Foreign Solutions to Domestic Problems

People interested in the safety of investing short term cash in certificates of deposit who are unhappy with yields they’ve been receiving may want to consider some other options. The total return on CD’s has been hammered throughout the economic crisis by the compounded effects of the declining U.S. Dollar and the fiscal stimulus packages designed to lower interest rates and create inflation. This has created a net negative return for the people who are most reliant on income generating, principal protected investments.

The fiscal stimulus plans have been designed to keep interest rates low with the intention that low rates will spur economic growth. The hope has been that businesses will take advantage of these low rates by borrowing money and putting it to work increasing their gross revenues and hiring more workers in the process. However, early on in the economic crisis when the Federal Reserve Board began printing money and slashing rates, the money they created was bottlenecked by the banking industry trying to heal their own balance sheets and make up for their own overextension into the sub prime real estate lending market. Thus, much of the initial stimulus never made it to small businesses that might have been willing to borrow early on. The depth and severity of this crisis has since scared off those same businesses as it has dragged on and on with no pickup in consumer demand. Now that the money is finally flowing, businesses have no need to ramp up production.

The official unemployment rate is 3.5% higher now than it was when the economy collapsed in October of 2008. I have a hard time cheering about an unemployment rate just because it’s less than 10%. Perhaps a more telling statistic is that the number of employed people aged 16 and over has declined by 5.8 million people over the last two years. The fiscal stimulus package has not been designed to create employment. The effect is a mild opiate for the masses in the form of increased subsidies and treatment of the economic symptoms like home and auto loans without establishing a rigorous protocol for fixing the economy and weaning the public off of its pain medication.

The haphazard way in which the fiscal stimulus has been doled out has been viewed by the world as U.S. Dollar negative. The U.S. Dollar Index, which is down approximately 14% since the crisis began, only tells part of the story. This index is calculated by the value of our Dollar against a basket of foreign currencies. The Euro Currency, Japanese Yen and the British Pound dominate that currency basket. These three countries, which total more than 80% of the U.S. Dollar Index each have their own economic crises to deal with and are therefore, not reflective of the global value of our currency.

The only real source of global inflation at the moment is in the emerging countries. China is main headline and rightfully so. China holds the key to the next wave of developing middle class. Their growing consumer base will fuel the next round of global economic recovery, along with India, Brazil and numerous smaller Asian economies. These countries are experiencing their very own, “Industrial Revolutions.” Their metamorphosis is happening much faster than the one in our history books and it is their healthy economies that can provide those seeking principal protected earnings some measure of value.

Those of you invested in domestic money markets and CD’s are well aware of the deleterious effects of declining interest rates and a falling Dollar. The compressed yields aren’t enough to offset the waning value of the principal denominated in U.S. Dollars. Fortunately, the global economy brings global alternatives. Our firm trades currency futures. We do not have access to foreign certificates of deposit or, global money market accounts. These ideas are from my personal finance management and are being passed along because they are investments that I’m personally entertaining.

A brief survey of domestic six month CD’s provides us with investment opportunities ranging from a low of 0.05% at Fifth Third Bank to a high of 0.20% at Chase and PNC Bank. Compare those with the following six- month foreign currency deposit rates; South African Rand- 3.68%, Norwegian Krone – 0.6%, Mexican Peso – 2.14% and the Australian Dollar at 3.25%. These investments are not free money and the risks need to be understood. These risks include but are not limited to, the currency exchange rate between the U.S. Dollar and the currency you choose to invest in and also include interest rate policy shifts within the individual countries. However, as it becomes clearer and clearer that the United States’ Federal Reserve Board is going to continue to push for lower rates and flood the market with cheap Dollars via their second round of Quantitative Easing, it becomes increasingly important to protect the value of what we have and that means trading shiftless Dollars for global industrial development.

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