How The US’s Debt Crisis Affects Savings

Shout Bits Blog ^ | 07/11/2010 | Shout Bits

[Shout Bits]

While hardly a household name, Dr. Harry Markowitz developed a new way of looking at savings and investment that has fundamentally changed the financial world. In the 1950′s, Markowitz quantified the benefits of diversification in one’s savings. Prior to his work, most investors thought in terms of individual good and bad investments, but Markowitz proved that the best approach is to consider how an overall portfolio performs. Among the many assumptions in the application of Markowitz’s Modern Portfolio Theory is the notion that US Treasury Bills are risk free. With the US assuming far more liabilities than it can likely service, this assumption is becoming more dubious by the day. The implications for savers and investors tell a story of how government benefits debtors at the expense of savers. . .

[bigbob]

National debt has another effect on individual savings that this article doesn’t mention.

We are used to seeing savings as positively correlated with interest rates. In other words, when interest rates rise, we tend to save more - in effect the higher interest is a “reward” for delaying consumption.

Unfortunately we’re now in a situation where the government has lowered interest rates to all time lows at exactly the time we need to decrease consumption and increase savings. But our political leaders lack the wisdom or guts (or both) needed to reduce spending and thus the national debt at a time when it is most urgent they do so.

[rbosque]

I think it’s time to separate politicians from fiscal decisions. They are only interested in the short=term and their own political careers rather than focusing on the long term.

[cranked]

I heard that digging holes in the backyard, the shoebox, and the slit mattress have made a huge comeback....=.=