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Wednesday, 15 December 2010

QE hit savers twice as hard and left a dangerous moral hazard

Caught at this angle with a very shallow depth of field the Queen on my ten pound note looks like she might be winking at me. Which is about right. With inflation staying stubbornly high and savings interest rates pitifully low, cash is becoming a joke.

The joke started a couple of years ago.  The banking crisis meant cash was in short supply, but instead of the banks raising money from savers by hiking interest rates on savings, they thought it better to take assistance from the government, in effect shafting us twice.

One: they take our taxes to fix their funding black hole
Two: they give us no interest (in real terms) for cash in our bank accounts.

Banks needed money, but weren't prepared to pay the ordinary folk for the privilege.  Instead they went the indirect route - via HMRC and the Treasury.

With inflation at around 3.3%, any savings account offering less than this in interest is losing you money for every day your money sits in the bank.  A quick check of my own reveals: 0.1% (current account), 0.4% ("savings" account), 1.1% (business "savings" account).

Of course it's losing you even more money if it's sat on the shelf at home, which brings me on to the rest of the joke.  This morning a headline caught my eye:

Investors told forget savings accounts, think of shares

And the punchline came a few hours later:

Spain debt downgrade threat sends Euro and stock markets lower

It's clearly not worth having cash at the moment, which undoubtedly is the intentional effect of the current policy.  Those with cash should in theory wake up to the reality that it's rapidly losing its value and do something with it, pronto.

But this simplistic view sidelines human nature.  In uncertain times we like what little rainy day money we have.

And the problem is compounded by a mass of personal debt.  In the UK we have mountain of this - in addition to government debt and corporate pension deficits - of around £1.45 trillion pounds.  That's over £24,000 per person (including children).

And whilst the banks are penalising savers with low interest rates as they take our taxes to support their lavish reward structure, they're not dropping rates of interest on borrowing.  I checked the rates offered to me on junk mail sent out by my banks and credit card companies over the last 2 months.  Every single offer is at least 2 percentage points higher than the last loan I took out (8.9%) over three years ago, when the Bank of England base rate was 5.5%.

The base rate is now 0.5%, but so I should expect to be paying around 3.9% on my borrowing, right?!

Ok, so let's say we get the hint and decide to get rid of our devaluing cash.  What should we do with it?  Shares are still risky.  Gold and previous metals are at historical highs - not a best time to buy.  We should be paying-off our debts, but many of us fear we may need quick access to cash in the near future, which seems to put otherwise rational people off this option.

And who's the real villain in the piece?  I'm becoming suspicious of Quantitative Easing (QE).

Since 2009 we've injected £200bn into the money supply system by "printing money" in a way that isn't officially classed as "printing money" because (a) no money is actually "printed" - but it does appear on the balance sheet(!); and, (b) so long as the government eventually pays-off the debts financed (via a circuitous route) by not printing money, the money can presumably be "unprinted", and everyone's none the wiser.

So really QE isn't printing money.  It's transferring a portion of government debt from bondholders and securing it against the pound.  If the debt isn't repaid, the pound takes the hit.

But the problem in reality is that QE has increased the money supply.  The net effect is the same as printing money.  Banks have hoarded much of the extra cash created by QE, which must be another nail in the coffin for savers. Banks don't need our cash.  Banks don't want our cash!

And the extra money freed by QE that didn't get hoarded?  I'm left wondering what effect the extra cash that did hit the "real" economy has had on the higher inflation we're seeing now.  The high inflation that's devaluing savers' cash and making life difficult for anyone living with pay freezes or even pay cuts and job losses.

Yes, I can see all this has been done with the right intentions.  The right intention being to stimulate the economy, get the money supply moving again and make life better for everyone.

But there comes a time when we have to face up to a couple of realities.  When we print more money, we create inflation, and inflation is a moral hazard.  Inflation penalises prudence and provides an out for indebted institutions.  And when we gift taxpayers cash to shore-up the balance sheets of the banks, we remove any incentive for those same banks to offer savers any reward for saving, again penalising prudence.


1 comment:

  1. Very good observations. The photo of the Queen winking, it's doctored - as in photoshopped, right?


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