I was doing some additional research this weekend, and discovered that investors purchased $1.799 billion worth of Series I U.S. Savings Bonds for calendar year 2007. Assuming this dwindling rate of new investment were to remain constant in future years, the government would save only $21.6 million in incremental annual interest expense by cutting the fixed rate for these bonds to 0.0% (from an already low 1.20%).

It’s absolutely inconceivable to me that the government would thoroughly discourage savers like myself from investing in our country to save a mere $21.6 million.

Furthermore, at around the same time the fixed rate on Series I bonds was slashed to 0.0%, the government started sending out Economic Stimulus Act of 2008 rebate checks to eligible taxpayers. So it amazes me that the government could afford $152 billion to promote spending, but could not afford $21.6 million to promote saving!

In my humble opinion, financial strength is built not upon the shifting sand of reckless spending, but rather upon the solid rock foundation of saving and investment.

Sources:

TreasuryDirect - Historical Savings Bond Sales

After working out at the gym tonight, I ran into Barack in the locker room. We talked for a couple of minutes, and he actually remembered me, which was pretty cool.

TreasuryDirect has a page where program participants (and the general public) may submit questions concerning U.S. Savings Bonds, so on July 12, 2008, I sent a question that asked (in part):

Why was the fixed rate for Series I Savings Bonds set at 0.0% (zero) on May 1, 2008?

And this morning I received the following reply:

Adam,

The Secretary of the Treasury or the Secretary's designee determines the fixed rate of interest. Our Department has no control or input of the earnings rate of savings bonds.

Series I bonds will never decrease in value. The earnings rate will reflect deflation as well as inflation. Even if deflation is enough to offset the fixed rate completely, the earnings rate will not go below zero. Series I bonds will maintain their values until the earnings rate will again produce and increase in value.

Thank you for your participation in the Savings Bond Program.

*******
Customer Service Specialist

I was glad to receive a response to my question, but unfortunately, contrary to the reply that I received, Series I bonds will not maintain value at a 0.0% (zero) fixed rate.

Earned interest is tax deferred for U.S. Savings Bonds, meaning that interest will compound tax-free while the bond is owned. However, once the bond is cashed, the total earned interest is then treated as taxable income. So a 0.0% (zero) fixed rate may preserve the value of the underlying principal while the bond is owned, but the value will actually dip below what is necessary to keep pace with inflation once the bond is cashed and the earned interest is taxed.

In terms of economics, the negative impact of this taxation means that investing in Series I savings bonds paying a fixed 0.0% (zero) interest rate will always be a losing proposition.

For several months now, I've faithfully invested a part of each paycheck in Series I savings bonds. However, as I was preparing to purchase more bonds this month, I noticed that effective May 1, 2008, the government slashed the fixed interest rate on these bonds to 0.0% (that's right--zero percent).

Unfortunately, without realizing it, I've already purchased $700 of Series I savings bonds at the new rate, which is locked at 0.0% (zero) for the entire 30-year interest-bearing lifespan of these bonds. Furthermore, regulations prohibit me from cashing these bonds until at least one year after the purchase date, which means I'm stuck with them for now.

This whole scenario has me somewhat upset. In fact, this weekend, I wrote a letter to every single United States Senator to express my disappointment. I then went to the post office in Chicago's federal district, and mailed these letters earlier today.

The effective interest rate for a Series I savings bond is composed of a fixed rate plus an inflation rate, so that the bond will always return a fixed rate over inflation. However, if the fixed rate is 0.0% (zero), then the bond will have a real rate of return equal to 0.0% (zero) regardless of the inflation rate. This means that even though the bond continues to earn the annual inflation adjustment component (currently 4.84%), the money in the bond will never actually increase in purchasing power.

So by slashing the fixed rate to 0.0% (zero), the government is essentially telling us that we might as well spend all our money now, because it will never be worth any more than it is today.

I knew going in that government bonds were not the highest paying investment I could put my money into. After all, U.S. savings bonds are not exactly the investment of choice for the rich and famous. However, it was very important for me to start financing my share of the national debt, because I do not believe in having foreign governments own such a large percentage of our bonds.

But in my opinion, there's a big difference between investing in a bond with a low interest rate and investing in a bond with no interest rate. Perhaps I'm wrong to think like this, but it's starting to seem like the government always finds a way to discourage people from trying to help the country, and often penalizes those who put in more than they take out. I believe the American people deserve better.

Read the letter that was sent to all 100 U.S. Senators