FED policy maker says low rates to 2015

[Mulligan]

I'm still trying to figure out the problem with low inflation. So I'm losing 0.1% to it on my 1% CD instead of losing 2% to it on my 10% CD?

And low-yield Treasuries. Hey, China, want some more?

And, gosh, imagine if the only way to earn a return over inflation was to hold low-volatility dividend stocks for years or even decades...

Maybe it has only been local to me, but I used to have no problem getting CDs that paid significantly higher than inflation. I got a 4 year CD that paid 6% as recently as 2006, and inflation wasn't that high in 2006. Plus high CD rates with relatively high inflation is good for people with high assets in CDs.
Example- a person with 1million in CDs with 6% interest (6% inflation), who spends $40k a year, is still $20k ahead at the end of the year (excluding taxes).
Now take the same person, same scenario except plug in 2% as the variables, the same guy now has only $980,000 instead of 1,000,020. That is why they call it the war on savers. Even accounting for the next year budgets going up 6% and 2% due to inflation, there is still a significant gap in assets between the two scenarios. If I am wrong, someone please correct me!

 

[samclem]

If I am wrong, someone please correct me!

Well, since you asked . . .
In both the 6% and the 2% case, the guy's portfolio is worth exactly the same (has the same buying power) at the end of the year as it did at the start. You can take out any amount you wish for his annual "draw", in neither case is he making (or losing) money.

Except: If the money is in a taxable account all the interest he was paid is subject to tax. Even though he really made zero true gains in either the 2% or the 6% case (because each dollar is worth less than it was due to inflation). Now, is it better to pay tax on $20K or on $60K? Each dollar in the $60K case is only worth 4% less than in the $20K case, but he has to pay about 3 times as much tax.

 

[Mulligan]

Well, since you asked . . .
In both the 6% and the 2% case, the guy's portfolio is worth exactly the same (has the same buying power) at the end of the year as it did at the start. You can take out any amount you wish for his annual "draw", in neither case is he making (or losing) money.

Except: If the money is in a taxable account all the interest he was paid is subject to tax. Even though he really made zero true gains in either the 2% or the 6% case (because each dollar is worth less than it was due to inflation). Now, is it better to pay tax on $20K or on $60K? Each dollar in the $60K case is only worth 4% less than in the $20K case, but he has to pay about 3 times as much tax.

Thanks, and I am following you, Sam. But maybe its just simpletons like me, but it is way more palatable to see your money grow even if its just relative terms instead of absolute terms. It seems reassuring even if its false that the money grew over a year instead of instead of drawing down.
Concerning inflation rates and CDs. I checked that inflation was 4% in 07, and I got a 6% CD in fall of that year. Assuming inflation is about 1.5% now, I don't see any CDs that pay 3.5%. I guess I have to accept the fact that those days are over. I guess I am more of a complainer than most because I am more of a CD guy than investor. Although I have stepped up my aggressiveness the past few years and have been loading up on I Bonds