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Dear Masters of the Universe:

Just wanted to send a note of thanks for making it so much more attractive for me to save for my children’s college education since you started monkeying around with the economy. With yesterday’s announcement that the Fed will start intervening in the long-term Treasury market, the one remaining attractive savings option I had has been eliminated. Long-term treasury rates are sure to plunge to below 1% very shortly. My daughter will be attending college in 15 years. As a baseline, I was hoping to have available $30,000 for her, for each year of college she attends. One simple way to do that (and to avoid interest rate risk, which I should be seeking now) is to buy and hold to maturity zero-coupon bonds that stand to mature at the time she gets into college, and each year thereafter.

With rates where they were when I started saving for her, it would have required less than $15,000 put away today in order to have the necessary $30,000 when she got into college. Now, it will take me over $25,000 to accomplish the same task. Interesting strategy for a group of people that think college is too expensive, and are pushing everyone to go at least for a little bit. While it takes universities many years to increase their tuition by $10,000, you guys have managed to do it just about overnight!

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Furthermore, investing in the stock market may not be as attractive as it once was, given the uncertain investment environment you have stirred up, given the fact that it is likely for you to continue to crack down on greed, and keep up the double taxation of dividends, so that is one less option for me right now too.

Should I buy commodities? Sounds a bit risky for a college savings plan, but given that you are running the printing presses on full blast, maybe that is an attractive option. However the TIPS spread does not seem to indicate that this would be such a hot idea either.

Should I put cash under the mattress? Not a good idea either.

Maybe I should overextend myself on a house purchase, and then go buy a couple of jet-skis, flat-screen TVs, snowmobiles and power boats. That is what you want after all, isn’t it? And if I have nothing saved by the time I get to college, won’t I be rewarded with generous financial aid packages?

Why do you make it so difficult for folks to wish to be prudent? Pray tell my dear masters.

One Response to “Thanks Ben, Tim, Hank, W, and Barack!”

  1. Harry Wood says:

    The Fed can affect long-term rates only by what it does, along with the Treasury, to the value of the dollar. While the Fed can tinker with short-term rates, it has always been helpless in doing anything about long-term rates.

    Depending on how fast people catch on, the Fed can buy long-term treasurys, raising the price and lowering yield. But what are they going to buy the treasurys with? Federal Reserve Notes? Soon people will expect more inflation. Even Barney Frank will demand a higher inflation adjusted yield, or get rid of their cheapened dollars elsewhere.

    Right now the spread between treasurys and corporate bonds is wide, largely due to the uncertainty our government has created. Electric Utilities? Who knows how bad cap-and-trade will be? Railroads? What will their fuel cost be, and how many little cars will Detroit ship to Los Angeles? How about Caterpillar? Will it benefit from shovel-ready projects, or will it be singled out by Chuck Schumer for having unacceptable profit margins?

    But whatever they do, Exxon Pipeline bonds will be OK. If you can find any.
    Just wait awhile, and long-term yields will rise.

    Regarding your folly in saving money for your daughter’s education, forget it. You are better off spending it and being poor when she graduates from high school, since whatever you have saved will be sent to the college of her choice anyway. That is, unless you hope to save a few million. If you taught at Florida State, you could put everything into a house, which would be untouchable after you declared bankruptcy just before your daughter matriculated. You are then assured of a free education for her, with the river of money Obama has promised “our children.”
    Cheer up. It could be worse.

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