How to have your inflationary cake and eat it
Inflation is proving to be the Chancellor’s best friend. In it he has an ally that is systematically reducing the real value of the UK’s debt and, at the same time, by changing the measure of inflation used to index link certain expenditure he is able to reduce Government spending. The fact that it is also eroding the value of the Nation’s savings seems to be of no concern to him at all, though.
Savers hold a total of £1.085 trillion in cash deposits that reduce in value by an enormous £10.85bn for every percentage point of inflation that they can’t make up for in interest which with today’s low returns, is most of them.
The Government, however, is more interested in its effect on the National debt, which is in the region of £900bn. Each percent of inflation reduces the value of the debt by a similarly massive £9bn a year.
Whilst on the one hand, however, Government favours high inflation, it is also in its interest for any index linked spending to be tied to low inflation. In accomplishing this neat trick, the Government is busy switching its use of the Retail Price Index (RPI) to the lower measure of Consumer Price Index (CPI) as the default for index linking payments. In so doing so it is able to save huge sums – a predicted £6 billion a year in benefit payments alone.One of the reasons RPI is almost always higher than CPI is due to its inclusion of housing costs; if we look back to the Coalition Agreement there is a commitment to “investigate how the process of including housing costs in the CPI measure of inflation can be accelerated”. I would not be surprised if this takes a long time to materialise, unless they can find a way of incorporating them without causing an increase in CPI.
All that most savers want is a safe place to put their savings where they can get a reasonable return. With the vast majority of interest rates now paying less than inflation it is more a case of minimising loss rather than actually generating a positive return. This is a situation compounded by the Government charging tax on interest income, even though the real value of the savings has reduced.
The only option that was offering to protect savings against inflation and provide a small return was removed recently when National Savings and Investment (NS&I) withdrew its index linked savings certificates because – unsurprisingly – they were proving too popular. Allowing it to be withdrawn is a move that seems to be in direct contrast with the Government’s stated intention of encouraging saving.
With massive spending cuts on the way, plans afoot to force – or at least cajole – everyone to join a pension scheme and with many benefits being reduced, the big message from the Government is that you need to provide for yourself. But that is exactly what millions of savers have been trying to do for decades. Rather than supporting them the Government is now persisting in making it harder and less worthwhile to save than ever.
Jason Riddle is a co-founder of Save Our Savers
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Definitely the best SOS blog article so far Jason. This avoids the usual allegiance and deference to the establishment, to overlook their tricks and deliberate deceit and tells it more or less like it is.
The trick of using debauchment of the currency to pay for government debt is nothing new. It has gone on to a greater or lesser extent in the UK ever since we left the gold standard in the 30s. Fiat currencies allow politicians to sequester citizens' money as an additional stealth tax. That is exactly what Keynes wrote. Most of todays politicians and economists claim to be Keynesian, but they only follow part of Keyne's theories and pronouncements; they ignore the algebraically opposite elements which do not fit their Socialist dream.
The modern toolkit for political embezzlement of citizens' wealth is firstly fraudulent statistics (to deceive) allied to smoke and mirrors in expanding the money supply to fund their profligacy. They are identical to the techniques used by confidence tricksters, the only difference being one of scale. Here they are robbing all people of much greater sums of money in a different league! A previous UK Prime Minster, John Major, recently stated that real inflation is currently at least double the official ONS number (RPI). He can say that now, because he is not in office; but of course he would not have said the same thing whilst he was PM or Chancellor! He was playing the same game then himself.
As far as savers are concerned, the final coupe de gras is charging income tax on the loss which savers bear after inflation has already diminished their saved value, when they have already paid income tax on the earned value before saving it! The whole gamut of tricks and dishonesty is completely outrageous, and it is difficult for any thinking person to understand why citizens just accept this unacceptable state of affairs generally without any significant and angry protest. (It is all the mark of professional politicians, just as the way they levy taxes on taxes, e.g. Excise duty on road fuel, and then Vat on the taxed fuel, in other words VAT on the Excise duty already levied!) Did you know they do the same with matches and cigarette lighters?
However, the key issue to consider is what SOS are now going to do about this other combinative injustice? Perhaps the only answer after the statement from the BoE amateur governor today is for all savers to move their savings out of Sterling into a currency with a higher interest rate. It is now clear that the present government nor the BoE are going to pay any attention to the representations of SOS. There are some difficulties, since some foreign banks (e.g. some in Australia) will not allow non-residents to open accounts. Some will however. So the best technique is probably to spread savings across a number of currencies to limit risks. SOS could organise a collective fee rate with a currency transfer specialist for all members ( to minimize costs), and then have a recommended list of banks with the best deposit accounts. (There are protection schemes in other countries like Australia, so the risks would not be that great.) The principal risk would be the currency risk, but with the present state of the UK economy and the inflation which is now evidently planned by the UK government and BoE governor as announced today that would be likely to be minimal. SOS may be able to negotiate preferential rates with some foreign banks, because of the amount of funds involved. It is clear that some members have quite significant funds saved.
Countries with higher Central Bank interest rates
Egypt 8.25% 8.50% Sep 22 2009
South Africa 6.5% 7.0% Mar 25 2010
Australia 4.50% 4.25% May 04 2010
China 5.31% 5.58% Dec 22 2008
Hungary 5.25% 5.50% Apr 27 2010
Iceland 8.0% 8.5% Jun 23 2010
Turkey 6.50% 6.75% Nov 20 2009
Indonesia 6.50% 6.50% July 05 2010
Against those interest rates the other factor which has to be considered is their inflation rate, since this reduces any real yield. The above are the Central Bank rates, and so the available deposit rates are higher.
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Hi Tim
Thanks for your comment on the blog, I don't disagree with you. As you have observed I'm not exactly anti-establishment, but I am strongly against blatant-hypocrisy and there is plenty of that around at the moment..
I'm not sure I'm qualified to organise what you suggest regarding currency transfers, but if people did want to get together to organise or be part of something like this, please write to me – use the contact form on the web site – and I will put you all in touch with one and other. I'd also be happy to provide whatever other support I can.
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A great comment, thank you.
The problem is none of us seem to know where it's safe to invest and which country's accept a Brit's money.
As for the BoE, wrote to them again, but they don't give a damn about savers.
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Are this lot any less devious than the last lot?
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I am new to this page, so unsure whether I can post, but here goes. I think you're onto something potentially huge – it needs one experienced, connected person or organisation to set it up, but I can imagine all Britain's savers transferring their trillion pounds into an overseas savings fund. There's collective power!
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Hi Jason,
I sympathise, being a saver, but I have to pull you up over “inflation erodes debt”. Inflation defined as a rise in prices can have many causes, and they have different effects. What the media dishonestly call inflation, the RPI or CPI is only a measure of prices, and rising prices alone actually *increase* the burden of private debt – debt payments have to be made out of a smaller disposable income. It is increase in *wages* that erodes debt.
Similarly, when it comes to public debt in Sterling, it is increased tax revenue that erodes debt. When it comes to foreign debt, it is a stronger pound that erodes debt, which we would see as a *fall* in prices.
Tim Glover
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Clearly now as we can see Pauper, by the things they have said and done so far – NO!
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Hi Tim,
I think you are allowing yourself to be befuddled by the semi-neo-Kenyesianist's deception. As part of their toolkit of deception they have deliberately avoided continuing to use the original Classical definition of inflation. As Milton Friedman showed, and as those of the Austrian school of Economics have explained, inflation is ultimately about an increase in government spending which exceeds the total of all revenue received from taxation and borrowings. Since we left the Gold Standard, governments have been able to sequester the algebraic deficit by printing more fiat money, or issuing new money in one of the various other forms they are able to do. This increases the money supply and causes inflation. (Increases in prices are a symptom of that, but not the only effect, nor the only symptom.)
They like defining “inflation” in terms of price rises only because this enables them to conceal the realities. There have always been and will always be, cycles of natural price changes. There are many reasons for this, such as varying sources of quantity, seasonal variations, material and commodity variations, vogues, and other natural phenomena. This enables them to confuse why price changes are occurring, so as to conceal the real inflation which they are generating.
Thus Jason is correct to point out that inflation erodes debt. For example, if you have a house on a mortgage which was worth £200 000 when you bought it with a borrowing of £150 000, and there is real inflation of 20% in one year, your house in theory is then worth £240 000, but your mortgage remains the same at £150 000. Your equity in your house has therefore increased by £40 000 but your debt is still only £150 000 less whatever you have repaid during that year. That is true whatever increase in income you may or may not have achieved over that year. So your debt as a percentage of the equity has been eroded.
I appreciate what you mean about an increase in income though. If you also achieve a corresponding increase in income, the mortgage payments which you have to make become a smaller percentage of your income. And this is the point; inflation favours the debtor but discriminates against the provident!
Changes in the exchange rate for Sterling have little or nothing to do with inflation, but are more a function of base rate.
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“Savers hold a total of £1,085 trillion in cash deposits…”
I'm pretty sure you mean £1.085 trillion. If it was £1,085 trillion then with 60 million people in the UK the averages savings would be £1,085,000,000,000,000 / 60,000,000 = £18.1 million per person.
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Why cant we launch a petition ?
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Because it's already been done & they take not a blind bit of notice. They don't give a damn, does anyone here understand me THEY DO NOT CARE ABOUT SAVERS ONE LITTLE BIT, NOT EVEN A MICROSCOPIC TEENSY WEENSY BIT. Get real, all! The only way forward is to find a safe way to move money out of the UK to higher rates abroad. I don't know what's safe. I do reckon the BoE won't care a jot about that either as they are now printing money a bit like like Zimbabwe, if you ask me, they are doing what they like – as usual. I voted Tory – before that I voted Labour. I see now why people don't bother to vote – because whichever party it's always the same old lousy government that gets in. Cameron, Osborne, King, Hammond, May, Clegg, etc etc – all are the same old same old same old.
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I feel that you make some valid points in this article Jason. Savers are right to feel that moves are being made to disadvantage them. To illustrate the details of this let me quote from the analysis of the notayesmanseconomics web blog which is very helpful on such matters as the importance and significance of the change in inflation measure.
“The original documentation for the change was produced in the period of late 2003 and it has an interesting statement on this subject.
Since January 1989, RPIX inflation has exceeded CPI inflation by an average of 0.7 percentage points and, at 1.3 percentage points in October 2003, the difference is currently quite wide.
One might think that such a time “currently quite wide” might be not the time to make such a change but the then Chancellor did not have such doubts. I demonstrated the differences since 2002 in the two inflation indices in my article on Budget Day (22nd June) but today I have added RPIX to the comparison as it excludes mortgage costs. This is because some suggest that for pensioner households this is not appropriate. The annual rates of change from 2002 are.
CPI: 1.3%;1.4%;1.3%;2.1%;2.3%;2.3%;3.6%;2.2%
RPI:1.7%;2.9%;3.0%;2.8%;3.2%;4.3%4.0%;-0.5%
RPIX: 2.2%;2.8%;2.2%;2.3%;2.9%;3.2%;4.3%;2.0%”
At least someone understands what is happening and explains it….
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Bryan
Absolutely right, thanks for pointing it out and I've corrected the article now.
Jason
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I am sure this article is on the right track. Perhaps other countries, like the US, also stricken by the bankers' greed and misguided bailouts will also suffer major inflation.
I like the idea of transferring my savings away from UK banks but deposits in foreign currencies are subject to currency swings even if interest rates are better. There may also be a risk of default and of course no protection for savings.
Sadly banks have, like so much else in our society, become focused on profit to the exclusion of all other considerations. Profit has become the only measure of success. As long as this mantra remains unquestioned we savers can expect no respite from the banking sector.
As an alternative to moving money abroad, some websites (e.g. zopa.com) offer bank-like services, i.e. taking deposits and lending them out at a higher rate, and their rates look good. But there is a risk that is not present in high street savings accounts. And your money is tied up for several years. I have no experience of using these schemes but would be interested to hear if anyone has.
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I to have written to the BoE several times and each reply suggest the base rate will increase soon or its to benefit everyone. They could not give a straight answer when challenge with matieral suggesting that the base rate will stay low for years. I have exhausted this avenue and look forward to any other suggestions as to where I can move my money to get a fair return thats above inflation.
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Hi Tim,
I like your approach and SAVE OUR SAVERS more critical voice attemting to get SAVERS pro active-I think you could add the thought that interest rate may not be the biggest incentive for us to move to a foreign currency-why not take a view that there are certain currencies that will as night follows day strengthen against sterling and the profit you will make will far out weigh the interest rate you might get.
After Oct 22 sterling will in my view weaken substantially against key currencies including the euro as the Government poses as a friend to SAVERS but does very little for them and has no idea how to re balance the economy around the 5% that pay some75% of the taxes and who will develop the positive environment to reward all SAVERS .crucially those that prudently fight to achieve some SAVING from very little resource.
Until MONEY/SAVING is valued we will be in trouble-only SAVERS adopting the logic of your argument and voting against sterling will achieve the interest rate that will reward our prudence as SAVERS,
If they can force Bankers to lend why not ask the Government to legislate for up to the guaranteed deposit
Level (£50,000 today) to be rewarded at least say 75% of the Mortgage rate the Bank charges?
If forcing Banks to have minimum reserve ratios is crucial is it not necesssary to see SAVERS as the solution not the hindrance to growth in the economy?
Peter Duck
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I don't think someone who would use the phrase “what the media dishonestly call inflation, the RPI or CPI is only a measure of prices” has been befuddled by anything. And he's right that inflation in general does not erode debt.
What you have shown is that inflation in an asset you own can improve your balance sheet, but you don't take cash flow into account. For example, if prices of food and energy rise but there is no upward pressure on wages then your mortgage interest rate may rise but you will have less income after essential bills with which to pay it. Without an increase in wages, inflation has increased the burden of debt. Needless to say, static wages and rising interest rates are not conducive to your debt being eroded by house price inflation, and even if HPI were to happen you could only reduce your debt payments by selling up.
I expect rises in food and energy prices are more likely than rises in house prices or wages in the UK. And it's not because of anything the government will do, it's because of a lot of people in developing economies are getting richer and using more resources.
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It's much easier just to buy gold and silver. Over 12 months gold has risen 32% against sterling and silver has done slightly better.
An easier way to get foreign income is to invest in overseas bonds via a fund. For example, “iShares JPMorgan $ Emerging Markets Bond Fund (IEMB)” (an ETF) currently has a yield of 6.25% (paid monthly). This is paid as a dividend rather than savings interest so the taxation may be more favourable. It tracks an index of “sovereign and quasi-sovereign” emerging market bonds which favours countries with lower debt. Obviously there are risks other than just exchange rates when investing in a fund such as this.
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James, I fear you are now confusing inflation eroding debt with also being able to continue to service that debt.. The two are not synonymous nor necessarily occur together.
Inflation ALWAYS erodes debt. That is exactly why governments use it – it erodes the public debt they have profligately incurred! Then you state “Without an increase in wages, inflation has increased the burden of debt”. That is total nonsense. There is no way that inflation can increase any debt – quite the reverse. Even if you receive no increase in wages or salary your incurred debt will remain the SAME. If you have borrowed £100 000, you still owe £100 000 regardless of inflation. That is the way inflation works, and that is why it erodes debt in real terms.
You seem to be concluding that if there is inflation interest rates must automatically rise; but as we have seen for over a year that just is not so, and in the UK and many other countries we have had increasing inflation with interest rates not rising and being way below officially admitted inflation. This in fact rather than making it more difficult to service debt has made it easier, since the monthly repayments (based on variable rates) for debt have fallen! Hyperinflation would also not change any debt in Sterling terms. It would remain the same. It might become more difficult to service your debt if you lost your job. You then also refer to house price inflation. That is another make-believe term which does not exist in reality. House prices will always tend in the longer term to follow real inflation, since it will cost more to build a new or replacement house. Additionally supply and demand will affect the current market price of houses. That has nothing to do with inflation.
In general workers always eventually receive increases in pay as inflation increases and erodes their payment level. If they did not they would cease working for employers. There would be no point in being employed. That is what leads to so-called Stagflation, when governments generate inflation. It comes back like a whiplash as sure as night follows day.
It is clear from your last remarks that you are confusing price rises with inflation. I repeat – price rises are a SYMPTOM of inflation, although changes in price also occur for reasons other than inflation from time to time, and that is what makes trying to measure inflation only in terms of price rises so inappropriate and erroneous. Classical inflation is not measured in terms of price rises. Governments have only forced that method to aid their deception, in co-operation with their agencies.
So I stand by my previous comment. Inflation always erodes debt. That is why governments like it, and why they do not like the gold standard monetary system. Jason was perfectly correct. If you still dispute it then I suggest you do some proper research into what money actually is and how since the abolition of the gold standard and original Bretton Woods agreement governments have debauched the currency, causing inflation, and why.
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