ARE "NO RISK" CDS REALLY NO RISK?

With all the turmoil in the financial markets, people are interested in finding no risk CDs more than ever before. After all, if you are one of the lucky ones and actually have money to invest, you might just want to sit on the sidelines safely and earn interest risk free until this crisis is over.

We have never before (other than the stock market crash of 1929) thought of our banking institutions as vulnerable. The FDIC guarantee of $100,000 (now $250,000 until the end of 2009) has always been there but none of us ever really expected to have to think about it. Now though, we are seeing that any kind of bank, big or small, can get into trouble. Citigroup and Bank of America are two financial institutions that very few people probably ever thought would need help from the government in the form of a stimulus bailout.

So, this finds everyone of us that wants to invest our money and still sleep at night, scrambling around looking at our different options for no risk investing. Bank CD's have always been one of the safest vehicles and as just mentioned, they are guaranteed up to $250,000 at least through 12/31/09. But are they really risk free?

Interest rates on CDs are so low right now that a case can be made that no CD is risk free. What I mean by that is that when you factor in inflation, you are losing money with even the safest investments. Now most people are looking for a certificate of deposit that cannot lose any of the principle and that is their intent when they search for "no risk" CD's. Right now, anything guaranteed by FDIC is the safest and, although the economy is in shambles, the government guarantee is the best thing we have going.

But nothing is really guaranteed in life and if things get really bad, who knows whether the government can come through? It is only our tax dollars they have and things can and have spiralled down quickly. Inflation though is one of the biggest problems we face and it is only multiplied by the way our goverment is printing money. The common person tends to ignore inflation and that is one of the reasons the government can get away with all the things they do.

So, although you might be able to find some no risk CDs and feel good about it, remember that you are losing money on inflation. As long as interest rates are at this rock bottom level, it is very likely that you are still effectively losing purchasing power no matter where you put your money and how safe you think it is.