greentheo

I was recently doing some thinking about low yield investments like Treasury Bonds and Certificates of Deposit.

Sure Bonds and CD’s are safe. In fact you basically can’t lose your money. But as an investment they stink!.

10 Year Treasury Bill Interest Rate: 4.25%
Assumed Inflation: 3%
Married Filing Jointly Income: 80k (Federal Tax Rate = 15.9% from the IRS)
Estimated Actual Return per year after subtracting taxes and inflation = 1.05%

But the thing that really gets me about Bonds and Certificates of Deposit are that they are nearly a free loan to the government/banking industry… which can turn around and use your money to generate 700% profits (700% of your loan to them that is).

Now not to get to conspiratorial theoretic here but really I must ask why we as citizens are allowing the banking industry and the government to take loans from us for nearly free while we pay them back at a much higher interest rates? It must be some kind of conspiracy.

First inflation is directly caused by the banking/loan industry. What else is inflation but the expansion of the money supply? Only the Federal Reserve and the banks have the ability to inflate the money supply…and they do so all the time. How do they do it? By creating a loan out of thin air. Federal law only requires that they keep 10% of the money on deposit with them. The rest they are free to loan out. That means for every 10 dollars they receive on deposit, they could potentially loan out:

[tex=math]y = 10\times \sum_{i \in (1, \infty)}0.9^i \rightarrow 90[/tex]dollars

given that each new loan is deposited back into the bank.

Thus for every dollar deposited, the bank has the potential to loan out 9 dollars which didn’t exist before. Furthermore the Federal Reserve needs no deposits to make a loan, it just creates money at the push of a button! Hence inflation.

Now take that same principal and apply it to the government. As the government has the ability to raise taxes to pay off it’s debt, money loaned to the governemnt is all but assured to be payed back. Thus the government uses it’s own citizens as collateral to borrow money at good rates. And it can borrow not just the collective worth of the United States, but many times more. Hence our 9 trillion dollar deficit. Hence more inflation.

To top it off the government first borrows our money at a very cheap rate, then taxes it (for a further discount) and then loans it back to us in various forms (student loans, mortgages) at a profit to itself! The big Banks do the same thing. First they borrow our money, then inflate it (devaluing it) and then loan it back to us at much higher rate.

I do appreciate the fact that the government provides such services as student loans and mortgage backing, I wouldn’t have my house or education without them. I appreciate that banks will lend money when I’m in a pinch or if I want to buy a house or car. However one last figure ought really to make you wonder if what they’re doing is right or good for our country.

Initial Deposit: $10,000
Loans Generated from Deposit: $90,000
Difference in loan rate and deposit rate: 2% (money is loaned out at 7% and deposited at 5%)
Interest gained by bank over 30 years: $73,990 = %700 of original loan.

In other words the government or bank who takes the bond or CD has the potential of making nearly 7 times the original deposit amount… and it wasn’t even their money to begin with!

I’ll only be investing in stocks and businesses from now on I think.

Related posts:

1. Fed creates more money from thin air, gives to govt.
2. Credit Card Mathematics
3. Bailout Sleuth

This entry was posted on Monday, December 10th, 2007 at 2:31 pm and is filed under Miscellaneous. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.