Friday, December 05, 2008

Savers complain

As predictably as night follows day, we have had a savers rant in the Times, complaining about falling interest rates.

What people don't seem to understand is that interest rates are the price of money and savers are really lenders, who loan money to borrowers, with the banks acting as middlemen and taking their cut as middlemen do. All year we've had savers complaining about the feckless youth of the country who are borrowing too much when they should be saving. And these same people have been complaining about prices. Now they've got their dearest wish - this it what it looks like when you have rapid disinflation and everyone is saving. The profits (interest rates) of the savers/lenders are falling, because no one will borrow from them. Message to savers - your interest comes from borrowers, not out of thin air, and when people cease to borrow, you cease to get a return for your money.

Of course some savers believe they should be paid high interest rates even if no one is borrowing, in the same way that some people think they should be paid an income even if they do no useful work. But that's not how it works in a capitalist system. If savers want interest rates to go back up, they need to get out there and do their Christmas shopping and stimulate the economy.

If the above makes you feel grumpy, then console yourself with the thought that we are not a pure capitalist economy. Instead we are a mixed economy with a big Labour government. There is still one borrower left in town willing to pay you for lending your money. You can lend to Her Majesty's Government either by buying gilts (you can do this directly - see your Post Office for the form) or through National Savings. National Savings are offering tax-free Index-Linked Savings Certificates at 1% + RPI, which is pretty damn good. It should be enough to cheer up the grumpiest saver.


Anonymous said...

Has it ever occurred to you that many elderly people rely on the interest generated by their savings to help fund their retirement?

We now have the absurd situation that saving rates before tax are lower than the government's own fudged CPI inflation figures.
The most recent survey put pensioners real inflation rate at 9%+

As for the VAT reduction,you need to get out more,with shops cutting prices by upto 30%,a piddling 2.1% discount makes no difference at all,only further ramps up this government's massive debts.What a complete waste of time and money.

Hughes Views said...

I can remember the good old days - in the 1970s we savers had, in effect, negative interest rates - inflation in the thirties and interest in the tens of percents.

If low-risk savings keep up with inflation that's about the best anyone should hope for, anything more is a (probably undeserved) bonus.

Anonymous said...

I occasionally read your blog because you occasionally have interesting things to say. This isn't one of those occasions, and instead you just show that you don't really understand economics.

Part of the cause for the current economic crisis is that low interest rates have stoked up huge demand for borrowing. Banks have satisfied that demand, not by somehow getting more cash from savers somewhere, but by reducing their "reserve requirement" and lending a greater ratio of cash to their assets. This extra debt was simply created out of thin air - it doesn't exist as anyone's savings.

The BoE interest rate is not a reflection of the supply and demand for debt, it is a figure chosen to best balance the objectives of keeping the currency stable and helping the economy.

Savers are rightly angry that they are being penalised because of profligate behaviour by banks and people/companies with no financial sense.

I think you have become more of a Labour-defence blogger, rather than interesting analysis. Shame.

snowflake5 said...

Sorry anonymous, the interest rate is the price of money, the clearing rate between borrowers and lenders, with the BoE the lender of last resort.

You might not have noticed this, but there is massive deleveraging going on, with the banks not lending, and people not borrowing. When this happens, the price of money drops, and savers (who are lenders), can't get a good price for their money.

However, as pointed out in the main piece, the government is borrowing, and at rates above RPI. Historically, most savers received a rate below RPI, so not sure what you are moaning about.

Anonymous said...

You've missed the point again Snowflake, keenly avoiding backing up yourself on the original question: the BoE interest rate is not a manifestation of the supply and demand for debt as you implied in your article. The BoE interest rate has dropped because a committee decided that it needed to drop.

Your point about real interest rates is also incorrect. Indeed you yourself have made a big point of telling us how wonderful Gordon has been precisely because he has "single-handedly" kept real interest rates positive for over a decade. The implication that we have nothing to moan about because rates were negative in the 70's in laughable.

Your consistency in economic argument like this is very poor - it changes to suit your needs. So poor in fact that I decided to have a look back over your old posts to see what you were saying a while ago about the economy, and found quite amusing results:

"I believe we will come through the current global crisis too, as long as the Labour government is in power. We have been living in a fantastic golden age, which will come to an end when New Labour finally exit the scene. Apr├Ęs New Labour, le deluge."

"We are not doing enough to challenge the rubbish written about recession and "meltdown". We should be agressively challenging the misconceptions. We should be saying up-front that we believe that the Tories are wrong about the economy and that events will prove it. And when events do prove it, we should bang on endlessly about how they got it wrong.

"I wonder if all the doom-mongers in the press will do stories headlined "we were being muppets" when the supposed "worse than the US" recession doesn't materialize. And will they admit they were deliberately trying to talk up a recession to hammer the government? I'm not holding my breath. When we get through this and can point to solid evidence that the recession didn't happen after all, the government should excoriate those who predicted one and they should certainly laugh at those who panicked."

"People "predict" the future by what they read in the press and the newspapers have been full-on with "Recession is nigh" stories, seizing on such things as house prices dropping in October according to the Nationwide, and ignoring the figures from the Land Registry which showed a rise, let alone the figures from everyone showing house price growth strongly up over the year.

"What is happening now is not unlike what happened in Britain in 2005, in my opinion. In the absence of a recession, there will be a pause, and then buyers will get tired of waiting, and the market will move again. These pauses are actually healthy.
Update 3/12/07. I see that Vince Cable is saying that the "housing bubble is about to burst": "Gordon Brown’s reputation is built on economic growth but there are ominous signs that the bubble is now about to burst." In my opinion this is a mis-reading of the situation. I think events will prove him wrong, and when they do, we should expose him mercilessly as yet another b$$$$cks-merchant masquerading as a serious politician, when all he's doing is engaging in scare-mongering. "

I don't suppose you'll admit how silly those quotes look now?

Have a look at this:
Which pundit do you most associate with, Snowflake?

Danivon said...

How do banks generate interest? By investing money in savings accounts and using the profits. What has happened recently? Those profits have been hit (or even wiped out) by falling stock values, mortgage defaults, etc.

So clearly savings rates are going to fall anyway.

Another side to it is that banks are not lending each other money, and when they do the rates are relatively high. If banks can't lend each other money, they can't lend anyone else money (otherwise known as investing). If central banks don't reduce their rates and free up borrowing, then the economy as a whole will slow down further, reducing investments and reducing any returns from those investments - so savings rates would again fall regardless.

Furthermore, there is now talk of deflation coming up soon - led by falls in oil prices and then in food prices. A cut in VAT combined with retailers needing to attract business is also deflationary. So a low savings rate in that context is not actually so bad.

Most pensioners are not relying on the current interest rate. People taking out an annuity now will be, but those who took one out a year ago will be unaffected. The poorest pensioners are those on benefits, not those living off savings.

Anonymous said...

One small point Snowflake. The BoE rate isn't hte price of money, LIBOR is, and that isn't going down as fast as the BoE rate. Deleveraging doesn't automatically cut the price of money. LIBOR rocketed skywards because banks weren't prepared to lend to each other.

Governmetn becoming the main place savers deposit their money is bad for the wider economy. Money that goes to the government is money that isn't in the banks, which the banks can't then lend against. Given the increased capital requirements they have, therefore, they can't lend so much money to business and they have to get it from the government, (at a penal 12% for the recent preference share recapitalisation) or not lend at all. Governments have a great record of state directed lending, like Japan where the Post office dwarfed all other saving institutions and the government poured this money into bridges to nowhere.

snowflake5 said...

Anonymous - I stand by what I wrote before.

The period 1997 - 2007 was indeed a fantastic golden age. Before that we had a third-world country with buildings crumbling, homeless on every street corne and the stink of urine everywhere. Only Tories like yourself wish to go back to that dreadful crumbly-homeless-urine-stinking Tory world.

Despite everything, the labour participation rate is 74.4% - well above what it was in Tory times. Most people are still in their homes, and the Labour government will help keep people there, unlike in Tory times.

As for the press - the run on Northern Rock was down to loose talk, as was the slowdown earlier in the year. And despite all the predictions that the UK is in a worse position than the USA - the data shows the opposite. The recession didn't need to happen - it was triggered by the right-wing ideologues in the Bush administration letting Lehman brothers go to the wall, as they thought it proved their market credentials. Idiots. And George Osborne and Tories wanted to do the same here. Idiots.

Anonymous said...

Nice one Anonymous,old Snowy as rambling and as self contradictory as ever.

Anonymous said...

I am absolutely not a Tory Snowflake (please don't insult me like that!), and your knee-jerk reaction that everyone who disagrees with you must be is a bit paranoid.

If you really think this global crisis was caused by Lehman going bust then you are totally deluded. This has been brewing for many years and was always going to happen once such a gigantic global bubble had built in property, equity, and commodities.

Since last winter, serious economists had known that a raft of banks were about to go under (back when you were denying there was any problem) and if it wasn't Lehman it would have been someone else. Governments the world over were in denial because people like you were cheer-leading them saying everything was fine. Now you criticise them for not realising quick enough that the "doom-mongers" (as you called them) were right!

As I said before: consistency?

Danivon said...

Lehman's collapse did not 'cause' the overall problem. But what it did do was to provide a massive shock to the financial system at a bad time, making the overall situation far worse. The problem was not that Lehman fell, it was that no-one bothered to catch it when it did. A rescue from the Federal Government would have softened the blow immensely, and would have reduced the pressure on other banks (particularly those owed money by Lehman).

I suspect that had Northern Rock been allowed to fail, we in the UK would have hit major credit problems much earlier than we eventually did.