Why @saveoursavers are doomed

Aziz and Frances have a nice posts which complement mine on why savers can’t have nice things. It’s still supply, demand and time travel, stupid.

Both take issue with the idea that savers are being stolen from via low rates. Both point out that the world doesn’t owe you a positive return and that positive returns are quite hard to find at the moment for everyone. Your cash isn’t getting much of a return and neither is my human capital. Ce la vie, I’m afraid, in the absence of reflationary policies.

As you’ll all be aware, I think in graphs, so I wanted to try to visually represent this. Unfortunately the legend reads SAVINGS/GSP/S500 which is a bit scary. But allow me to explain. Here’s the graph from FRED. It’s for the US because their data portal is easier to use than the damn ONS website and represents savings as a proportion of GDP relative to the current stock market valuation.


Why does this mean savers can’t have nice things? I’ll put a break in here if you want to guess in the comments. 

This is kinda a response to Aziz’s graph that simply shows savings relative to GDP. I wanted to add a prediction of future wealth and I’ve used the S&P 500 as a dirty proxy for this. The spikes followed by the elevated rates are recessions and slow recoveries, the sorts of things that make owning safe assets now look good and future economics prospects look bleak.

What you see in this is an graph illustrating what I said in my last post. Saving is buying something now to sell in the future, usually via a financial intermediary.  That is difficult in itself, but centuries of financial innovation now make it routine. But when lots of people want to buy something now and nobody thinks that lots of people will want to buy it then you will be unable to find a decent return.

In the late-1990s and in the mid-2000s bubbles popped which reduced the expected future value of the world’s assets and made people want to hold more safe assets right now. This pushed down returns to savers mechanically. Even though some savers think it was the evil machinations of central bankers, that makes no sense.

Look. Demands for higher interest rates are demands for transfers from people in the future to people in the present. It’s a ludicrous demand which would coincidentally have disastrous results, but it’s perfectly respectable. This either shows how hard economics is or how stupid economics is without political economy. I’m not sure, but either way there’s no way to save today’s savers by demanding higher interest rates.


One thought on “Why @saveoursavers are doomed

  1. Demands for higher interest rates are not necessarily demands for transfers from people in the future to people in the present. Indeed demands for ongoing low interest rates are demands to bring forward growth from the future to the present.

    In other words, one could perhaps look at this from the other end of the telescope to offer an important alternative perspective that might be more enlightening.

    It is not the case that nobody is doing well at the moment. There are plenty of people making good returns. These include many borrowers with big mortgages who have seen their interest charges fall enormously, making them much better off. Also wealthy asset-owners who have benefited from rising asset prices – bonds and stocks, as well as other assets such as commodities. Those who are borrowing at record low rates, mainly for house purchase (whether for their own accommodation or buy to let) are also much better off now, but they will be the wealthier groups. The growth strategy for the UK, as promoted by the Bank of England and Funding for Lending, relies on increased borrowing, especially in the housing market, to ensure stronger growth.

    Relying on borrowing to generate growth is merely bringing forward growth from tomorrow to today – when the debts have to be repaid, growth will be impacted. The current environment seems to assume that borrowing will create its own sustainable growth and we simply don’t need to worry about paying back the debt. That was the mantra during the 2002-2008 boom years and here it is again. In those years, people had ‘self-cert’ mortgages, or 125% mortgages to help them pretend to be able to afford these long-term loans. It ended in tears last time, why do we think it will be different this time? This time, we are enticing people to borrow at record low interest rates or asking taxpayers to underwrite 15-20% of the mortgage for other people to borrow huge sums. This is just a different kind of subsidy but the principle is the same as the pre-crisis mantra.

    Relying on borrowing to generate growth can only last in the short-run, especially with an aging population. We need to invest in job-creating, growth enhancing projects, not just rely on pushing up house prices. Rising house prices do not create growth. Indeed, for those who rent, they have a major negative impact – and one third of UK households rent.

    If we keep discouraging saving, how will anyone ever repay their debt? Will we all just end up owing more and more and not bothering to save because saving doesn’t pay. In the longer-term every economy needs people to save. That does not mean that institutional investors cannot harness people’s savings for productive, risk-taking projects. But it does mean that we need a financial system that can help recycle people’s cash savings into more productive investment. Individual savers cannot be expected to do this for themselves. However they do need to save in order to look after themselves in the future, rather than expecting the state to take care of them if they have no savings.

    As they reach the point where they need to draw on their savings, they cannot keep taking risks, so the system needs to ensure that it functions to do that for them. Those who recycle the savings make larger returns (or ‘expected’ returns) while those who want to take low or no risk would have much lower returns, but cannot be expected to accept losing their capital, since that defeats the purpose of the saving for their income needs. Low interest rates, negative in real terms, destroy people’s savings. They also lull borrowers into a false sense of security and just create problems down the road when the debt repayments rise and the debts actually have to be repaid.

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