The only real hope for savings bondholders is the re-establishment of a sound dollar. Tragically for America, that goal seems as far distant as ever…

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Trevor Daher

Very insightful commentary has been made of late, much of it by fellows or fellow travelers of the Mises Institute, regarding the effects that monetary policy is having upon the lives of ordinary people and the potentially disastrous future consequences which may be wrought upon the same. This article will introduce, and lament, the reality of interest rates and inflation.

The interest rate on a thirty-year Treasury—a thirty-year loan to the US government—is 1.6 percent as of this writing. Shorter-term yields are far lower. Interest rates on savings accounts and certificates of deposit are so low that, for long-term holdings of US dollars, a mattress or an old coffee can might, for many people, constitute a satisfactory substitute for banking products.

Many individuals depend upon fixed-income securities as a means of nominally protecting the principal of their savings and wealth while also generating an income. This is particularly true of retirees or those nearing retirement. This is because fixed-income securities are generally viewed as among the safest income-producing assets, since the counterparty (the borrower) is contractually obligated to make the payments. This perception of safety and security is especially true for government-issued debts—bonds—from governments that are considered a good credit risk and whose currencies are widely accepted—such as the United States.

Consider that the individual or family in today’s interest rate environment would need to have millions of dollars saved or invested in fixed-income securities in order to generate enough income to sustain them in retirement. If we consider the case of US government debt securities, generally regarded as among the safest investments in the world, the thirty-year Treasury yields the highest interest rate, 1.6 percent as of this writing. In order to earn a retirement income in excess of, say, $30,000 per year, an individual or couple would need to hold at least $2 million dollars’ worth of Treasurys. 

Lest we forget, $30,000 may not even afford a comfortable living for those individuals or couples who do not own their own homes, who live in high-tax jurisdictions, who have debt obligations such as car payments, who may have substantial medical expenses, or who might wish to provide some financial support for their children. In other words, those prudent and thrifty individuals who have arranged their affairs such that they can retire debt-free, in a low tax jurisdiction, and with more than $2 million dollars worth of fixed-income securities may get by with these interest rates, ceteris paribus. But, presumably, these people number very few. As for the rest, they would need substantially more than $2 million dollars’ worth of assets.

Low Interest Rates and Savings Rates

Consider this, too: that the problem of where to put one’s money and what to do with one’s savings affects us all—not just the retirees. Do you want to save up your money, say, to buy a car in the future? A house? To fund your children’s education? To start your own business? To have an emergency fund? Where can you put your money, with a reasonable degree of confidence in the safety of the principal and where it can also generate a positive return? We will return to this question in a few moments.

Many institutions rely on fixed-income securities for the same reasons as the individuals and the families aforementioned. One difference, though, is that these institutions use the fixed-income securities as a means to meet their future obligations. For instance, insurance companies often invest premium payments in fixed-income securities, because they are generally regarded as safe, income-producing assets, and the insurance companies can use the future returns of these investments to meet their future contractual obligations. The same is true of pension funds, endowments, charities and nonprofits, and other institutions. Consider, now, that these institutions also serve individuals: contributors, customers, communities, and constituents. Many ordinary people are relying on these institutions, and their ability to meet their future obligations.

These artificially low interest rates, the Federal Reserve has made very clear, are here to stay. According to Federal Reserve chairman Jerome Powell, at a press conference in June of this year, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”

Chasing Yield

Many commentators here at the Mises Institute, on Wall Street, and elsewhere, have all identified another worrisome consequence of this artificially low interest rate environment: it has induced individuals and institutions to chase yield, i.e., to knowingly make successively riskier investments in the hopes of attaining a higher rate of return than can be found in the “safer” investments. Bear in mind that this problem is global; in other developed countries, interest rates are often equally low or in some cases negative! This further frustrates the search for yield and provides incentive for people and institutions to lend money to borrowers with a higher credit risk or to wade into alternative asset classes which are generally viewed as riskier than fixed-income. The now infamous mortgage-backed securities? Junk bonds? Stocks? Real estate? Savings accounts? The mattress and coffee can combo? Where are people and institutions to put their money?

In a bygone era, many people would not have worried so much about this problem. They could have held onto their cash, or put it in a savings account, a certificate of deposit, or some other banking product, and felt relatively confident that their money would retain its value and purchasing power over time. Today, though, this is no longer possible, even for the thrifty and prudent retirees who were mentioned earlier, the ones who scrimped and saved all of their lives and achieved a great deal of financial success.

“Flexible” Inflation Targets

This is because the Federal Reserve promised just earlier this year that they will debase the value of the US dollar at a rate in excess of 2 percent per year for an indeterminate period of time. For context, a 2 percent annual rate of inflation was the Federal Reserve’s previous inflation target. At a press conference in August of this year, though, Chairman Powell unveiled their new plan for monetary policy. In Powell’s words, since the Consumer Price Index—the Federal Reserve’s metric for measuring inflation—has been running at a rate below 2 percent per year for a number of years, their new inflation-targeting scheme “will seek to achieve inflation that averages 2 percent over time.” And, since the CPI has been running below 2 percent for some time, “appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” Notice that he did not specify an upper bound—a maximum annualized rate of inflation—but just stated that it would be “moderately above 2 percent.” Nor did he specify a period of time during which the inflation rate would exceed 2 percent. Rather, the Federal Reserve says, “In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average. Thus, our approach could be viewed as a flexible form of average inflation targeting.” Flexible indeed.

If the Fed is successful in keeping the interest rates artificially low, and debasing the value of the US dollar with increasing rapidity, one might reasonably conclude that most people are going to suffer financial and economic hardship in the future. The value of people’s savings and fixed-income assets—generally viewed as the safest kind of assets—is going to decline, while their cost of living is going to rise. This is the expressly stated goal of the Federal Reserve.

The types of individuals who read articles published on mises.org will know what to expect as a consequence of this, the tragedy of our savings. In response to the grievous loss of their life’s savings, and the insufferable rise in consumer prices, many people will clamor for the government to save them. Confronted with the problems caused by monetary policy—the interest rates and the inflation—many people will lay the blame at the feet of the market, its firms and entrepreneurs, and the very nature of our economic order. They will turn to the government for a solution.

Howard Buffet on the Savings Bond Scam

None of this would surprise Howard Buffet, the Nebraska congressman and insightful critic of American monetary policy in the post–New Deal world. Buffett warned the American public about these twin problems of monetary policy and their insidious consequences more than sixty years ago.

He wrote an article, published in Human Events magazine in 1959, entitled “The U.S. Savings Bond Tragedy.” The US Congress had just held an intense debate over whether or not to allow the Treasury to raise interest rates on US government bonds. Buffett noticed that “Despite furious verbal exchanges, both sides generally avoided any talk or action that would bring into public view the investment record of savings bonds. That subject was strictly taboo.” For years, “the Treasury pulled out all the stops in glorifying the merits of these securities…the claim was made that ‘US savings bonds are the safest investment in the world today.'”

Their advertising efforts paid off. According to Buffett, at the time of his writing in 1959, “An estimated 40 million Americans, mainly of the small income group, are owners of over $40 billion worth of US savings bonds.” To Buffett, these poor Americans had been suckered into a raw deal. “Technically, savings bonds have been absolutely ‘safe,’ just as the advertising claimed. Every investor in them has gotten his dollars back on demand plus interest.” However, there is more to this story than meets the eye.

In fact, Buffett said, for the twenty years between 1939 and his writing in 1959, “no large group of Americans has been hurt worse financially than that which placed its nest-egg in savings bonds.” Depending on the date when they were purchased, the owners of these bonds had suffered a loss of “up to 50 per cent or even more” because of “the rotting of the dollar.” Buffett’s analysis didn’t stop there, though, with the mourning of the loss of these Americans’ savings. He continues,

During this same period, of course, all holders of fixed dollar obligations suffered similar losses. Without minimizing their losses, it is our purpose here to examine the facts and circumstances surrounding the specific disaster to those who had directly entrusted the Government with their savings.

Fair play, to this special category of 40 million thrifty citizens, has been entirely within the control of successive Administrations and Congresses. It is the Government that has created the inflation that has raised the cost of living 100 per cent since 1939. Likewise, it is the Government that fixes the dollar income of the various groups paid out of the US Treasury.

So it is instructive to learn how Congress has treated not only savings bondholders, but also several other groups whose income is determined by the lawmakers. Then it will be possible to decide whether or not savings bondholders have been treated fairly.

Buffett then went on to analyze and compare five categories of people whose incomes are paid out of the Treasury and are determined by the Congress (these ideas are Buffett’s but have been edited and adapted by the author of this article):

1. The US congressmen themselves. Between 1940 and his writing in 1959, congressional salaries had increased by 125 percent and their pay, according to Buffett, was mostly tax-free.
2. The federal civil service employees. Between 1944 and 1959, their income had increased 149 percent.
3. Social Security recipients. During the same period, their income had increased by 111 percent, and was totally tax-free.
4. Welfare recipients (ADC, Aid to Dependent Children, in his day). Between 1942 and 1959, their incomes had increased 196 percent.
5. Savings bondholders. “The percentage increase to the savings bondholders’ income was 30 per cent between 1939 and 1959.” This was calculated assuming that all of the bonds were held to maturity.

For Buffett, these figures led to some very clear conclusions. First, that Congress has “been thoroughly aware of the rising cost of living.” And, second, that the Congress had taken “prompt and vigorous action to protect and preserve living standards for various other groups whose income comes direct from the U.S. Treasury.” This led Buffett to ask, “Are savings bondholders a class of second-rate citizens, entitled to less consideration than the other groupings mentioned?” Buffett spoke a few words in their defense:

They have by voluntary act shown a superior degree of trust in the Government….They have been the most responsive to patriotic appeals by Government for financial support….They have demonstrated the stamina to forego comforts now in order to be self-supporting in their declining years….They possess the industry and self-restraint to have achieved frugality in their personal finances.

Buffett pulls no punches and minces no words with his former colleagues in Congress. “Is there any item in this list of qualities that justifies a Federal policy of spoilation of these thrifty and patriotic people?” and “Yet, so far, the Government has caused them to be among those who have lost the most from inflation. It would be sobering to conclude that these better citizens have experienced unfair treatment simply because they were not organized into a pressure group.”

Buffett’s conclusion to this article, “The U.S. Savings Bond Tragedy,” is as powerful and stirring as it is prescient. In his own (abridged) words:

The only real hope for savings bondholders is the re-establishment of a sound dollar. Tragically for America, that goal seems as far distant as ever….In the background there is a political aspect of this problem that should not be overlooked. The integrity of our electoral system ultimately depends on the preservation of economic independence by the small and middle-income citizens. Unless this grouping can exist without Government subsidies, the term “free elections” can and will become a mockery. The savings bond episode is the most devastating blow this segment has ever been dealt.

Indeed, the terrible loss suffered could be worth its cost if our people would learn from this episode that Government is not benevolent, is not humanitarian, is not filled with compassion for low income people. 

If the delusion that Government ever truly embraces such noble attributes could be revealed for the mirage that it is, then this sad chapter in government finance could pave the way for a recovery of public understanding of the perils of the State.

The story of US savings bonds should teach us that most political talk professing deep concern for “the little people” is nothing more than oratory designed to catch votes.

The learning of that lesson in all its ramifications could bring about a revitalized America—equal to the challenges of the modern world, both at home and abroad. Author:

Trevor Daher