Cheap money boosts stocks

German investors and small savers have ended up in a tight squeeze. They are losing money by the day, notably since the losses they suffered during the 2008 financial crisis have caused many to keep their money in so-called instant access savings accounts.

Germans are conservative with regard to money and traditionally shun riskier investments such as buying shares and bonds. However, a rise by 30 percent in the value of German stocks in the past year alone is tempting more and more of them.

Real interest rate trap

By the end of September 2012, German savings accounts held about 2 trillion euros ($2.6 trillion), which amounts to roughly 41 percent of private housholds' cash assets here. In 2002, Germans' savings accounts held just 36 percent in spite of the higher interests this asset class paid at the time.

As a matter of fact, for fear of losing money through crashing stock markets rapidily, Germans it seems currently prefer losing money gradually through negative returns on their savings.

By the end of December 2012, savers in Germany were paid about 0.6 percent interest on their instantly accessible accounts, on which 25 percent capital gains tax were still due. But as prices rose by an average 2 percent in 2012, savers became stuck in what's called the real interest rate trap, meaning the value of savings diminishes as inflation outpaces income from interest.

Risk investment alternative

Meanwhile, Germans are scrambling to escape the trap, but few options have remained. Should Germans take a bigger risk by buying higher-yielding bonds from crisis-hit eurozone countries the likes of Italy and Spain?Is buying gold still worth the money after prices of the precious metal are well past their previous peaks? What about real estate for which prices in Germany have also climbed to an extent that talk of a property bubble is already rife?

An alternative Germans seem increasingly willing to weigh is buying shares in the country's stock markets. Boosted by cheap money from major central banks, stock markets around the world have been rallying for quite some time.

From boom to bust?

Each month, major central banks such as the Fed in the United States and the Bank of Japan (BOJ) are pumping billions in liquidity into financial markets in hopes to boost their sluggish economies.

Last week, the European Central Bank (ECB) cut its prime interest rate to the historic low of 0.5 percent to cap its policy of monetary easing, initiated at the end of 2011.

As a result, investors seeking yield rather than loss cannot but go for higher risk in stocks. However, some analysts warn to beware the signs that stock markets were already building up crash potential.

Assuming that the stocks bubble will burst in autumn, Guiseppe Amato - analyst with Lang & Schwarz  brokerage - told Reuters news agency that the real economies were no longer keeping up with rising stock markets.

However, others urge investors to keep their nerves, arguing that as long as the debt crisis in Europe isn't resolved the real interest rate trap would persist. And few, at the moment, would doubt that the debt crisis isn't here to stay for quite a while longer.