NCPA - National Center for Policy Analysis

The Death of Cash as a Vehicle for Saving

December 9, 2014

Cash is no longer a viable vehicle for saving, contends Senior Fellow David Ranson in a report from the National Center for Policy Analysis. The Federal Reserve's zero interest rate policy has encouraged spending rather than saving, and low-risk options like U.S. Treasury bills provide little in the way of returns, leaving investors to take on risky and volatile assets in order to generate wealth.

This situation is a problem not just for individual investors, but for the American economy, which relies on capital and savings to generate growth. 

But though cash is no longer a viable savings vehicle, Ranson says there is another way to generate decent and stable returns: by using a specific mix of inverse, volatile assets, investors can produce returns similar to those previously produced by cash. For example, stocks and gold have a highly inverse relationship: when the dollar rises, gold falls, and vice versa. By investing in a mix of equities and gold, investors can guarantee a safe return. Ranson notes that from 2000 to 2010, S&P 500 stocks returned just 1.4 percent annually, while gold rose at 17.5 percent, but in the previous decade, gold fell by 3.5 percent annually while the S&P 500 returned generated an 18 percent return annually. Similarly, commodities are inversely related to high-quality bonds, so investing in the two simultaneously can generate returns that are much less volatile than investing in commodities or bonds alone.

By investing in a mix of stocks, bonds, gold and commodities, Ranson says investors can reap high returns with long-term stability.

Source: David Ranson, "The Death of Cash as a Vehicle for Saving," National Center for Policy Analysis, December 9, 2014.  

 

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