Saving money doesn’t work like it used to because the monetary system has stopped reliably rewarding it.
In “The End of Monetary Hedonism,” Jeff Deist (Chief Risk Officer at Monetary Metals) describes how his grandfather approached money.
He earned a modest paycheck, spent less than he made, and saved the difference.
- He didn’t buy the decade’s most popular stocks.
- He didn’t trade on margin.
- He didn’t short the market.
- He didn’t hedge commodity positions.
- He didn’t make investing a second occupation.
He relied on thrift and compound interest. But this approach rested on a straightforward relationship between saving and production.
What happens when that relationship incentivizes consumption?
How saving helps finance future production
When people don’t consume everything they earn, they make resources available for future use.
Financial institutions can direct those savings toward businesses that purchase equipment, expand inventories, develop products, or otherwise increase production.
- Interest compensates savers for postponing consumption and making their capital available to borrowers.
- Higher rates encourage saving while forcing borrowers to use capital more selectively.
Over time, this process empowers businesses to produce more with fewer resources.
Saving therefore does more than prepare households for future expenses. It also supports the capital accumulation that makes greater prosperity possible.
Does money in a savings account lose value?
Yes, money in a savings account can lose “value” (in terms of purchasing power) even while the number of dollars in the account increases.
Suppose you deposit $10,000 into an account earning 2%. After one year, you have $10,200. In nominal terms, you’ve gained $200.
But dollars matter because of what they can buy.
If the cost of housing, food, insurance, healthcare, education, and other necessities rise faster than your account balance, your additional dollars purchase less.
This leaves the ordinary saver exposed to a quiet form of loss
The central bank aims for inflation of 2% over the longer run[1]. If it achieves that target exactly, the general price level still rises year after year.
At 2% annual inflation, something that costs $100 today would cost approximately $122 after ten years.
A savings account must earn enough merely to keep pace before its owner gains any purchasing power.
What is the real return on savings?
The conventional real return on savings attempts to measure how much purchasing power a saver gains or loses after accounting for inflation.
A common shorthand is:
Savings rate − inflation rate = approximate real return
This formula can help illustrate the saver’s predicament, but it shouldn’t be mistaken for an objective measurement of value.
(We explore this concept more fully in “Real vs. Nominal Interest Rates.”)
For savers, the practical question is more personal:
Did the interest earned increase what my savings can buy?
Answering that question requires comparing the return available to you with the prices that matter in your own life.
The Grandfather Index
The Grandfather Index is a simple way to express this problem: the return available to an ordinary saver (through savings accounts, short-term certificates of deposit, or money market funds) vs. the rate at which that saver loses purchasing power.
- A positive gap means the saver can increase purchasing power without assuming substantial investment risk.
- A negative gap means the saver falls behind despite practicing thrift.
Does patience receive a reward or a penalty?
The Grandfather Index isn’t intended to replace a formal economic statistic, nor does it resolve the limitations of consumer-price indexes.
It functions as an intuitive test of whether the monetary environment rewards the behavior that empowered Jeff’s grandfather to build wealth (watch the video above).
- Can an ordinary person spend less than they earn, save the difference in a straightforward account, and become more financially secure over time?
- Or must they become an investor simply to avoid losing ground?
The larger and more positive the gap, the more the system rewards delayed consumption.
The further it falls below zero, the more strongly the system encourages people to spend, borrow, or speculate instead.
Why are savers forced to chase yield?
Even when traditional savings fail to preserve purchasing power, people still need to save.
- They still need emergency reserves.
- Young families still need down payments.
- Parents still need to prepare for education expenses.
- Workers still need to finance retirement.
- Retirees still need income from the capital accumulated during their working lives.
But preserving purchasing power may require them to move beyond simple savings accounts.
Unfortunately, each move introduces new risks.
- Bond prices can fall when interest rates rise.
- Stocks can lose value during a downturn.
- Rental property requires capital, expertise, and ongoing management.
- Speculative assets can experience extreme volatility.
- Private investments may be difficult to value or sell.
These assets can serve legitimate purposes within a diversified portfolio—when people buy them because the risks suit their goals.
But if people buy them because ordinary saving no longer offers a viable path forward, the result is an inversion of saving.
Instead of accumulating capital gradually, people must expose accumulated capital to greater uncertainty merely to maintain its usefulness.
Saving becomes indistinguishable from investing, and investing drifts toward speculation.
Low interest rates encourage debt and speculation
The return earned by a saver is also a cost paid by a borrower. When rates remain artificially low, saving becomes less rewarding while borrowing becomes more attractive.
- Households can finance larger purchases.
- Investors can leverage rising asset prices.
- Companies can borrow to:
- acquire competitors
- repurchase shares
- pursue projects that make less economic sense at a higher cost of capital
- Governments can expand their debts without immediately confronting the full cost.
As borrowed money enters stocks, housing, and other assets, prices can rise. Those gains reward leverage while savers watch the assets they hope to buy move further out of reach.
But low rates don’t eliminate the cost of capital, they obscure it.
- A business financed at an artificially low rate may look profitable even if it uses labor and resources less effectively than competing uses.
- An investment may appear sound only because buyers assume credit will remain cheap and another buyer will later pay a higher price.
When financing costs eventually rise, the weakness becomes visible. And when that happens, the saver suffers twice: first through inadequate returns and later through the instability created by the resulting debt and speculation.
How financialization changed the meaning of saving
Finance performs an essential economic function. It connects savers with productive borrowers, helps price risk, and directs capital toward competing uses.
Financialization occurs when financial activity becomes increasingly detached from that purpose.
Companies may devote more attention to share prices, capital structures, acquisitions, and cheap credit than to producing better goods at lower costs. Profits increasingly depend on moving money, restructuring claims, or benefiting from asset appreciation.
Households experience a similar transformation. Where a saver once asked “How much of my income can I put away?,” today, the questions multiply:
- Which asset will outperform inflation?
- What will the Federal Reserve do next?
- Will mortgage rates fall?
- Is the stock market overvalued?
- Which sector will attract the next wave of capital?
- How much risk must I accept to reach my goal?
Everyone becomes a portfolio manager
Asset prices can rise without a corresponding increase in productive capacity. Households may appear wealthier on paper even as the income their savings generate declines.
The culture shifts from producing and accumulating toward borrowing and trading. Success depends increasingly on access to credit, financial markets, and newly created money.
Monetary Metals describes one element of this system as financial repression: savers have little control over the terms on which their capital is used or the return they receive.
The harm extends beyond individual account balances. A society that discourages saving also weakens the pool of real capital available for future production.
Can sound money make saving worthwhile again?
A sound form of money should enable people to carry value from the present into the future.
It should not:
- require constant management
- steadily lose purchasing power by design
- force every saver to become a speculator
Gold has served this monetary function across centuries because it is durable, scarce, divisible, and independent of any government or financial institution’s promise to pay.
No central bank can create additional gold with a policy announcement or keystroke.
Preserving gold isn’t the same as compounding it
Conventional gold ownership leaves one issue unresolved: an ounce of gold remains an ounce. It doesn’t automatically produce additional gold.
Investors may benefit when the dollar price of gold rises, but measuring gold exclusively by its dollar price returns them to the currency they sought to escape.
If the goal is long-term accumulation, preservation alone can’t fully reproduce the experience of earlier savers. Our grandparents didn’t merely hold dollars, they earned additional dollars through interest and let them compound.
Gold yield applies that principle to sound money.
Gold owners can make their metal available for productive use and earn a return paid in additional gold.
This creates a different model of saving:
- The asset being saved is gold.
- The return is denominated in gold.
- Success can be measured by the number of ounces accumulated.
- Compounding doesn’t depend entirely on a rising dollar price.
This approach restores a core feature of traditional saving: patience can produce more of the asset being saved.
To explore this further, read “Investing in gold vs. gold investing: What’s the difference?”
Restore the ability to save in gold with Monetary Metals
The decline of ordinary saving doesn’t mean that thrift stopped working. It means that thrift can’t fulfill its purpose when the currency loses purchasing power faster than your savings grow.
Forcing households to assume greater risk doesn’t solve that problem. It transfers the burden of a distorted monetary system onto people trying to prepare for the future.
Sound money alone can’t restore every economic condition that earlier generations experienced.
But saving in an asset that can’t be diluted, while earning a return in that same asset, restores the essential relationship between patience and accumulation.
Monetary Metals connects gold owners with businesses that use gold productively. You can earn a yield paid in gold, increasing the number of ounces you own without selling your metal for dollars.
To restore the connection between saving and accumulation, discover how to earn a yield on gold with Monetary Metals.
