Money market funds make banks rich
If anyone still has some degree of faith in the United States banking system, you should consider reconsidering after the various bailout packages of the past several months. It’s no secret that these bailouts are going to increase the rate of inflation considerable. In 2007, the inflation rate was 2.85%, in 2008 it was 3.85%. I can only imagine how high the inflation rate will be in 2009 after trillions of more dollars are printed, given to these very banks, and then put in circulation. If you are considering lending money to a bank in the form of opening up a money market account, consider the following example:
You open up a money market account with an interest rate of 2%, which is about the going rate these days. In one year you will have 10,200 dollars. You might think this is great, you avoided losing the money right? I mean, I guess it’s better than losing 30% of the value that you might have if you had been in the stock market.
However, after one year, assuming the interest rate will be 4% in 2009 – and it will probably be considerably higher based on the increase between 2007 and 2008 and the fact that there are trillions of more dollars in circulation after the Federal Reserve gets it’s printing presses running full force – your 10,200 dollars will only be worth 9,792 dollars of today’s dollars! In other words, instead of making 200 dollars, you actually lost 208 dollars when you take inflation into consideration. Think of what a great deal this is for the banks! Personally I would gladly pay anyone a 2% interest rate on money they lent to me with an inflation rate of greater than 4%.
In other words, when you lend your money to a bank at 2%, your “loan” to the bank is definitely going to lose value. Giving your money to a bank to manage is a bad idea, especially considering the rate that the Federal Reserve has been printing money. If you have no other options, at least buy Treasury Inflation Protected Securities. These are govenment bonds that pay a rate of return marginally higher than the inflation rate. Money market accounts do not do this.