The Fed's War on Pennies
Jesse's Café Américain

"A penny saved is twopence clear," wrote Benjamin Franklin in his now-classic Poor Richard's Almanack, published annually between 1732–58. Franklin's Almanack embodied — and perhaps shaped — the ethos of money in Colonial America.

Today, we're far from pennies earning more pennies. Heck, we hardly even talk about pennies after a century of inflation. These days, if you deposit money in a bank, you receive historically low interest rates. I'll show you an astonishing chart in a moment.

First, though, consider… What are the implications of low interest rates? How should you tailor investing to low interest? In this write-up, I have some thoughts on beating the low interest problem while preserving your wealth over the long haul…

How bad are interest rates — for savers, at least? Look at the chart below, based on data going back to 1790. It puts a new spin on Ben Franklin's old quip about a "penny saved." A penny saved earned strong interest, back in Franklin's day!

Throughout most of U.S. history, you could "earn" decent money by following Franklin's advice and saving pennies. For over two centuries, U.S. interest rates have seldom been less than 4–5%. Often, rates were higher. If you'd followed Franklin's advice and saved pennies, you'd have earned decent returns over the long haul.

Not anymore! In the past five years, interest rates have crashed below even previous rock bottoms during the Great Depression and World War II. How low is low these days? Let's take a closer look, using a chart of interest rates over the past six decades, prepared by the Federal Reserve Bank of St. Louis.

Just eyeballing the chart, you can see the 5% interest level running across much of the past six decades. Rates were lower sometimes and higher at other times. For example, look at how the fed funds rate spiked up strongly during the recessions of the 1970s and early 1980s, in a battle against inflation.

But look at interest rates since 2008. Over the past five years, they plummeted. Where's Ben Franklin when you need him? After the crash of 2008, the Fed dropped rates like a stone, and kept them down near zero.

Savers suffer at zero interest. Down at the bank, you don't even earn pennies on the dollar. The Fed and its principals know this. In fact, they know it and don't care!

Last year, none other than Fed Chairman Ben Bernanke cried crocodile tears over the low interest issue. In a speech, Bernanke stated, "I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some."

Yes, and boohoo for you. If you're a saver, Ben Bernanke feels your pain. But pain or no, the Fed has kept interest rates low, and that's the plan looking ahead.

Even worse, there may be more pain to come, because lately there's talk of banks charging fees to hold your funds. That is, you'll pay the banks, in a form of "negative" interest! In the brave new world of modern money, the Fed's Ben has turned the other Ben — Mr. Franklin — on his head.

Low interest rates rob the noble saver. The saver defers instant gratification, yet receives nothing for the effort. It goes against history. It ought to change, "one of these days." But we're stuck with this situation for now – even as we enter the Janet Yellen era.

Along the way, it's infuriating to do the "right thing" and save but then get kicked around for it. All that and, broadly speaking, it's not so much individual savers who are harmed by low interest rates. Large-scale damage from low interest rates affects institutional money and pension funds. We're not talking about "pennies saved" here. We're looking at literally trillions of dollars of pension funds and such all seeking return.

Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.

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