Another reason oil prices soaring

Lots of explanations are offered for the soaring prices of oil and commodities. You can choose from: (a) the terrorism premium, (b) speculators, (c) peak oil theory, (d) shrinking net exports from oil-producing nations, (e) rising demand from emerging market economies, or (f) any combination of the above.

But another reason may be as important: the futility of holding dollar-based investments.

The most recent indication is the May interest rate reset on I Savings Bonds.

These are the savings bonds that anyone can buy because they are sold, commission-free, in amounts as small as $50. Indeed, you aren't allowed to buy more than $5,000 of them in a year.

I Savings Bonds, like Treasury Inflation Protected Securities (TIPS), guarantee the money you invest will be protected from losses of purchasing power due to inflation. This is done by adjusting your principal upward to compensate for inflation, as measured by the Consumer Price Index. In addition to the inflation adjustment, you also receive a fixed premium, giving you a modest "real" return. The premium amount is reset every six months and you receive the premium offered in your purchase period, plus inflation adjustments, for the life of the bond.

When they were first offered nearly 10 years ago, I Savings Bonds paid a premium of 3.40 percent over inflation. Since then the premium has declined as the bonds have become more popular and an increasing number of savers have understood that the total return on these bonds was often higher than the return on conventional savings bonds. Those who bought the early bonds, for instance, are now enjoying returns over 8 percent (3.40 percent premium plus 4.84 percent inflation).

But that was then.

Savers were shocked on May 1 when the Treasury announced that I Savings Bonds issued during the next six months would carry a premium of zero. Yes, you read that right. Zero.

Even so, the annualized "return" on the bonds for the next six months will be 4.84 percent, the annualized inflation rate.

The Treasury Department basically told savers it would condescend to take their money, use it for whatever it chooses, and return it adjusted for inflation.

The inflation adjustment will be deemed "interest," however, so when the bonds are redeemed savers would, in effect, be taxed for lending money to their government.

For small savers it's a raw deal. But it is offered in a market filled with raw deals for savers. Conventional savings instruments, whether offered by the Treasury or banks, are no better. All are offering interest rates well below the rate of inflation. And then, adding insult to injury, your interest income will be taxed.

What's unique about the I Savings Bond rate is that the hosing is so explicit. By having a premium of zero over inflation, the Treasury is sending a simple message to savers: Drop Dead.

If American savers are getting a raw deal, how do you think the Chinese government feels about its holdings of depreciating U.S. Treasury obligations? Or the Japanese government? Or the Russian government? Or any holder of Treasury obligations anywhere?

For those seeking to protect their wealth, Bubble Risk may be better than worthless paper risk. Small wonder commodities are booming.

ˆ· Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com or by fax to (505) 424-0938. Please visit my Web site at www.scottburns.com to comment on any of my articles, find referenced Web links or to discuss personal finance topics on my forums. Questions of general interest will be answered in future columns and on my Web site.