Tough topics: money, interest, banking and saving, Part II

HT: http://observer.com/2011/06/bit-omoney-whos-behind-the-bitcoin-bubble/ Satoshi Nakamoto is the pseudonymous creator of Bitcoin. (Rasmus Rasmussen, Z1Xwitch ArtWork)

IFO’s reponse to Hydrangea’s comments on money, interest rates and banking:

Yes, sadly, I do have some ideas! You are absolutely right that low interest rates punish savers. Worse even than your essay indicates, since the current 0.5% to 0.1% interest rate on savings is about one-fifth of the amount of inflation, which is now at about 2.5 percent.

In essence, savers are paying the banks to hold their money. This is also true for holders of government debt, meaning people lending to the govt, as well.

However, the real reason interest rates are low is that the federal government now has some $17 TRILLION in debt. ( http://www.usdebtclock.org/ ) They have to PAY INTEREST on that debt. If average interest rates triple, say, to 3%, this would triple the amount of money the government would have to pay its borrowers, leaving little if any money left over for all the programs lawmakers and bureaucrats want to run.

The low interest rate, despite what you hear (from economists, financial experts and other highly-placed people), is NOT to stimulate the economy. It is to bail out federal, state and local governments and their related pension funds by increasing the price of the assets – land and stock shares – they hold, and reducing the price these entities have to pay for the “privilege” of borrowing money.

On the upside of this dire situation, the free market is taking a hand in the matter. The rise of Bitcoins is no coincidence. People raise the issue that this private, electronic currency has no government backing. Big deal. What has government backing ever done for currency issued by a free-spending, high-taxing government system?

Answer: nothing.

Further answer: until 1913, US currency DID NOT HAVE government backing!  Still doesn’t, really, but that’s a topic for another day. Surprised? Banks issued their own notes, guaranteeing with their good name, that the paper they issued would be redeemed in gold upon demand. Sure, banks failed in those days. It was very visible and embarrassing failure and other banks strove to avoid that horrible fate.

Further answer: Another complaint is that Bitcoins are hard to value. Not so. They are valued in comparison to other currencies, like the US dollar. This shows how little confidence some people have in the USD and is a good corrective.

Until now, the devaluation of the USD has been hidden behind (slightly) rising incomes and prices. Now it is out in the open for those who understand what is happening. It is also scaring the heck out of the US government and the Federal Reserve banks.

So, I will say that the powers that be HAVE thought about it and are quite willing to sacrifice the savers. People like Investing For One are not harmed, because IFO invests in individual, dividend-paying stocks.

IFO has had a quite nice return, including dividend income, on her investments over the past years, in spite of showing HUGE losses (30% declines in total net worth) in 2008 and 2009.

These comments barely scratch the surface of the current pickle we are in, but we don’t want to bore or depress you, so will stop now.

N.B. After IFO sent this response to Hydrangea, she took a trip to Seattle and visited her son, who happens to be a brilliant geek. She eagerly picked his brain about Bitcoins, so will be posting more on THAT topic in a day or so as she gets herself up to speed. He’s quite excited about the trend.

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About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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