(The Burning Platform)—When the Fed raises interest rates to curb inflation, ripple effects spread across the economy. Some of the impacts are negative (especially if you owe a lot of money), but others are positive for savers.

Today, let’s take a break from exploring the downsides of higher interest rates. Let’s focus on the positive.

If you’re prudent, you undoubtedly have some extra money tucked away in a savings account at a bank or credit union. Savings accounts are typically used for household emergency funds, cash set aside for short-term expenses like a big vacation, a significant home improvement (or down payment on a home) – that sort of thing.

Recently, setting aside cash in a savings account got a lot more attractive:

Not long ago, it was common to earn low returns on cash – less than 1%.

But after the Federal Reserve embarked on a series of interest rate increases to tamp down inflation, that has changed. Now, investors may get as much as 5% or more interest on their savings – the most they have been able to earn in about 15 years.

“What I hear from advisors these days is the phrase, ‘This is real money now,’” said Michael Halloran…

Just one year ago, Dr. Ron Paul calculated exactly how much the Fed’s interest rate repression was costing us. For example:

…banks are paying less than 1% APY on CDs and savings accounts, on average, while inflation is 9.1%.

What a difference a year makes!

At 5% APY (annual percentage yield, or “yield”), the most generous savings accounts are actually outperforming inflation – most recently reported at 3.7% year-over-year.

• A positive after-inflation return on your cash?
• Liquidity on demand?
• Insured by the FDIC?
• What’s not to like?

If only we could take these benefits at face value…

The drawbacks of savings accounts

Unfortunately, offering 5% APY on your savings isn’t something banks are just offering you for free. If you have an existing savings account, don’t expect a complimentary upgrade to your APY. For example, here’s the current yield on my personal savings account:

You’ll probably have to shop around, but if you do you can find an account offering 4.75%-5.25% APY. But should you? Switching banks (even opening a new savings account online) can be a hassle. Is it worth it? Well, there are two reasons banks offer high yields on savings accounts:

1. To attract new customers, and entice them into opening a savings account (which, they hope, will lead to a profitable relationship)
2. To attract new deposits, which they desperately need

Don’t forget, the entire banking sector is still dealing with unrealized losses on their reserves – more today than in March, when SVB and Signature banks suddenly failed:

Banks can borrow money from the Federal Reserve BTFP fund, which costs them 5.55% today. Why wouldn’t they offer savers a bit less to fill a hole on their balance sheets? From that perspective, a 5% APY savings account rate doesn’t look quite so attractive…

Even if the worst occurred – you opened a savings account with a bank that promptly collapsed – your deposit would be insured by the FDIC. Right?

…there are limits to those protections. Depositors generally have up to $250,000 of coverage per bank, per account ownership category through the FDIC.

When banking troubles cropped up earlier this year, the federal government stepped in as a backstop regardless of those limits. But savers should not count on that happening again.

Stay under those FDIC insurance limits, folks!

Fortunately, the FDIC maintains a significant deposit insurance fund (DIF). Unfortunately, the DIF has only $116 billion on-hand. That sounds like a lot, until we compare it to the $17.2 trillion currently on deposit in banks nationwide (about 40% or $7 trillion of that total is uninsured). If the deposit insurance fund is depleted, the Federal Reserve can always print more money to make up the difference. Which would cause inflation, naturally… Even in a worst-case scenario, you’d get your money back eventually, but you might need to wait on an act of Congress to make it happen.

But we’ve been starved for yield on our savings for so long, a 5% APY might be enough to encourage even the most skeptical to open up a savings account.

One more point to ponder – if we factor inflation into our calculations, how much after-inflation yield are we earning? Less than you’d think…

“Real” returns or a mirage?

The number one enemy of cash is inflation.

The phrase “real return” means what’s left over after subtracting the corrosive effects of inflation on your cash. As I said earlier, the official CPI is currently 3.7% per year.

Pause for just a moment and ask yourself whether that 3.7% increase in the cost of living accurately reflects your own expenses? For most Americans, the answer is a resounding No. That’s because CPI or “headline inflation” isn’t terribly accurate.

Absent a deeper dive into the politics of inflation calculations, consider this. If we were to use the Federal Reserve’s own price index procedures from the 1980s (before substitution hocus-pocus were allowed to corrupt the data), inflation would measure about 12.5%.

That would also mean any cash stashed in a 5% APY savings account would actually cost you 7.5% of your purchasing power…

Listen: Liquidity is great. Insurance on up to $250,000 in savings? Outstanding. Even when a bank collapses, the FDIC generally figures out a way to make insured deposits available within a day or two. Are those privileges worth a -7.5% return on investment? Maybe it’s time to consider a more inflation-resistant form of saving…

Inflation burns up dollars, but it can’t touch this

Whether you put your hard-earned cash in a savings account is totally up to you. So long as you’re aware of how much you’re really paying for liquidity and deposit insurance.

Savings accounts aren’t the only solution, though.

Consider the benefits of physical gold and silver. They’re not only resistant to inflation, they’re also historical safe-haven assets. Instead of a misleading APY, physical precious metals offer you long-term stability that can’t be inflated away. Gold and silver are almost as liquid as cash in the bank. And your physical precious metals are your property (unlike a bank deposit, which is a bank liability or IOU to you, the customer). Gold and silver cannot default, cannot go bankrupt. Ever.

Savings accounts are supposed to offer low risk and low reward. Right now, it seems to me they offer a combination of low risk and guaranteed loss of purchasing power instead.

There are two ways to own gold and silver. You can purchase them and have them delivered to your home. Or, you can use the retirement savings funds you’ve already set aside for your future to open a Precious Metals IRA.

They want a reason to “build back better” in preparation for The Great Reset.”

One of the reasons I was reluctant until last year to take on precious metals sponsors is because the vast majority of them support Democrats. Some of them work directly with proxies of the Chinese Communist Party. It’s an ugly industry that thrives on fearmongering and the suffering of Americans, so I stayed clear until about a year ago when it become necessary to research and vet out the companies to see if any of them were America First organizations. Out of over two dozen companies I checked, I found only three that don’t work against this nation.

Keep that in mind as you read through the article below. Unfortunately, the precious metals companies recommended by many other conservative and alternative news outlets are owned and managed by people who take your money and donate some of it to Democrats. I suppose that makes sense for some precious metals companies since tanking the economy benefits precious metals prices and Democrats are great at tanking our economy. I’ll only recommend companies that aren’t trying to destroy us, and sadly that’s barely over 10% of the companies I checked out. Here’s Gary’s article…

There has long been a cottage industry of telling Americans they don’t save enough. One of many Wall Street Journal articles in this genre, for instance, was Kelly Greene’s “Workers Saving Too Little to Retire.” The U.S. government’s AboutUSA.gov site even included “Save more” on a list of recommendations for citizens’ New Year’s resolutions.

But our government has long been waging war on savings, making it the cause of, rather than the solution to, low savings rates. As a result, Americans have fewer resources for investment, innovation, technological advancement, and education, which reduces real economic growth and citizens’ wellbeing. Recent policies have illustrated this to an impossible-to-miss extent.

For years, governments at all levels imposed COVID-related restrictions and shutdowns that forced vast numbers of Americans to draw heavily on their savings. Government “solutions,” like cash handouts before elections and higher unemployment benefits, only increased government debt, the financing of which requires that the government suck even more savings out of productive, private use.

The recent jump in inflation is the predictable effect of recent monetary policy profligacy, another part of government’s war on savings. Just ask any American who was faced with near double-digit inflation, but whose bank accounts were still paying interest rates under one percent.

Similarly, the President’s college loan proposal tells people to take past educational expenses they had already agreed to pay back out of other people’s pockets instead. Further, it tells them to borrow more for future education expenses as well, rather than to save for it, as they will be less likely to have to pay what they borrow. Saving less for college, and borrowing still more in order, ultimately, to raid other Americans’ pockets will also leave us with fewer resources to save.

But such recent sorties in the government war on Americans’ savings are just the latest in a long list.

One huge policy-induced savings problem is that people have been led to substitute Social Security’s vastly under-funded promise of retirement benefits for funds they would have saved to finance their “golden years.” Not only do those Social Security taxes and future-benefit promises crowd out savings, but because promised benefits are trillions of dollars greater than current rates of taxation can sustain, people anticipate being “richer” in retirement than they will actually be, reducing saving even more. Those who save enough to provide well for their retirement also face income taxes on up to 85 percent of their Social Security benefits as well, lowering the rate of return on such responsibility.

Social Security exacerbates the crowding-out problem of government budget deficits, which take funds that would have gone to private investment and divert them to government. The federal debt has skyrocketed to “pay” for recent government “rescues,” but Social Security’s unfunded liabilities are even greater than the official federal debt.

Taxes on capital also reduce saving by reducing the after-tax returns on investments.  These include property taxes that, while relatively small percentages of the capital invested, are sizable fractions of the annual income generated. Then state and federal (and sometimes local) corporate taxes take further bites from income, reducing the after-tax return still more. The implicit “tax” imposed by expanding regulatory burdens must also be borne, before earnings can go to investors.

Personal income taxes at up to three levels of government reduce saving even more. Investment income (what is left after other taxes) is taxed again, if paid out as dividends. Earnings from saving and investment can also trigger additional tax burdens like phase-outs of income tax deductions.

If investment earnings are retained and reinvested, increasing asset values, they are taxed as capital gains upon sale. Further, there are substantial limits on using losses on some assets to offset gains on others, as those whose portfolios have taken big hits have been made well aware. And even increases in asset values that only reflect inflation, which is a far greater issue now than in the recent past, are taxed as if they were real increases in wealth. That can be a huge problem: in the 1970s, the real (inflation-adjusted) return on the S&P 500 was negative, due to high inflation. Yet people and companies still had to pay taxes, often at very high marginal tax rates, on illusionary profits.

Many other government policies also reduce saving.

Coverage from Medicare, whose unfunded liabilities are far greater than Social Security’s, reduces incentives to save for future medical costs. Further, current earners, who must cover three  quarters of the cost, are left with less income to save. Medicaid (MediCal where I live) covers nursing home costs only after other assets are exhausted, undermining another motive to save (and has created an entire industry dedicated to gaming the system).

Unemployment benefits, along with food stamps and other poverty programs, also reduce the need to save “just in case.” This mechanism was recently supercharged with unemployment benefits that often exceeded what people could have earned in their current jobs. And as we have seen with any number of disasters, government steps in to assist those who proclaim they “need” it, reducing the incentives for financial self-responsibility.

Estate taxes also reduce successful savers’ ability to pass on assets to heirs, another major motive to save.

Each of these government policies acts as a disincentive to save. Together, they heavily punish saving, reducing it to the point that many do not have any appreciable savings (which many then claim is a “market failure” government must fix, rather than a government failure). And the recent ratcheting up of anti-savings policies escalates the policy war on savings, which is also a war on investment and economic growth. Truly addressing the savings problem doesn’t require more government involvement; it only requires that the government stop undermining our incentives to save in all the ways it does now.

Article cross-posted from AIER.