I’ve posted Entry #15 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Certificates of Deposit Will Be Paying Higher Returns in Days to Come.
Juicy Excerpt: The natural return is the return paid by stocks (6.5 percent real). Saved money is put to productive use; it is used to expand business enterprises and the profits from such enterprises have in the United States always been sufficient to generate an average long-term return of 6.5 percent real. The puzzle we need to solve is not why the return for stocks is higher than the risk-free return but why the risk-free return is lower than the return on stocks.
Don’t the banks that collect the money deposited by the purchases of CDs put it to productive use? Don’t they earn from it something in the neighborhood of 6.5 percent real? If not, why not? They must know about the stock market. It’s been written up in all the big papers.
The money deposited in a CD is earning something close to 6.5 percent real. But the CD owners obtain a return far less than that. Why? People don’t like the riskiness of stocks. So market forces permit the payment of a lower return. It’s not that stockholders are being rewarded for taking on risk. It’s that non-stockholders are being penalized for failing to do so. It’s a Non-Equity Non-Risk Penalty that is responsible for the low CD returns.