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Are CDs becoming obsolete?

By Claes Bell · Bankrate.com
Monday, January 30, 2012
Posted: 4 pm ET

It's hard to overstate how grim things are in the CD market right now. CD balances hit a nearly three-decade low this week, falling to $750 billion, according to the Federal Reserve. That may seem like a lot, but the last time the total amount of money Americans held in "small-denomination time deposits," Fed-speak for CDs, was this low was September 1983, a little more than 28 years ago.

These numbers are especially striking when you look at the share of the total money supply going into CDs, rather than the absolute number. In other words, think about how much more money there is now in the American economy is than there was when Michael Jackson's "Thriller" was tearing up the charts and the final episode of M*A*S*H* was setting an all-time TV ratings record. According to the Federal Reserve, in September 1983, the total money stock in the U.S. was a little over $2 trillion, and 36 percent of that was in small-denomination time deposits. Nowadays, the money stock is $9.6 trillion, with just 8 percent of that sitting in CDs. So even relative to that previous low in 1983, things are looking pretty bad for CDs.

Of course, it's no mystery why investors are avoiding CDs. Just look at current CD rates; the average rate for a one-year CD right now is 0.34 percent, the lowest it's ever been since Bankrate started collecting CD data (coincidentally, in 1983).

The upshot is that if you're living in a 1983 mindset about how to keep your money safe and get a decent return, it may be time to step back and re-evaluate. The financial world has moved on since then, and especially with the Fed pledging to keep the federal funds rate low through the middle of 2014, we're not likely to see a return to even the 3 percent yields on one-year CDs you saw in the early aughts again anytime soon.

I'm not going to say CDs are obsolete, but their usefulness has really diminished and will stay diminished for what's looking like a really long time. Why would you choose to lock up your money when you could keep it in a liquid savings account at about the same rate?

What do you think? Are CDs obsolete?

Follow me on Twitter: @ClaesBell

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2 Comments
Sanford
February 01, 2012 at 6:14 pm

They are usefull as when locked in, it keeps one from blowing them on expensive vacations, expensive foreign cars and other costy items, on a whim, or to "feel better" for the moment. If there is a penality for early withdrawal - one might hold off and thnk about blowing a $30,000.00 CD for God-knows-what!
It's sitiing in a bank, insurred, and it is parked with money in the meter ! :)