Why saving is for suckers

By Jon Markman

If there's one thing that seems like it has to be a good idea, it is saving money. I mean, it's like walking grandmas across the street, eating hot dogs on the Fourth of July and rooting against the Yankees, right? A concept that seems above reproach.

Yet the reality is that in times of low interest rates, a credit bull market and a steadily advancing stock market, socking income away in a savings account may be the dumbest idea in the world.

In fact, I'll go one step further and say it flat out: Saving is for suckers.

The reason this is true explains a lot about where we are in the business cycle right now and how the banking establishment and government conspire to rip off the public at every turn.

The truth about saving

Here's the deal: When you put a portion of your income into a savings account, a money market fund or a certificate of deposit at a bank or brokerage, it appears from your perspective that you are placing it in a vault for safekeeping. But the truth is that you are lending your money to the bank at a rate of about 1%. The bank then laughs behind your back as it turns around and lends it to the government for 4%, to big companies at 6% or to smaller companies for 8% or more.

The difference between what the bank gives you for your cash and what it earns from lending it out at higher rates is called its "spread," and it amounts to the bank's profit margin. That spread right now is so large -- as wide as 8 percentage points -- that even many stupid bank executives could not avoid earning huge profits this year.

Mind you, there are some bankers who are so lame that they won't make money. But for the most part, the profitability of banks right now is so obscene that any tricks they pull in their earnings reports this month will be intended not to hide losses (as bears would have you think) but to hide their gains. A steep yield curve -- which occurs when short-term interest rates are very low relative to long-term interest rates -- is a direct pipeline from your savings account to bankers' bonuses.

There is a way for you to halt this robbery and redirect the process in your favor. But before I get there, let me note that the cover story for this mass misappropriation of the public's money is quite simple and may actually have a positive purpose.

A spin on the credit cycle

The government wants banks to become as profitable as possible now, after their incredible screw-ups of the prior few years, because to the extent that they can regain their balance by siphoning income from their customers, they will not need to hit up Congress for more emergency relief funds. Thank goodness for small favors, right?

Video: Still too many skeptics, Markman says

It's a little hard to comprehend at first, but let me tell you how the credit cycle works, according to independent credit analyst Brian Reynolds, and then I'll tell you how to intervene:

• First (in this case, from 2003 to 2006), you have a normally strong economy and equity bull market. Banks make loans to companies, which use the proceeds to expand, and all is well in the realm.
• At some point (2007), banks get crazy and lend too much, and companies and individuals go crazy and expand too much, until eventually borrowers can't pay their debts and a credit crisis ensues.
• As cash flow tightens (2008), companies turn to low-cost lines of credit they obtained from banks during better times but never used, and banks are forced to lend them at below-market levels, weakening their structures.
• The central bank cuts interest rates, giving commercial banks some breathing room. Banks then spend the next year (2009) reducing loans to the public and less-creditworthy small companies as they bolster their own broken balance sheets via the carry trade, which is that pipeline from consumer savings accounts to their own treasuries.
• As banks cut back on loans to everyone (2009), companies then turn to the bond market for cheap funding. Banks don't mind, because they are fattening up by borrowing cheaply from the public, which has been stampeded and scared into stowing income in savings accounts.
• The Federal Reserve eventually raises interest rates, killing the value of the carry trade (late 2010). Only then do banks start to make commercial and industrial loans, then loans to the public.
• Banks ultimately become more competitive with each other and the bond market and then start to go crazy again, issuing loans to any business or individual with a pulse, and that's when the credit cycle really goes nuts again (2011 to 2012).

Continued: A simple plan

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