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Low interest rates' a double whammy for some.

Tuesday, March 27, 2012

Central banks in many large economies around the world are keeping interest rates really low, near zero in countries like the USA and Japan, in fact. Low interest rates are seen as the way to encourage economic growth by making borrowings cheaper.

To revive their sickly economies, the relevant countries' low interest rates could be instrumental. However, as money would go to where it is treated best, a lot of this cheap money is finding its way to Asia. Although the USA would like to see inflation in their economy, their money printing has also caused inflation in Asian economies.

Declining value of the US$. Source: Wikipedia.
The low interest rate environment is hurting people who save. They get less interest income for their savings and they are also impacted by higher prices like everyone else. They are being paid less and forced to spend more! A double whammy!

Savers have to put their money to work if they want to be paid more than the paltry interest rates on savings offered by the banks. This means taking on risks by investing their savings. This sounds simple enough but we have to remember that not everyone should be taking risks. What about the elderly?

I get worried when my mother and others her age are telling me now that they should invest their money in real estate, bonds or the stock market because they are getting next to nothing for their savings in their bank accounts. Do they have a choice?

Related posts:
1. Perpetual bonds: Good or bad?
2. Money continues to flow into Singapore.
3. To protect our wealth, we have to take risk.


meesiam said...

bank in India is giving min 7 percent for FD

Gems said...

Hi AK,

Amongst all the noise on investments, I think the safest bet is still in property in spore. At least, one doesn't lose that much (limited downside) and there's chance of appreciation. Compare to stocks and bonds, I feel more comfortable with something I can touch and see.

AK71 said...

Hi meesiam,

And they successfully brought inflation down from 16% in 2010 to 8.8% in February 2012.

Never mind the fact that Singapore's official inflation number of about 5% is lower than India's 8.8%. What is our highest FD interest rate in Singapore? 1.3%?

AK71 said...

Hi Gems,

As with any investment, we should do a reality check from time to time.

I still remember how property prices declined some 30% in the last financial crisis. Also, some properties (e.g. Aspen Heights) bought during the late 1990s before the Asian Financial Crisis have only recovered their values last year.

If we should buy a property at the peak of a cycle, it could be a source of great discomfort for years to come.

Serendib said...

Hi AK, you should pioneer a low-cost ETF comprised of dividend stocks/REITs that could provide a well-diversified and decent yield for small-time investors like our seniors :-)

AK71 said...

Hi Serendib,

Oh my, I would feel like I am taking money for doing almost nothing. No, no. I won't be able to live with myself. ;p

RayNg said...

Quote: I get worried when my mother and others her age are telling me now that they should invest their money in real estate, bonds or the stock market because they are getting next to nothing for their savings in their bank accounts

A good indicator of property bubble forming...

AK71 said...

Hi RayNg,

In an earlier blog post, I said that more marginal investors could be hit when the oversupply situation becomes increasingly apparent in the next few years. Many are overly bullish and complacent about Singapore's residential property market.

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