Zero Interest Rate for U.S. Series I Savings Bonds - Letter to U.S. Senators

July 2008

The following letter was mailed to all 100 United States Senators on July 7, 2008.

July 6, 2008

Senator John McCain
241 Russell Senate Office Building
Washington, DC 20510

Subject: Zero Interest Rate for U.S. Series I Savings Bonds

Senator McCain,

This weekend, I joined my country in cheerful celebration of a distinctly American holiday—the 4th of July! Amidst the fireworks and festivities, I took pause to remember a man to whom we owe much: Thomas Jefferson, author of the Declaration of Independence. Like the Liberty Bell first summoning citizens to the reading of this country’s immortal Declaration, Jefferson’s words continue to ring forth with clarity, forever echoing in our American consciousness. And in so striving to live these ideals of freedom, let us not forget the call to financial independence found in one of Jefferson’s lesser known writings:

“I place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.” - Thomas Jefferson

Jefferson knew firsthand the danger of debt. Brilliant though he was, Thomas Jefferson struggled for many years under the weight of numerous personal debts, and I believe that we would all benefit by heeding the warning born of his own personal experience and hardship.

Unfortunately, the U.S. national debt is now $9,473,062,472,197.15—and growing! We continue to indebt ourselves to foreign countries, undermining our financial independence and in consequence, threatening the future sanctity of our freedom.

As a result, I have voluntarily taken it upon myself to start financing ‘My Share’ of the national debt through the purchase of U.S. Savings Bonds. I believe that a citizenry in support of its debt will be more likely to balance the national budget and will become more responsible in matters of both personal and public finance. After all, freedom isn't free!

I began saving at the beginning of the year, starting with little more than spare change to purchase my first Series I Savings Bond. Like many Americans, I work hard--and enjoy getting paid for it! And with a new reason to save, I started looking forward to the purchase of more bonds after earning every paycheck. After just a few months, I’m now up to $3,798 worth of Series I Savings Bonds, meaning that I am financing 12.209% of ‘My Share’ of the national debt. I still have a long way to go, but it’s a great start and a great feeling—helping my country while at the same time saving for my future.

The added benefit is that Series I Savings Bonds were designed to return a fixed rate over inflation, meaning that these bonds will always provide a positive real rate of return. This is great, because my money will always continue to grow in purchasing power, since the composite rate is a fixed interest rate in addition to what is necessary to keep pace with inflation.

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

There’s only one problem. As of May 1, 2008, the fixed rate for newly purchased Series I Savings Bonds has been set at 0.0% (zero). Frankly, this doesn’t make much sense. A fixed rate of 0.0% (zero) defeats the whole purpose of these bonds, since in real purchasing terms, it means that an investment will never be worth any more than it is today. What’s the point?

Perhaps the fixed rate was set to 0.0% (zero) because of recent inflation fears. On May 1, 2008, the semiannual inflation rate, which is based on the Consumer Price Index for all Urban Consumers (CPI-U), was determined to be 2.42%, meaning that Series I Bonds will now pay an annualized 4.84% to compensate for the effects of inflation. However, by comparison, the semiannual inflation rate was 1.91% on May 1, 2000. So if the semiannual inflation rate is only 0.51% more than it was 8 years ago, why is the fixed rate now 0.0% (zero) instead of 3.60% like it was in May of 2000? What changed?

Not to mention that Series I Savings Bonds must be held for a minimum of 1 year before being cashed, and the bonds will forfeit 3 months worth of interest if redeemed within the first 5 years of ownership. Therefore, these bonds are designed to be longer term investments. The problem is that inflation goes up and down, and the whole point of Series I Savings Bonds is to protect average investors from such price fluctuations. But since the fixed rate is locked at 0.0% (zero) for the entire 30-year life of the bond, if say 3 years from now, the semiannual inflation rate were to drop to 0.0%, then Series I Savings Bonds purchased today would not earn any interest at all. That hardly seems right.

Even if increasing the fixed rate required the government to pay interest in excess of current market rates, it would at least encourage national saving among Americans, which seems preferable to paying interest to the foreign governments that now collectively own over $2.6 trillion worth of U.S. debt.

After all, there are currently only $37.216 billion Series I Savings Bonds outstanding as of the May 31, 2008 statement of the public debt, which means that these bonds are currently financing only 0.393% of our total national debt! So I just don’t understand why the government needs to slash the fixed rate to 0.0% (zero) on Series I Savings Bonds for average American savers, especially when taxpayers are already paying an average interest rate of 7.252% on over $580.983 billion worth of Treasury Bonds, held typically by wealthier investors.

No matter how you look at it, it just doesn’t make sense for Series I Savings Bonds to have a fixed rate of 0.0% (zero). By my estimate, I’ve already purchased $700 worth of bonds at the new 0.0% (zero) fixed rate, and I’m hoping that Congress will act quickly to resolve the issue by increasing the fixed rate of return for future purchases. After all, despite this setback, I’m still dedicated to financing ‘My Share’ of the national debt. And most Americans who purchase savings bonds have a similar desire to help the country—so why penalize this Patriotism?

Regards,

Adam Florzak
Citizen, United States of America

Contact Information for Adam:
Address: XXXXXXX
Phone: XXXXXXX
E-mail: aflorzak@gmail.com
Blog: http://blog.pactamerica.com/

Sources:

Wikiquote – Thomas Jefferson
http://en.wikiquote.org/wiki/Thomas_Jefferson

TreasuryDirect – Public Debt to the Penny
http://www.treasurydirect.gov/NP/BPDLogin?application=np

U.S. Census Bureau – U.S. POPClock Projection
http://www.census.gov/population/www/popclockus.html

TreasuryDirect – Series I Savings Bonds Rates and Terms
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

TreasuryDirect – Redeem Series I Savings Bonds
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm

U.S. Treasury – Major Foreign Holders of Treasury Securities
http://www.ustreas.gov/tic/mfh.txt

TreasuryDirect – Monthly Statement of the Public Debt of the United States
http://www.treasurydirect.gov/govt/reports/pd/mspd/2008/opdm052008.pdf
Page 1, Total U.S. Treasury Bonds Outstanding
Page 7, Total Series I United States Savings Bonds Outstanding

TreasuryDirect – Average Interest Rates on U.S. Treasury Securities, May 2008
http://www.treasurydirect.gov/govt/rates/pd/avg/2008/2008_05.htm