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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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Ed - Are you saying that we're all replete and that our world is perfect? I can't think of many that would agree. Nevertheless you raise an important point.

Only a tiny minority of people are economically and mathematically literate. I'm from a generation that watched their parents put their money into pensions - and the returns turned out to be a fraction of those promised. We've seen the repercussions of Endowment Mortgages. We've been sold PPI and we're now watching banks (with government blessing) keep the housing bubble inflated.

Most of us don't have the tools we need to fully understand what makes a good investment, and there doesn't seem to be an easy resource to help teach us. (Pieria peeps - any views on this last point?)

As such, even when given an opportunity to invest, we are naturally distrustful, because we've all had the financial services market try to rip us off. We understand that there is no altruism in this world, and that somebody offering us an investment opportunity is on the make. There's nothing wrong with that per se, but the norm seems to be that the reward for the investment adviser is up front, not linked to the performance of the investment itself.

I think there's lots that could be better in this world, and as such I think there are lots of potential investment opportunities.

However, even if you find a man who tells you that he's found a way to make the world better and make a good return doing it, you have a problem. Can you tell a convincing con merchant from a genuine opportunity? Really? Are you willing to bet your life savings on it?

Can you indepedently verify the accuracy of their figures, and can you afford to have everything you've worked for disappear.

Without education and transparent and understandable financial markets, there is no hope of savers abandoning banks in favour of direct investment. And to my mind, this is the impasse we find ourselves in now.

That's terrible advice for the average small saver: throw your hard-earned money at some start-up venture, or take the advice of a broker to buy some stock he's front-running, either directly or through HFT.

It's even worse advice for retirees whose time horizons are shorter, whose judgment is worse according to a number of studies, and whose need for financial security is much higher.

Nobody needs more crappy mass produced consumer goods, no plastic dogpoop scoops, no 13th undershirt made in Bangladesh, no nothing. The plain fact is that most of us have too much crappy stuff and it's bursting out of our closets. So buying isn't a solution for the small saver or the retiree.

On the other hand, this analysis is par for the course for contemporary economists, whose primary concern is the protection of great wealth and the enhancement of the City and Wall Street and their thuggish devils.

John Aziz

Philippe James — it's a custom graph made using the math and stat functions that FRED provides. FRED lets you graph the various data sets it provides together. Here I created a line from two datasets — SAVINGS and GDP and performed a transformation to show savings a percentage of GDP.

Frances Coppola

Tering,

I agree with you that high inflation discourages saving. But the UK does not have anything like the level of inflation in Venezuela. It really isn't reasonable to compare the two.

Lack of spending is as damaging to an economy as lack of saving. Slightly more so, actually - which is why a healthy economy needs inflation to be above zero. When everyone is deferring consumption into the future, economic activity eventually ceases. It's slow death.

Without guaranteed returns on savings that keep pace with inflation, a lot of people have been turning to real-estate to preserve capital. It's low risk, has intrinsic value. It's also one of the few leveraged investment vehicles available to most people. One with favourable rates at that.

So housing prices drive inflation. It's a circle, no?

The graph I am referring to:

http://azizonomics.files.wordpress.com/2013/08/fredgraph-22.png

John,

How/where did you get this graph on FRED? I can't find it myself on FRED anywhere.

Seems to me savers have a right to complain but not about interest rates now but their management (and monetary policy in general) leading up to the bust. That's when the damage was done. CBs now have no alternative but to keep interest rates low to sustain the over creation of credit they facilitated in the past.

John Aziz

Except banks have wholly failed to do this since 2008. And that's the point.

mmm.. semantics? if i put my money in the bank (b/c i dont know how/want to 'invest'), the bank will invest my money, that's their business. trying getting a good roi, giving me lower risk-free interest rate. my money will not be put in a safe, lying still.

John Aziz

Good thing that the best way to care for people's savings is to get people investing instead os saving right now...

when people know the value of their savings will diminish, they will spend it immeditaly. i have witnessed it myself little while backijn venezuela. talked with a cleaning lady who gave her daughter of 14 a pair of silicon breasts instead of saving for her study in a couple of years. she could not save, because of big inflation rate. spend, spend, does not matter on what, loose your money now, thats what people will do. buy a third tv, more clothes.
not caring for peoples savings perverts society. (it is not about the "filthy rich")

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