I have just read a blog which once again suggests that those who save cannot expect returns because times are tough and everyone should expect to do badly at the moment. The blog discusses its views on ‘Why @SaveourSavers are doomed’. You can read it here:
This is my response:
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 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.
If savers are all doomed and they just start taking risks and lose their savings (as many of them will because they are not equipped to take such risks and actually need their savings to live on) then everyone else is doomed too. We cannot just keep encouraging borrowing and discouraging saving. The economy is picking up, inflation remains above target and low interest rates are making many of us poorer, both now and into the future. Those who are doing well are borrowers, but they will eventually have to repay the debts. Who will create the growth in future then, or do we simply not worry about it and hope for the best? Responsibility, prudence, living for tomorrow as well as today – all are missing from current policy thinking.