Why Savers Should Put Up Or Shut Up

There is an idea popular in certain circles that low interest rate policies are stealing from savers. When the economy went into freefall in 2008, central bank interest rates were lowered to the zero bound. And rates for savers and investors in both government and corporate debt have certainly fallen since then:

CD6M_Max_630_378

Critics of low interest rate policies actually have the wrong end of the stick. It is not central banks that set interest rates for the market. Central banks set lending rates into the banking system. The interest rates in the market remain a function of the demand for savings. Demand for savings (shown as a percentage of GDP, to show the real level of demand for savings relative to economic activity) has absolutely soared since 2008:

fredgraph (22)

How can savers expect a positive real return on their savings when the demand for savings has gone so high even in the context of lower interest rates in general? Central bank policy is designed to discourage saving and encourage investment and consumption. That’s the point — but even with interest rates close to zero, the growth in savings has not been stanched. All else being equal, had central banks not cut rates, demand for savings would be even higher. And with higher demand for savings, that would have just depressed interest rates to the levels we see now irrespective of central bank policy.

The great irony here, of course, is that there are still high rates of return for those with capital if they look for it. Payday loans companies continue to charge companies interest rates in the thousands of percent lending to people with poor credit histories or who may have lost their jobs in the context of the bad economy. Access to capital is not universal or even widespread. Real incomes are flat on where they were five years ago, which has led many individuals and families into borrowing to meet their bills. The fact that the financial industry is lending to some at huge interest rates and denying credit to many businesses while simultaneously paying smaller interest rates to savers is not symptomatic of theft from savers — it’s symptomatic of financial industry dysfunction, and a failed transmission mechanism.

For savers, positive real return on capital is not a right, and it should not be an expectation especially in a depressed economy. If businesses aren’t mostly expanding and taking on new workers, where is the positive real return going to come from? If wages aren’t rising, where is the positive real return going to come from? If the economy isn’t growing where is the positive real return going to come from? The answer is that with a pie that isn’t growing, those who get a bigger slice will be dispossessing others. Simply, high real rates of interest in the context of a depressed economy are rents, and demanding them — and especially demanding that the government enforce their existence — is rent seeking. This is ultimately why a low-growth environment is naturally and in the long run unavoidably a low interest rate environment. It is not central bank theft. It is the inevitable outcome of a depressed economy.

Savers looking for a larger rate of return should know damn well what to do — take their money out of low interest savings accounts and out of the failed financial intermediation industry and invest it into quality economic projects that create jobs and growth. This could involve buying the stock or debt of large companies that wish to expand, or it could involve starting your own business, or investing in a startup or a mixture of these things. The easiest way to return to growth — and thus higher interest rates, and higher returns for things like pension funds — is for today’s savers complaining about low interest rates to turn into tomorrow’s investors seeking out and pouring money into quality projects that increase incomes, create jobs and create products that people desire and want to use. Sitting on cash in a bank account in the dysfunctional financial system and whining about a low return is incoherent nonsense.

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56 thoughts on “Why Savers Should Put Up Or Shut Up

  1. “…seeking out and pouring money into quality projects that increase incomes, create jobs and create products that people desire and want to use.” That’s a tall order and easier said than done.

    The key here is the “dysfunctional” financial system. Let’s make it functional as it has been many times in history. The dysfunction primarily comes from a Federal Reserve that is attempting to play the U.S. and world economy like its own Milton Bradley board game. The Fed doesn’t know anything about what rates should be. The fed knows less about employment. Neither the Fed (nor politicians) are capable of valuation or investment. They are incompetent, egotistical, and outdated. That’s the dysfunction. The dual mandate is a joke and we have 15 years of incredible instability to prove it.

    We need to get back to money supply and proper management of same. Whether it’s M2 or Divisia M4 I don’t care. Manage the money supply and fight inflation and the rest takes care of itself. Call me old fashioned. I will be proven right.

    • From my first foray into Politics, they are fuck wits. We are all doomed if we don’t get them out of the system!

  2. Technological innovation is decreasing the rational need for employment at an ever increasing speed and so is widening the gap between the ratio of labor costs and total costs. It is actually widening it from both ends of that ratio because technology (a capital cost) is generally becoming more high tech and consequently more expensive. Other less systemic factors like international wage/labor arbitrage are militating the same effects.

    Nothing can or should stop either technological innovation or profit. Hence an individual dividend and a general discount on prices based on consumption and production statistics is the logical supplement and eventual replacement of the wage. The only alternative is a fascist or socialist work state. Finance must evolve and be transformed. It has every right to exist. It does not have the right to dominate and enslave.

    • Technology is not the problem, as if this was the case, we would have had difficulties long, long ago. The problem is debt creation that has brought future investment forward resulting in an advancement in technology that has outrun the ability of society to cope.

      Just as employment is affected by this process, so is everything else, especially health care, as you will soon be able to spend an unlimited amount of money keeping just one person alive.

      When things are a mess, look for the imbalance. This is where the solutions lies.

  3. Supposedly, the Chinese middle class has not been legally permitted to put money into foreign banks nor to buy stocks and bonds in foreign companies. Thus, because their banks also do not provide “enough yield” and supposedly the volatile stock market is not trusted enough, the bourgeois buy condominiums and other rental properties. But a real estate real “bubble” is apparently bursting and they’re apparently going into recession. There is an article earlier this week in the NY TIMES reporting about a city of 500,000 that’s in awful economic doldrums. SIXTY MINUTES has also portrayed vacant/empty real property, and it’s stunning if not ominous, because
    we are interdependent despite their restrictions on individual investing.
    We must hope they’ll eventually adapt and investment restrictions will be eased . PRC companies are reportedly buying Smithfield and petroleum land assets. Because surely when China sneezes, the rest of the world can get a cold. What has this got to do with low interest
    on savings in the current USA? Fear scenario: China doesn’t renew its U.S. Treasury holdings, because they need to loosen savings rates and encourage lending (for non real estate?) and re-ignite consumer spending.
    They’ve got to figure-out how to get their college students and lower income people out of slums and into the unbelievable vacant housing and supposedly never opened malls. Notice I didn’t do any dumb roader-running
    dog joke, because political econ is bloody serious if not dismal as hades.

    • My opinion is this was planned all along by the Communist elite. Play political games and manipulate the media. A few hangings here, a few gunshots there, and the slum dweller get a beautiful apartment. Seems so simple its scary.

  4. Good one.

    Another thing ignored by savers is that they have kids and relatives who get affected because of the slowdown. Imagine an old couple who are affected by lower interest payments but at the same time see their son or daughter not getting employment.

    • They don’t make the connection. I remember a surreal debate on one of my posts with a woman who was moaning about the poor returns her mother was receiving on her savings. Apparently the mother had been “helping out” her daughter, whose husband was unemployed, but because of poor savings returns was struggling to do this. The woman argued that interest rates should rise so her mother could continue to “help her out”. I had to ask the woman which was more important, her mother’s ability to “help her out” or her husband’s future employment. She didn’t get it.

      • Anybody can come up with dysfunctional story one way or the other… the important thing is do you accept the interventionist policy to fix the problems OR you take the reality as a given and cope with it.
        The interest rate should neither rise nor drop, it has to be a function of the economy without ability of the central body to push it around.
        Why would everything should have a price but money should not (interest rate). Why do we allow it to be a function of a whims and presumption of small clique of self promoted “intelligentsia”..

        • Not everything has a set price. Commodities don’t have set prices. Why should money which has commodity properties have a set price? Should out-of-control borrowing not be countered with interest rate increases? Should money supply be increased to keep the interest rate at a certain level in the face of massive borrowing? I can’t believe that can be espoused by any economic theory.

          Supply and demand is THE fundamental economic principle and that principle has not changed and never will.

    • Imagine a housing bubble not ignited, because of inability of the CB to print infinite amount of money…. ergo old couple OK.. son and daughter OK .. interest rate set by the market both in short run and in the long run.
      But .. wait, wait .. how are we going to fix the economy ? /sarcasm/

  5. John writes:
    “For savers, positive real return on capital is not a right, and it should not be an expectation especially in a depressed economy.”

    In a “real” economy, savings is THE source of available credit. If you believe that having a central bank is at all, real, then you must allow and account for all the lying, cheating, and stealing that defines central bank behavior. Central banks do not exist for the benefit of the people, but instead, the institutional commercial banks that direct it.

    John, life and economics existed before central banking, and, in my opinion, in a considerably higher form. Manipulation of the money supply for fun and profit is not so wonderful for the common man.

    In a sound money environment, interest rates should not affect the ordinary person a great deal, as their money will grow in value with an increase in societal productivity. Additionally, prices would be stable, as capital available for investment would be made available to/by those who are willing to assume said risk [borrower/lender] with no implied backstop.

    Central banking is the highest form of EVIL in banking. These are people who care for nothing other to steal the most from the most, their exploits revealed for all to see in this latest edition of depression economics, 1971 to the present.

    • Agree with Impermanence…I think the whole idea of even referring to a “demand for savings” in this environment of central bank manipulation is pure hokum. It’s kind of like when the Democrats in congress talk about cutting taxes as an “tax expenditure”…you know, as if they believe that government is entitled to all of our money in the first place…and if they decide to let us keep some more of what we earn..it is an “expenditure” to their future largesse.

      • The fact that net savings are rising is obvious evidence that demand for savings in things like CDs, MMFs and banks (as opposed to demand for other kinds of investments) is extraordinarily high.

        • I believe what we have right now is not a “demand for savings” as much as it is an “aversion to risk”. Money placed in savings is the default option…not the first choice of the average guy. Before the last credit crisis and subsequent stock market crash, the average guy might have placed a substantial portion of his cash in dividend growing companies like Coke or Microsoft…now that the hedge funds (rich people) and investment banks (other rich people) have managed to drive up the stock market using their free money from the Fed….the average guy is scared. He is not placing his money in a savings account because he wants to.(i.e demand)…he is doing it because he is scared of losing his principal, and sees it as the only option right now.

        • That is simply because the borrowing needs of the GOV where met by the Printing press, not by the real economy.

  6. When we suggest “…buying the stock or debt of large companies that wish to expand,” we are assuming companies wish to expand & are offering stock/new debt which the record-high stock of retained earnings seems to suggest is not the case. True?

    Also, about advising savers to “… turn into tomorrow’s investors seeking out and pouring money into quality projects that increase incomes, create jobs and create products that people desire and want to use”
    I’m not sure where one would find quality projects to invest in. Also, I absolutely agree increasing income & creating jobs is the right idea but I’m not sure how a business justifies that investment with current market conditions and with the high private debt burden. It seems that introducing new products & services income is likely to simply shift from other products/services to the new ones and therefore no macro improvement. If we are proposing this private investment as a solution it seems naive not to emphasize significance of a government investment as well.

    I don’t mean this as an attack. These things went through my head as I read the article this evening and I am genuinely curious. Great work, John.

    • I agree, there is a gap. There is an opportunity here for enlightened governments to provide safe long-term savings vehicles with reasonable returns and use the proceeds to fund much-needed infrastructure and other long-term projects.

      • See Australia’s Superannuation system. You can invest in Infrastructure vehicles. It is a good investment as the corrupt government usually sells public assets or right for a song, so the investors get a good return.

        See Sydney Airpoirt, Telstra, Commonwealth Bank and Queensland Rail privatisation for examples.

        • John, You say savers should ” …invest it into quality economic projects….buying the stock or debt of large companies that wish to expand, or it could involve starting your own business, or investing in a startup….”

          In short, if you want positive real returns, you have to put your money to work and take some risk. I agree with the sentiment. But like Frances and kmp89 say, that’s not so easy. Not everyone can or should start their own business – lots of entrepreneurs start businesses after they have worked in an industry for a while. Not everyone can or should be an angel investor in start ups. That leaves direct or indirect equity investment. Fine. But my understanding is that most quoted companies aren’t net investors right now. Even those issuing bonds are often just locking in low interest rates and sitting on the cash.

  7. Aziz. Great article and agee with it.

    Get your arse to Australia mate, we have a Political Party to set up. ANZAC United Party. I need your economic wisdom. You can have as much solar farming as you want. I have made contacts in high pressure diesel injection (High efficiency with less stress on components) and Fresnel lens manufacturers.

    We can change the world Aziz!

  8. John, there must be a mistake in your SAVINGS/GDP graph.

    Savings/GDP must be in line with the (gross) savings rate http://research.stlouisfed.org/fred2/series/PSAVERT, between 5 and 7%

    I have done your calculation via a FRED transformation here, which gives possibly the net savings rate (after amortisation)
    http://snbchf.com/?attachment_id=20562

    For me it remains that Americans DO NOT SAVE ENOUGH, even if companies were sitting on cash for years…

  9. Well if your retired, your not going to throw your money around like you have 30 years to make it back if you lose it.

    Dennis Wheelus BCNP (843)-601-3334

  10. I imagine that a great many people feel that they had better build up their savings because the economy and the political and business leadership are nonfunctional and untrustworthy. For most people who are still employed, the prospect of sudden, indefinitely lengthy unemployment is all too real. Of course the currency and the banks are also dubious, but there aren’t any good alternatives. For the less well-off, saving is the only prudent course of action. This is the price of putting the screws to the lower orders. There is no immediate relief in sight, because both major political parties in the U.S. are run by and for a feckless elite.

  11. Is that before or after ..The FED is shut down….and besides, you want me to invest in a company that can be trusted….like say GE, Citi Bank, GM…..I think not….old relics will do fine….as we watch fiat and thieves crumble…..imho

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  13. So two things emerge from this article –
    1.”Savers are’t needed”
    That is so true in a world where CBs generate unlimited liquidity. More than anything interest rates reflect the need for *cash* and when CBs pump infinite amounts into the system why does a bank need to pay you for your money? CBs will take any asset off the books of a bank and give them equivalent cash. Saved them all to date anyways. But it isn’t market led – true there lots of “savers” with lots of “cash” (as per your nice graphs) but nowhere near enough to meet all the banks needs – in a world without CBs interest rates would ****soar***.

    2. “Low interest rates are helping”
    The key point is that interest rates must be pinned to zero to continue the world as-we-know-it; if interest rates rise, the non-performing loans will be called out; asset values will plummet and pretty much every bank on the planet will go balance sheet insolvent. With interest rates at 5% they wouldn’t generate the cash to pay their savers so they would be cash flow insolvent the following quarter. The only people low interest rates are helping truly are the banks.

    So, to keep the world as-we-know-it interest rates are and will remain at zero for “eternity” – well until war/pestilence/riot (homeland police will be here to help!); truly we are saving the ass of the older generations whilst screwing the young. Sure the young person wants a job and interest rates at 15% would mess that up for a year or three. But the young have 40 years to get over that problem whereas the middle class rich with $1-5M does not; so we bail them out and keep the young in purgatory for the next 20 years instead. Ask Japan. Is it fair? Probably not but hey, if the young don’t like it they’ll just be labelled Terrorists.

    • Excellent points. And I agree as a Banker, all that is happened is the rot was put into a different cupboard. They are just delaying, but the Politicians are ot solving while they have breathing space. The stink will start to make people ill very soon!

  14. Economics is very similar to politics, two disciplines conjured-up by the Elite who insist on having the vast majority of the world’s population work in their stead.

    Institutional economics is simply organized crime on a global scale. Anybody who can not see this needs to have their cognitive abilities assessed. The political system simply legitimizes this theft a thousand different ways.

    What’s real can only happen between individuals. Bring on the groups [in whatever hideous form they make take (corporations, governments, etc.)], and you better hide your money, your daughters, and your wives, because you ain’t gonna have anything left once these amoral sub-humans get done with you and everybody else in their way.

  15. Shorter version:
    Hey old people: stop trying to retain your earnings and risk them all in an environment where the government can liquidate you at any moment for the sake of better connected groups.
    Seems legit.

    • Legislation in Australia ready to be voted on that allows “Bail ins”. Wait for after the election. It seems world wide they are preparing for the big reset.

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  20. Clearly savings by individuals is up and that should put some downward pressure on interest rates in a free market.

    But John aren’t you ignoring *at least* half of the story here — hasn’t the Fed’s balance sheet increased much more dramatically than individual savings since 2007? Isn’t that having a much larger impact than individual savers? And doesn’t this amount to government control as opposed to the market setting interest rates?

  21. with growing concern I observe your steady evolution towards the Dark Side, John. you’re loosing yourself to Darth Keynes :P

    If businesses aren’t mostly expanding and taking on new workers, where is the positive real return going to come from?

    I’am afraid this is a typical ponzionomics thinking that made Keynes get everything wrong. real return comes not only from direct expansion but from productivity itself. you can have ZERO expansion, ZERO new jobs and still experience positive return just because saved (i.e. not-consumed) goods are used as capital (input) to make more other scarce goods. these other goods supply is increasing so they get cheaper – savers experience positive real return in that sense they can buy more stuff for it. unless central banks increase money supply as well cancelling out savers’ return.

    savers complaining about low interest rates to turn into tomorrow’s investors seeking out and pouring money into quality projects

    the problem is, with increased money printing and Cantillon effects, there’s no way of knowing which projects are quality. is housing quality again? it’d seem it’s still better that sitting on cash and complaining, right? Bernanke thinks so..

    the mistake you make is focusing on numbers too much, losing the picture f mechanisms taking place. you’re getting too close to aggregate-centric (non)thinking.

    • real return comes not only from direct expansion but from productivity itself. you can have ZERO expansion, ZERO new jobs and still experience positive return just because saved (i.e. not-consumed) goods are used as capital (input) to make more other scarce goods. these other goods supply is increasing so they get cheaper – savers experience positive real return in that sense they can buy more stuff for it.

      How do you get increased productivity without increasing direct output? Deflation is not a cause of increased productivity it is a symptom of it in the context of tight money.

      the problem is, with increased money printing and Cantillon effects, there’s no way of knowing which projects are quality. is housing quality again? it’d seem it’s still better that sitting on cash and complaining, right? Bernanke thinks so..

      Money supply has always been an unpredictable variable, and always will be. Quality projects are always a risk, and always a matter of opinion.

      • How do you get increased productivity without increasing direct output?

        you can’t indeed. but the way you say it sounds as if only new jobs could lead to increased productivity. machines do not count as “new jobs”. old jobs + better machines = increased productivity. imagine groundhog-day economy with machines better every single day. more aboundant storehouse with same money supply -> price-deflationary.

        Deflation is not a cause of increased productivity it is a symptom of it in the context of tight money.

        price-deflations + constant monney-supply is a cause of increased productivity. money-supply-contraction is syptom of economy recalculating new wealth/work distribution.

      • Precisely. Investment is always a crap shoot, but it’s stupid not to have individual monetary and hence economic freedom in the mean time. You simply have to take responsibility for rationally controlling/equating the macro-economic and monetary systems. That is the wise and humane thing to do….instead of the merely orthodox and inaccurate neo-classical equilibrium one.

  22. “It is not central banks that set interest rates for the market. Central banks set lending rates into the banking system”

    Central banks set the base rate, i.e. the Fed Funds rate in the US. If the Fed decided tomorrow to raise the Fed Funds rate to 10%, then other rates would also rise.

    Do you agree?

  23. So you introduce all-fiat system with CB with unlimited ability to print and corner the market in short run…. then the savers are your problem..!!
    What a insidious thinking !!
    Yeah “savers” you are to blame, stop complaining and in the meantime we will steal your purchasing power left and right…
    Do you forget that if the CB hadn’t printed trillions of dollars the government would have to borrow those money from those “evil-savers”…
    Simple napkin calculation will show you that :85B * 12 = 1.02T per year had to be borrowed from savers every year … guess what would have been the interest rate ?!
    It is a shame to see so many people falling victim to “agregate”-thinking (as one of the poster mentioned).

    It does not matter what sort of dream-pipe-math you are using, if you have wrong assumptions/axioms.

    That is what is wrong with all kensyans.. they put all those ridiculous assumption as if the real world does not exists and everything is averages and sums.
    Guess what this is not Physics where you can do the experiment to check your statistics … and confirm your assumption.

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