Inflation Will Chew Up a Chunk of Cash
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Dear Mr. Berko:
We have a chunk of money to invest, and our broker wants to put it all in the Putnam Government Bond Fund that yields 4.5 percent. Is this a good investment for us at a good interest rate? Or do you think rates are headed higher? If so, how much higher and when will interest rates go up? This money is part of my retirement package. I will be getting 70 percent of my salary from my company for two years, but my wife wants to continue working till she is 67, which is three years from now, and
collect full Social Security benefits. Therefore, we won’t need an immediate return from this chunk. Please tell us what you think. Lastly, will you recommend a low-cost broker for our son, who is fed up with Merrill Lynch? — W.L., Kankakee, Ill.
Dear W.L.:
Well Humpty Dumpty doodle doo, we’re 15 months into the worst economic crisis since the Great Depression with a budget deficit equal to nearly 15 percent of our gross domestic product. And the Cossacks in Congress are pennies in their pants as they scurry to hide from voters the enormity of the liabilities they have created with unfunded federal programs. Consider the unfunded obligations of Medicare, Medicaid, civil service, military pensions, Social Security, the Pension Benefit Guaranty
Corp. and many smaller but less transparent obligations. The consequences of this congressionally approved financial cancer are off-balance-sheet obligations that exceed $150 trillion. It won’t be long until we begin adding in dollars by the zillions!
However, this $150 trillion number slightly overshadows our $14 trillion GDP and $2.4 trillion in tax receipts to the Treasury for 2009. This debt, most of which Congress blithely created over the past 20 years, guarantees huge tax increases, soaring interest rates, rising prices and a serious devaluation of the dollar. I can’t guess, even with a teeny degree of certainty, how high interest rates or inflation might be because no one had ever dreamt that capitalism could ever be so irresponsible.
Many believe that the consequences of the last seven years of redundant and rampant greed will be more inflationary than the monetary policies of the 1970s, when the prime rate reached 21 percent, when Treasury bonds were paying 13 percent, when inflation was 14 percent, when gold traded at $850 an ounce and when the dollar plunged on the foreign markets.
I can’t give you a specific date, but I tell you with a high degree of certainty that this financial cancer is inexorably working its way to the nation’s internal organs. A slow death, like a thousand cuts, is beginning to gain momentum. This is what happens when Congress, lobbyists and special interest groups try to fix economic problems with political solutions.
Yes, it’s no time to invest your “chunk of money” in the Putnam Government Bond Fund and your broker ought to be arrested for attempted financial manslaughter. Keep that chunk loose and ask one of your bankers to ladder your chunk in three-month certificates of deposit over a period of a year. That way, every three months you will have one-quarter of that chunk coming due, which you should invest for another three months, and so on, as rates surely move higher. And at some point, 18 months or 40 months from now, when interest rates are sexy again — and you’ll sense when — lock up your chunk for 10 years or longer.
As for low-cost brokers, there must be a half-zillion between New York and California. Some readers have told me their low-cost brokers provide better service than their old high-cost brokers, such as Darn Witter, Dumdential, Smith Baloney, etc. These readers are effusive in their praise of Charles Schwab and Vanguard. Other low-cost brokers receiving high marks are Fidelity and Scottrade. Consumer Reports lauds T. Rowe Price and Edward Jones. Consumer Reports also gives Merrill Lynch and Ameriprise low marks for service and singles out Bank of America for its numerous niggling and nasty fees that pop up unexpectedly, without explanation, on statements and billings.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net.
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