum. I guess it's one way to get TSMC to setup a plant here.
you can only tell a bubble after it pops.
Eg both houses and land purchases (something i'm trying to do) are quite a difficult market due to cash offers being consistently present. Ie a new family won't have 500k in cash and their loan offer isn't as good as a cash offer. It happened to me several times when i was buying my home ~6 years ago, 250k cash offers, 300k cash offers, etc. And ironically it just happened to me 2 weeks ago on a land offer. A 310k land offer (loan) beaten out by a higher value and pure cash offer.
So my question is if prices will really dip that much when seemingly so much of the house and land market are propped up by cash rich buyers. Hypothetically they don't care about high interest rates right?
Perhaps high interest rates will mean the cash rich people can offer less due to less competition, but if cash rich people are also competing against other cash rich people then.. i'm not so sure.
Thoughts?
They care, because when interest rates go up, rich savers buy the dip.
That's one of the biggest ironies when it comes to people shouting that low interest rates make housing expensive. Yeah they make it expensive for those who already have enough money to buy a house outright. The amount of money you are paying on your mortgage in an area with a housing shortage is determined by your salary, not the interest rate.
In fact you can see this hedging as a reason for the inflation in the first place. Even things like target date funds that need to have 10%(or some other number) bonds have this same issue. When the interest rate rises, the value of bonds gets wiped out. But target date funds need to have a set percentage, so all of these indexes rush INTO bonds at this moment. The more stocks are up in this moment, the more these passive investments are selling stocks and buying bonds.
You can imagine that as stocks go up, the more stocks go up, wealthy money managers buy more and more homes in the exact same way they buy bonds. When they see that we might be about to hit an inflection point with stocks anticipated to go down, they should be selling stocks and buying whatever does better. In 2008, housing did better, so they'll probably do it even more with history on their side. Now that houses are up 30%, maybe they look for another investment. There it is, used cars. There it is, lumber, steel, oil. There it is, commodities futures. All with unprecedented demand, not from common folk, but the wealthy.
Hedging against a stock market crash causes inflation, and inflation causes interest rate rises, which is a positive feedback loop that causes more hedging, which causes more rate rises until the common folk can not handle it, in which case the economy falls over. At the end of the day we get a recession, massive job loss, and the Fed resets the interest rate back to zero and they start selling their assets and re-buying stocks. Cycle starts again anew.
Inflation can only be produced if the demands for goods and services cannot be met and the price rises as a result.
Asset price increases are not inflation. A house's price going up is not inflation. Rent going up is. A house's rent is only indirectly related to the price of the house - there's a lot more that directly affect rents such as population growth or movement of people, changing preferences (some people might used to have house mates, but now prefer to live alone due to covid etc).
But yes, you're absolutely right that cash buyers should have way fewer concerns about interest rates.
Houses are thought to be worth X. One house is available and one labor-rich renter buys it for 2X. This is now the market price of a comparable house. Two houses are available and their owners swap. This is a cash transaction at the same 2X price.
And rent is nearing 1900 nationwide. How is that even reality?
If people just started killing landlords and investors I personally wouldn’t give a fuck (I’m kidding, not advocating this, but that’s how bad actors these animals are).
Inflation is always and everywhere a monetary phenomenon.
Unless you are a day trader (or r/WallStreetBets trader) this should not be a long-term concern.
>Time in the market beats timing the market.
I have my assets in an S&P500 ETF and some Danish funds and stocks. Owning a good home in a first-world country is also a good long-term investment.
Better to hold cash up until the point that the discount rate has mostly priced it in, then buy assets
The value would only grow _if_ the inflationary environment is worse than expectations, and people sacrifice even more discretionary spending to buy consumer staples. if the inflationary environment isn't as bad as expectations, then these companies would be out-performed by other, higher growth, discretionary goods companies.
There's no such thing as a risk free investment.
“Assets” is much broader than, and other categories don't consistently follow, the stock market.
If you want my crank opinion though, at this stage in the economic cycle you should be in commodities. Sure, you're late to the party and they're going to make you ill with their volatility, but generally that's where you want to be now.
Other options are recession plays like consumer staples. Think about the things people will still have to buy or will downgrade to in a recession. I bought $BUD and $TAP because I think people will drink cheap beer. Cigarette companies are good if you have no conscience and can catch them on a downswing(they're already up). My $KHC bet I made 6 months ago is probably the best thing in my portfolio right now. You have to be prepared for days like last Friday when nearly every stock was down. People are fleeing to dollars, so actually having cash right now isn't a bad thing. Your cash already lost value. We may see a dollar squeeze as people flee to safety and the fed drains liquidity from the financial system before the dollar continues its downward slide(late this year?).
Everything depends on the threat of war right now. Not enough people are talking about the supply disruptions happening. 20% of the world's container ships are currently in traffic jams thanks to Chinese COVID paranoia. Russia, a major commodity supplier, is cut out of the Western financial system. Fertilizer and energy are spiking. Recession may have peaked but it will settle into a steady 5+% rate unless the fed grinds the economy to a halt.
War may already be happening behind the scenes. The FBI is now warning(https://www.ic3.gov/Media/News/2022/220420-2.pdf) of attacks on our food infrastructure, possibly connected to the rash of fires occurring at food processing plants(stuxnet being fed back to us?).
Indonesia just suspended palm oil exports. They make something like 60% of the global supply. Countries are becoming protectionist. We are reverting in some ways to a pre-globalist world.
Sweden and Finland are likely joining NATO. The tensions with Russia aren't going away anytime soon. Even though Putin looks to be in poor health, the Russian aggression is not purely a product of Putin but baked into the national identity of Russia's elites. Maybe a good play, despite already taking off, is defense industry stocks(Lockheed, Raytheon, etc). The world is entering a very unstable period.
One thing you should consider doing as well: buy things you'll need over the next year. They're only going to get harder to buy and they're going up in price. Like a certain brand of shampoo? Why not buy a year's worth. Stockpiling is horrible on a national level, but as an individual it will help you cope with some of the price increases while your dollars would otherwise be stagnating or decaying.
Lets hope the bond market is currently wrong, because they seem to be pricing in many more hikes than the fed thinks will need to happen. There is a risk that inflation becomes unhinged and spirals for a while. The West isn't prepared for that sort of financial doom scenario.
Manipulating interest rates works when under otherwise normal condition the government wants to prevent overheating economy or to provide stimulus during a down cycle.
It is not immediately clear if the rate increases is going to help increase production or stabilise supply chains, perhaps just the contrary.
back in the oil crisis of the 70's, the inflation was high because oil embargo made everything that need oil (which was everything) more expensive.
Couldn't you make the same argument back then, that increasing interest rates isn't going to end the embargo and lower inflation? And yet, the then Fed chair did increase interest rate to combat inflation (granted, the inflation back then was much worse than now).
So perhaps this time, it's different - covid supply shocks playing out is not going to get resolved by interest increases. By increasing rates, the only result is to reduce demand, which is just another way of saying those who can't afford it will have to sacrifice, and lower their quality of life.
Citation needed.
Rate hikes were announced mid-march and I don't think you can even find that info on this chart https://finance.yahoo.com/quote/%5EDJI/
If we do see a crash soon I think it will likely be more related to major tech stocks failing to perform as expected. Of the original FAANG, F and N have both had days where there value dropped ~30% in a single day in the last six months, and that has nothing to do with interest rate hikes.
https://files.catbox.moe/cs4gtg.png
https://www.cmegroup.com/trading/interest-rates/countdown-to...
Remember, the fed folks can't insider trade like they used to, so they have no reason to prop up equities anymore. They made their money.
All markets are overvalued by virtually any historical metric. At least if you take the -6% real hit, at least you can know and predict what the hit is.
My financial advisor who manages the vast majority of my wealth is down 2% in comparison. I'm close to pulling my money because he's extremely anti commodities and I had to yell at him to invest my money into mining companies because he thinks it's better to just hold cash. Meanwhile my networth disappears. Don't use a financial advisor would be my advice to you and do your own research.
How are you invested in "foreign value stocks"? (e.g. are there certain funds / ETFs? Individual stocks?)
That doesn't make sense to me. Equities can rebound, cash cant
That's how your response comes off to people that actually understand the space. Less than 0.1% of the value in crypto has been exploited and it's always new startups.
But sure dig your head in the sand and avoid the best way to hedge against inflation because you base your risk assumptions off news headlines.
> Crypto
Choose one
Some banks actually offer loans with negative interest: https://amp.theguardian.com/money/2019/aug/13/danish-bank-la... (there are other examples)
Wouldn't expect the rate to ever beat inflation, though, since it is risk free (thanks FDIC!).
Looks like it's already here? According to one site[1], there are several banks offering above 0.6% interest.
[1] https://www.bankrate.com/banking/savings/best-high-yield-int...
If this comment helped you here's my referral link:
https://www.sofi.com/invite/money?gcp=0eff9a6a-1cc3-4073-b8f...
If I'm willing to ride the exchange rate risks, surely there's some bank in Honduras paying a higher rate on Lempira-denominated accounts. Compared to half the derivative products on the market, it's a straightforward offering, and it also feels an ideal product for flim-flam direct-to-consumer marketing-- backed by "government bank insurance" while dodging that it's hardly the FDIC.
Is there some regulatory angle that prevents it? I had always heard some foreign banks are uneasy about taking on American customers due to having to deal with the American tax infrastructure, but that wouldn't squash the entire product category.
Overall very interesting but way over the risk tolerance of people who deposit their money in CDs
Opening accounts for Americans is expensive [1]. Offshore banks thus tend to focus on ultra high net worth Americans.
[1] https://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance...
Can't you just skip the hassle and just buy foreign bonds from the market?
Its not too difficult to buy international bond funds. For example, SDEU (iShares German Government Bonds).
In most cases they are a way to purchase bonds and alike for people who don't want (or don't know how) to deal with that, and the bank pocketing the difference for their services.
If you're sophisticated enough to invest in a foreign country with a goal to actually get real returns and enough capital to make the hassle worthwhile, you'll find a way to do that better than a savings account.
But of course there is "market" for exchanging your USD into funny money at predatory rates, letting you experience these juicy 20+% APY, only to realize later that the country makes it illegal to transfer the money out – or you're due some extra fees, and taxes, and surcharges, and more predatory exchange rates – and in the end if you succeed to get your money out and factor in funny money devaluation and USD inflation, you end up barely making more profit than you'd get in a more stable economy.
That's assuming said foreign institutions are willing to deal with a US citizen in the first place.
Yeah and banks basically gave up on buying corporate bonds and only want treasuries or reserves. QE is basically a way to let banks use your savings account to buy treasuries. The commercial bank is making the decision on what to invest in, not the Fed. The Fed is actually just giving commercial banks as many reserves as they request.
Over time any interest rate arbitrage is priced into exchange rates.
So yes, you can get 7% on Vietnamese Dong deposits, but the currency will likely lose 6% of value against the USD over the same time period.
For example, Sofi offers 1.25% right now; https://www.sofi.com/banking/
That's just over 10% of the GDP. Not a small amount by any measure but our numbers are rather different. What am I missing?
USD is the sum of US dollars in use. It's an amount.
Comparing a rate (defined by an arbitrary local constant) to an amount doesn't make much sense.
I do take issue calling an anual arbitrary. It's a very common denominator used in finances. ie, you pay taxes anually. Don't attempt to tell the government it's arbitrary. To be pedantic, everything is arbitrary, even the value, the amount of, etc of USD, invadating this entire discussion.
As a society we agree upon things. A year is not an arbitrary unit of time.
https://tradingeconomics.com/united-states/money-supply-m1
Personally, I doubt anybody putting much relevance on M1 or M1'. But that's a 20% change in 1 year, what is quite large and probably has had some impact somewhere.
Comparing them is like comparing gallons as a number and speed of a car as a number, and ignoring that speed in mph or km/h or m/s will give different answers. Sure there are relations, but they're not comparable as ratios.
>In late February and early March of 2020, the Fed cut its policy interest rate dramatically to help ease credit conditions during the COVID-19 crisis. The resulting acceleration in the supply of M1 can be understood largely as banks accommodating an increase in people’s demand for money.
https://fredblog.stlouisfed.org/2021/01/whats-behind-the-rec...
currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institution
After May 2020 M1 is defined as:
currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts)
Can you explain the spike from those definitions, because I'm not getting it.
It never recovered. I never saw that rate go above 1% ever since.
Not unlike promotional rates at other types of subscription-like businesses that offer great rates to pull you in, hoping you’ll stay after the promotional period ends because of the inconvenience of switching.
But hey, who needs competition. Let the banking sector be run by a bunch of buddies that go to the same golf club, and if they cock up, they can always schmooze the regulator to give out a hefty bailout package. Who would have thought the consumer will get screwed?
Founder's sexual misconduct: https://en.wikipedia.org/wiki/Mike_Cagney
It is a known sales tactic to hook in customers betting that the hassle to switch later will keep them loyal. The 1.25% rate is if you set up direct deposit, with a $300 bonus.
Don't be surprised if they lower the rate after the promotion time. Happened with HSBC w/ 5% APY before 2009 crisis, Robinhood and Marcus before covid.
High yield savings has always been about attracting customers. SoFi just got their banking charter so they want to build up deposits. The rest of the HYS crowd is around 0.5% and pocketing the difference.
I just checked on Google Finance and it looks like it has gone down 4.18% over the past 1 year and negative 3.72% over the past 6 months, so you would be upside down overall if you had invested in it recently?
https://www.cnbc.com/amp/2022/04/19/us-bonds-treasury-yields...
Savings accounts can be drawn with zero notice. They're essentially rolling overnight. A 10-year Treasury cannot be redeemed before 10 years. (It can be sold, though at the market's whim with respect to price.)
Note: I am not suggesting holding long term treasuries as a substitute for a savings account here, though a ladder of short term treasuries could be an alternative when conditions are favorable, like now.
The reference to "the market's whim with respect to price" means that if you bought $1000 of 10-year treasuries at the beginning of the year and you sell them now you'll get less than $900.
Duration risk matters a lot less with the shorter dates issues.
Your treasury bonds can lose value if newer bonds pay a higher interest rate. Your free 3% is only guaranteed if you hold the bonds to maturity. If you have to sell them before maturity for some reason, you could lose money overall.
The credit union bragged about how high there savings account interest rates were. My honest reply was to say I was surprised they gave monthly rather than annual interest rates. When they corrected me to say that it was the annual interest rate I laughed, this was a savings account with fees even.
Unsurprisingly the interest rates on everything other than mortgages was in line with those in NZ. Mortgage rates were vastly lower, but 4 or so years later the economy collapsed due to terrible mortgage practices.
[0]: https://tradingeconomics.com/india/inflation-cpi
[1]: https://www.xe.com/currencycharts/?from=INR&to=USD&view=10Y
If you're talking about monetary policy, this is wrong. Low rates spur inflation. Raising rates fights it. Countries that implemented negative rates did so to fight deflation and spur inflation.
If you're talking about how we quote and talk about rates, we quote nominally because that's how most bonds are written. When you buy a 10Y Treasury, it will pay you a specific nominal rate. You know that ex ante. Inflation is whatever it is now, but we have zero guarantee around what it will be between now and ten years hence.
Also, there is no single figure for inflation. It's a measure on a basket of goods. That basket is designed to approximate the average American's, but nobody is an average American. (Or an average Indian.) Your experience of inflation will be different from mine based on our purchasing preferences. (This doesn't make inflation subjective. Just heterogenous.)
Japan is the classic example of this - lots of consumers who bought structured products like power-reverse dual coupon notes to get exposure to higher foreign interest rates got annihilated when JPY appreciated vs USD in the 2005-2010 time period.
For example, banks could place limits on your ability to withdraw, or the government can limit your ability to move money out of the country, or in extreme cases, they can just force conversion to the local currency.
(This is assuming its a dollar savings account. If you're getting 5% on local currency, you're exposed to the biggest risk of all: devaluation)
As for brick-and-mortar banks still at 0%, going by their low-balance fees, 0.5% probably only covers their overhead, if that.
If inflation is high and the interest rates are low. This tax is on you for holding currency or currency likes. Bonds for example are literally dumb to buy. Why are people buying them? They are legally required to buy them in some cases.
What happens is that those 'savings accounts' are paying the inflation tax. Whereas someone with a mortgage at say 2% and inflation is 8%. You are earning 6%. This generally speaking can be defined as wealth transfers from retirees to a lower generation. Primarily Boomer -> Millennial. This will and is causing lots of animosity between the generations. The boomers quite obviously didnt save enough for retirement and thought they could indebt a lower generation? Hilarious failure.
What irritates me is that a lot of people seem to treat this "humanity project" like a paper towel that is meant to be thrown away the moment they die.
You can't just put labor in the fridge and then take it out when you are 70. Time doesn't stand still. So old people are reliant on young people. Old people must find an arrangement that works for young people too. I don't think that is impossible.
However, a lot of old people don't care, they just want the future generation to be their worker bee with zero say. Let's say you work and save 20 years of labor. For your money to maintain its value, a young person must work 20 years for you.
There are obvious problems here. What if there aren't enough young people? What if they earn money at a slower rate than you did? What if you don't actually give them 20 years of work so they can work themselves out of that debt?
The latter is particularly ironic. A young person has 20 years of debt and his old father has 20 years of savings. When the father dies he thinks he is leaving his son a fortune, yet the only benefit the young person sees is that he is out of debt. He doesn't gain something he didn't already have.
No?
Due to inflation, today's labor would be far less valuable in $ terms.
Only if your income goes up 8% a year due to inflation.
Those inflation numbers are still rising. However, who will ultimately be able to find a new job and increase their $? Not retirees obviously.
$400,000, the average price of a home these days, is not a lot of money to live on when one or both might end up needing assisted living. My mother-in-law burned through half that in the last nine months of her life despite having incredible insurance and government pension. Now that is a screwing.
It's also not that crazy to think that rising rates causes a deflationary crash in the next year or two and causes the fed to drop interest rates back to zero (and thus, bond prices to go up). Honestly if the US 10yr treasury goes over 4% I would probably buy some, though it seems unlikely to happen.
Lets say we climb to 15% inflation and subsequently interest rates. Who can afford to pay 150,000$/year on a million $ home? Literally nobody.
The boomer selling the home suddenly cant sell their home for a million. It will have to drop in order to spend that $. That retirement fund is suddenly looking weaker.
Generational wealth is a remarkable field that we don't know anything about. We do know inheritance taxes are absolutely destructive to economies, but 1 generation can't in debt another in order to retire. Soon as you retire, I saw that I will now only work for much much more than you can afford on your fixed income.
The system is understanding this. There's a reason why real yields are negative. Hell Switzerland is -0.75% interest rates. Denmark -0.6%. Japan -0.1%. Most of the west is at 0% or recently increased.
Is there any data to back that claim?
The millenials are the children of the boomers, so if inflation accelerates the transfer of wealth, it just means the inheritances will be worth less. Meanwhile, the Social Security/Medicare gravy train rolls along for now, transferring some wealth back in the other direction.
When the market tanks as it inevitably will, you can enjoy the sweet salty boomer tears.
Open a TreasuryDirect account and buy bills, currently yielding about 50 bps for 4 weeks [1]. Or search out a high-yield online (FDIC insured) savings account, presently paying up to 80 bps [2].
[1] https://www.treasurydirect.gov/instit/annceresult/annceresul...
[2] https://www.bankrate.com/banking/savings/best-high-yield-int...
(PS: I always search for your comments in any finance-related threads as I learn a lot from them. Just an appreciation!)
Series I bonds promise a 0% real yield. TIPs [1] are currently offering between 0.5% and 1.6% of real yield [2]. Plus, no cap.
[1] https://www.treasurydirect.gov/indiv/products/prod_tipsvsibo...
[2] https://www.treasurydirect.gov/instit/annceresult/annceresul...
[1] https://tipswatch.com/2022/04/21/new-5-year-tips-auctions-wi...
[1] https://tipswatch.com/2021/09/07/i-bonds-vs-tips-whats-the-b...
USD has been increasing against major foreign currencies in the last few months so there is some upside if you're planning on spending outside the US.
(For example, USD is 12% up against the euro in the last year and 20% vs the yen)
Savings accounts have always been of dubious value for preserving or accruing value.
[1] https://treasurydirect.gov/indiv/planning/plan_education.htm
The shortest term TIPs are sold in is 5 years. They can be sold earlier, but the price will depend on market conditions.
Series I bonds have a 30 year term, but they're redeemable with a penalty after 12 months and without a penalty after 5 years.
Bills have no inflation protection, but they're sold in terms as short as 4 weeks. They currently yield 50 bps, in line with Goldman Sachs' savings account, but lower than others in the market. (Savings accounts can change their rates on a whim; bills do not.)
There was a time not that many years ago (15?) where I was actually earning higher interest in a bank CD than I was paying on my mortgage. I was also able to get short term cash advance at low introductory rate on a credit card, like $20K, and invest it short term at a higher rate. Good times.
If you want to give money away, give it to those who actually need it not those who need it least.
With the benefit of hindsight, I don't think we've been in a situation that resembles that (at least in the US) at any point since "supply side economics" was formulated. I don't know what I would have thought at the time; I expect it was less obvious than it feels now.
There's remains the possibility that, even in a situation like that, some other approach would work even better, although naively pumping money into the "demand side" probably isn't that approach.