Higher Interest Rates for Savings Accounts: Brazil Has the Right Idea
Posted on March 19, 2009
Read an interesting article the other night about how the President of Brazil, Lula, is looking to make changes in the savings system in Brazil so that larger investors can actually receive a higher interest rate on direct bank savings accounts. This is being investigated so as to provide an attractive risk-free alternative to government bonds, as interest rates fall in the country. Current interest income in savings account in Brazil is a little more than 6%. The full article (in Portuguese) is available here.
Interesting how a supposed third-world country, has a better sense of economic reality that the US. As opposed to Brazil’s desire to help savers, the Fed and Treasury in the US, are attempting to destroy savings, and encourage rampant speculation, by giving virtually no interest on bank savings accounts and by printing unlimited amounts of money. Make sense?
Incidentally, Lula had an interesting comment when the crisis first started nearly two years ago. He wondered why Brazil was struggling to get investment grade status, and the US was still considered investment grade. Brazil he said has a huge current account surplus, and the US is up to its eyeballs in debt (and now drowning in debt). Which country sounds like the better credit, he wondered? The problem, of course, is that the rating agencies are owned by the US.
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Brazil’s inflation rate for the last 9 months has averaged approximately 6%. See http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=BRL for details.
Additionally Brazil has an integrity risk that is different than the USA’s. See http://www.kpmg.com.br/publicacoes/forensic/Integrity_Survey_2008_2009.pdf
If savers in Brazil are only getting a 6% risk free return on investment, their real rate of return in 0%. This is the equivalent of investing in the short end of the US yield curve, where interest rates approximately match the inflation rate but nominal rates are approaching 0%. If one considers asset price deflation in the USA over the last year or so, one could argue that investment in the USA debt has had a very high real rate of return.
Investors in all instances should not be seduced by nominal rates of return but should instead focus on real rates of return. The 1980 14% percent return on short term treasury debt was actually a negative rate of return when inflation reached a short term high of 18% and asset price inflation (appreciation) was running at an even higher rate.