From What Do Savers Need Saving?

From What Do Savers Need Saving?

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Save Our Savers has a strange understanding of economics, claiming that interest rates in the UK are artificially low and that savers are being robbed. The organization writes, "Although the financial crisis was caused by debt, the Bank of England’s policy continues to favour borrowing at the expense of saving.”

As I noted in a recent piece, central banks do not set interest rates for the market. Interest rates in the market are ultimately determined by agents in the market, based on the supply and demand for money. While the central bank sets its own rate for lending to banks, this rate will not necessarily be passed onto savers or borrowers. While interest rates for lending to banks today hover above zero, interest rates for lending to higher risk borrowers in the market is in some cases up to 1000%. Savers, too, receive considerably higher rates of returns on their savings than the rates that banks are currently borrowing at.

So what are Save Our Savers complaining about? Well, interest rates for savers are far lower than they were 10 or 20 years ago. The incomes that savers could gain simply from putting their money in the bank and sitting on it — rents on capital — is considerably diminished. Is that a result of central bank’s interest rate policy? No — interest rates fell to zero at precisely the same time that the demand for savings went into the sky as the economy went into freefall in 2008. Central banks were simply reacting to the market. 

Now, saving in a bank is not economically equivalent to mattress-stuffing or hoarding. In normal times, supplying banks with reserves is supplying them with fuel for lending to enterprise. As long as the banks were lending, savers were making their funds accessible to entrepreneurs who could create jobs and growth. Yet since 2008, the financial system has been in a considerable funk. Since the crisis, banks have greatly lowered lending to business. This depression has coincided with flatline growth in the economy as a whole. And without growth — in an economy where the pie isn’t growing — a positive real return is simply a transfer of wealth. Should savers expect central banks to try to rig the market to guarantee savers a positive real rent on their capital? Or should savers expect central banks to try to get the economy growing again, so that savers can get a positive real return, workers can get wage growth, and the unemployed can get jobs?

Obviously, a zero-interest rate policy is designed to incentivise investment and consumption over saving — that’s the point! When many are jobless, and growth is low, how else is the economy going to recover unless those people who are sitting on capital employ it and put the economy back to work? If central banks were to raise interest rates, savers might get a better return for their money in the short run (although they might not, because the central bank does not set interest rates for savers!) but if more people start simply sitting on capital in a bank account instead of investing it in productive enterprises, this would simply lower growth further. So the notion that central banks should adopt policies to artificially incentivise saving over investment is simply nonsensical, and highly likely to be a road to even lower growth and higher unemployment.

Instead of complaining about central banks rigging the market against them, savers should go with the flow. Being a saver today is a powerful position — savers have access to capital to invest to create jobs and growth and profit. And for every saver who becomes an investor, this has the beneficial side-effect of disciplining the banking sector — withdrawing money from the dysfunctional banks that are refusing to lend, and thereby failing to supply the economy with capital for new enterprises and growth. Ultimately, savers have the power to punish the dysfunctional banking system that is at the heart of our problems, and just complaining about low interest rates is not the way to do it.

There will be many who say that retirees should not be gambling with their money in investments. And to some degree, this is a fair point. But obviously not all people sitting on large quantities of cash are retirees, and savers do not need to throw all their money into stocks or business investments in order to generate a recovery. Just a modest shift of 5% or 10% of total savings — currently over £1 trillion — could do a lot to lubricate the economy and lower unemployment. In the longer run, with increased investment and lower unemployment, interest rates should rise as the economy gets some grease in its wheels. With a recovery and low unemployment, retirees should be able to more easily live off their savings as they have done in previous decades.

At this point, savers need saving from saving more than anything else. Concerted central bank action has not been enough to achieve growth by getting money flowing freely through the economy. If central banks yielded to the demands of savers, this would simply prolong the depression by incentivising inactivity over activity.


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