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No Dumb Bonds

Before I begin: This post is not about politics. I’m talking about this from a purely financial point of view. Numbers. If anyone leaves comments with political hate-talk, they will be deleted with extreme prejudice.

As we all know, Americans don’t save much. That’s one reason why we have to borrow so much from China, Japan, etc., and it’s obviously a bad thing. In addition, many people are unable to retire due to a lack of sufficient money to fund their golden years. So in order to make it easier for you to save, Obama is proposing several measures. One of them is this:

In a second move, Mr. Obama said the Internal Revenue Service will allow people to check a box on their tax returns and receive their tax refunds in the form of United States savings bonds. White House officials said about 100 million families get tax refunds each year, and the average refund is about $2,000.

This wouldn’t be a bad idea…if U.S. savings bonds actually offered a decent rate of return. According to the US savings bonds website, the interest rates as of September 2009 range from -5.56% (this is not a typo — the website really says that the rate is negative) to 1.5%. So the government gets to keep your federal tax refunds for years and pay you almost nothing. (You know the Chinese demand more than 1.5% on their money.)

If that’s not bad enough, with the current rate of inflation, the value of your money will decrease. If you’re making 1.5% on a bond and the inflation rate is 4% (let’s just say), then your money is worth 2.5% less every year you leave it in the bond. So by saving, you actually lose ground.

The best way to encourage saving is not “allowing” people to put their tax refunds into some savings bonds that pay a nominal and virtually worthless rate of return. It is by raising interest rates and making saving (i.e., delayed gratification) worthwhile.

But I doubt that’s really going to happen. If everyone saves, who’s going to increase consumer spending, the all-important gauge of economic activity in America?


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