Critics believe America’s central bank, the Federal Reserve, is a threat to retirement savings.

Many critics believe the Fed’s policy of quantitative easing (QE) destroys savings by causing inflation. In quantitative easing, central banks make enormous purchases of stocks, bonds, and other assets to boost the economy. For example, the Federal Reserve bought $8.7 billion worth of bond exchange-traded funds (ETFs) in the first eight months of 2020.

The idea behind QE is to inject more money into the economy to encourage more economic activity. To give companies reasons to expand, hire more people, and buy more goods from supplies, for example.

The critics’ fear is that the Fed’s ability to create money will allow it to pump unlimited amounts of dollars into the economy. Increasing the money supply can generate inflation by lowering the dollar’s value.


How Inflation Destroys Retirement Savings

Inflation destroys retirement savings by decreasing the value of cash in savings accounts, or CDs. For example, $100,000 in cash would lose $9,100 in buying power with the 9.1% June 2022 inflation rate.

Interest will not protect savings from inflation. To explain, the average interest rate for U.S. savings accounts was 0.11% on July 20, 2022, according to Bankrate. However, the U.S. inflation rate was 9.1% in June 2022. That means the money in a savings account lost 8.95% of its value despite the savings rate.

Inflation destroys even “high-yield” savings accounts. Bankrate estimates Citizens Bank’s online savings account paid a 1.75% interest rate on July 23, 2022. Thus, with the current inflation rate, money in a Citizens’ Bank savings account still lost 7.31% of its value.

Additionally, inflation can lower the value of stocks by decreasing economic activity. To elaborate, in inflation, prices usually rise faster than income sources such as Social Security or wages. Hence, people have less spending money, which leads to less economic activity.


Did Central Banks Create Inflation?

Even some central bankers are blaming central banks for inflation. Mervyn King blames the Bank of England’s QE for the United Kingdom’s 9.4% inflation.

King called quantitative easing an “intellectual mistake” in remarks to Sky News. Notably, King led the Bank of England, the United Kingdom’s central bank, from 2003 to 2013.

An official report from Australia’s central bank blames QE for that nation’s 5.1% inflation. The Reserve Bank of Australia’s official autopsy of the COVID-19 QE admits the institution overestimated the extent of economic collapse, which led to inflation when the economy recovered.

Hence, the autopsy concludes the Reserve Bank helped cause inflation by getting QE wrong. Governor Philip Lowe admits the Reserve Bank of Australia will have to interest raise rates by 25 to 50 basis points to counter inflation.


Are Central Banks Responsible for Inflation?

Central bank critics note that Japan had a 2.2% core inflation rate in June 2022. In contrast, the United States had a 9.1% inflation rate and the United Kingdom had a 9.4% inflation rate in the same month.

Japanese leaders engaged in a different version of quantitative easing than their British and American counterparts. American and British leaders did not respond to the economic downturn of 2008 with massive spending programs. Instead, quantitative easing and the bailout of failing companies were the only responses.

In contrast, Japanese Prime Minister Shinzo Abe engaged in a massive government spending program the press calls Abenomics. For example, Abe’s government expanded the military and built new high-speed rail lines. However, quantitative easing by the Bank of Japan was part of Abenomics.

Abenomics did not restore Japan’s economic growth, but it prevented inflation. The Japanese example shows how quantitative easing combined with government spending could limit inflation.

Notably, both the Biden administration in the United States and the UK’s Conservative government, have adopted elements of Abenomics. For example, Biden has proposed a $5.8 trillion federal budget that includes $550 billion in new infrastructure and a $30 billion defense increase.


Can You Protect Your Savings From Central Banks?

Predictably, many people are trying to protect their savings from central banks, or rather, central bank-created inflation.

There are two popular strategies for protecting savings from inflation. The first strategy is to move savings from cash to assets that are less vulnerable to inflation. Those assets include gold, other precious metals, collectibles, and real estate.

No asset is immune from inflation. Yet, many people believe physical assets, such as gold and real estate, are more likely to retain their value.

Some people think gold retains value because it sits outside the cash economy. Others believe real estate retains value because of demand—people will always need homes.


Inflation Resistant Assets

The second strategy is to invest in assets that could appreciate faster than inflation. Such assets include stocks and cryptocurrencies. For example, the S&P 500’s average annualized return was 10.49% between 1926 and 2021. In some years, the S&P 500 delivered a higher return, for instance, 26.89% in 2021.

Individual retirement accounts and 401(k)s are an attempt to use this strategy to protect savings from inflation. However, stocks are vulnerable to massive losses. The S&P 500 lost 38.49% of its value in 2008.

Neither strategy is perfect, but a combination of both could protect your savings from the central bank’s caused inflation.

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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.

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