Invest in America

Having trouble deciding where to invest your money lately?  Though the Dow has made a slight recovery in the last week, investing your short-term money in CD’s or a savings account sure doesn’t pay much today.  Even a one year CD is paying only roughly 3.5%. 

Have you thought about investing in U.S. Government I-Bonds?  Right now they’re paying 4.84% and there’s no safer money than government securities.  The upside to I-Bonds are that they pay the inflation rate plus a fixed rate.  Right now, the fixed rate portion is 0.00%.  Our government thinks the inflation rate is roughly 2.42% every six months, giving the I-Bonds a whopping return compared to other low risk or risk-free securities. 

The downside is that you must hold onto the bonds for at least a year, and if you sell them before five years, you forfeit 3 months worth of interest.  Also, you can only save up to $5,000 per year per person, which is a shame but some think the government also believes we are coming upon high inflation and therefore they are limiting the amount we can invest in these inflation-protecting securities.  But it’s a secure place to stash some of your savings and a great way to invest in America.

The other downside is that experts say that we are currently experiencing just over 5% inflation and even the U.S. Department of Labor says we’re at 5% inflation.  Interest rates must surely rise with this level of inflation and to keep pace, the I-Bond will also likely increase its interest rate.  You should monitor this closely because the Fed will likely change (note: increase) interest rates in the near future to reflect a higher inflationary period.  With the economy coming into recession, simultaneous inflation will likely give us stagflation, which has a lot of nasty side effects as evidenced by our economy in the 1970s. 

The difference today is that the loose monetary policy beginning in 2003 and the resulting violent turmoil in real estate and banking were followed by a significant increase in oil prices.  In contrast, during the 1970s, loose money supply was a resulting policy immediately following the increase in oil prices.  These two time-periods have correlation between rising oil prices and loose monetary policy but an exactly opposite timeline of these two events.  Since we are a net importer of oil, the results could be identical but hopefully we can somehow avoid the wage-price spiral we experienced in the 70s.

Incidentally, savings placed in U.S. savings bonds has dropped a whopping 84% between 2005 and 2007, with only $3.557BB saved in 2007 compared with $22.426BB in 2005.  I wonder how much of that money went into real estate speculation and now into oil speculation?