Four years of savers propping up the banks and subsidising debt

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This week four years ago, the Monetary Policy Committee of the Bank of England announced that they were cutting Bank Rate – which had been 5% just six months earlier – to 0.5%, the lowest in the Bank’s 300-year history. In addition, they were implementing a radical new programme called Quantitative Easing, presumably because it sounds much more academic than “printing money”.

Back then, only the most pessimistic saver could imagine that Bank Rate would remain at 0.5% for four years and that there would be £375 billion of QE, resulting in the Bank owning a third of all issued gilts, increasing inflation and, on the Bank’s own admission, boosting the wealth of the richest at the expense of everyone else.

 The effect on savers

There is precious little sign, even after four years, that the MPC’s actions have done anything to boost the economy. They have, however, certainly had an effect on the nation’s savers. Savings rates have steadily declined, with the new Funding For Lending Scheme pushing them even lower of late.

Save Our Savers has calculated that the total cost to savers in the four years since March 2009 is £220.4 billion.

How is this worked out? The average level of interest-bearing savings in the UK over the period is £1,102 billion. The total interest received by savers since March 2009 is £55.7 billion, with the effective interest rate being 1.27%. This compares to an average rate prior to that of 3.57%.

Had rates not been cut, we calculate that savers would have earned, not £55.7 billion, but £157.4 billion, making the loss in interest foregone £101.7 billion.

Inflation, too, has eaten away at savings. The cost to savers – the effect of the Retail Prices Index less interest actually received – is £118.7 billion. Taking the two together, the total loss to savers over the past four years has been a massive £220.4 billion.

The effect on the economy

It’s hard to get your head around numbers so large. This is a gargantuan and brazen theft of the nation’s savings, a theft which is becoming even more severe with the Funding for Lending Scheme, not yet fully reflected in the savings rates used in the calculations.

£220.4 billion is roughly 25 times the official cost of the London Olympics, while the annual figure is not far adrift of the £63 billion tax contribution of the entire financial services sector last year.

The announced rationale for the MPC’s policies was to boost consumer spending. But while that might have been the expected reaction suggested by their theoretical economic textbooks, the human beings who comprise the British economy reacted differently. Savers and pensioners on fixed incomes, seeing their money whittled away, have not gone on the MPC’s anticipated spending spree but have instead done all they can to preserve their precious capital. Yet borrowers too have pulled in their horns and are endeavouring to reduce their debts.

The MPC could hardly have got it more wrong if they wanted to boost consumer spending. With those in debt not keen to spend, £220 billion of potential spending money has been stolen from savers through the reduction in interest rates and the depredations of inflation.

The MPC’s true agenda?

The members of the MPC are not stupid; misguided, perhaps, but not stupid. Can their decisions really been made because of a misbegotten desire to boost consumer spending, whatever the cost? Or is there a hidden agenda?

The Bank’s policies, particularly Quantitative Easing and the Funding for Lending Scheme, have greatly benefitted the banks. Although being pressed to lend more, the banks – in some commentator’s opinion, mostly insolvent – remain reluctant. Lending in the last quarter of 2012 declined, yet the banks’ reserves have been greatly strengthened by QE and FLS.

Many companies cannot pay back loans but are surviving because they can just manage to keep the interest payments going. Without the banks’ forbearance, they would go under. These companies are often referred to as “zombies” and, although they do not have the strength and potential to expand, they are diverting resources away from capital-hungry companies which do. It is in the interest of the banks not to call time on loans to zombie companies, for fear that the extent of their bad loans will become known.

While many borrowers have benefitted from the Bank of England’s policies over the past four years, none has been helped quite so much as the British Government. Its declared total debt, £600 billion four years ago, is now around £1.1 trillion and is set, on Government projections, to climb above £1.5 trillion in four years. It is clearly in the Government’s interest to keep its borrowing costs as low as possible. Interest payments are estimated to be £47 billion in the current year, the same as the country’s defence budget. A rise in interest rates could be disastrous for the government.

Perhaps this is why the “independent” Bank of England can talk about letting inflation remain above target for the next two years without getting rapped on the knuckles by the Chancellor. Perhaps this is why officials at the Bank of England can talk down the pound with impunity, even though it will have an appalling effect on inflation. And perhaps this is why the Bank can do everything it can to plunder savings – the precious capital the country needs for future growth – just so long as it keeps interest rates at their current grotesquely distorted, recovery-inhibiting, levels.

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17 Comments

1. Neil

   March 5, 2013 at 1:12 pm

   If I accept your premise that the decision makers are not stupid, my interpretation is more that they are not engaged with the real world. They clearly did not anticipate cheap money being used to pay off debt rather than boost consumption. By also denying responsible savers the ability to continue spending they have created a society that is as much out of sync with sustainable long-term financial planning as it could be. The lesson that is being spread is live for today and someone will bale you out in the future. The recent HSBC Report on The Future of Retirement sets the scene for the miserable old age facing future generations. If there is a “Master Plan” behind the actions I can only assume that it is to force people to carry on working into their dotage to relieve Government of any responsibility to provide other than a basic State Pension and keep taxes rolling in. The only solution is for the strategy to be realigned back to the proven normal balance between debt, consumption and saving as soon as possible. If something as devious as the Funding for Lending fiasco can be dreamt up, surely mechanisms can be brought in to retrieve money gifted to irresponsible borrowers by low interest rates and hand it back to the innocent savers.

   Recommend (15)
2. helen jones

   March 5, 2013 at 1:38 pm

   Without a shadow of doubt the decision makers are both stupid and RICH

   Thus they have no interest or appreciation of what they have done to Pensioner/savers of today or the hell it will bring for tomorrows generations

   They cannot see that the Grandparents like me who were helping their grandkids can no longer even afford to heat their own homes or pay the bills because interest rates are so low our incomes have nose dived over 60%

   I was enjoying being able to buy what i wanted and treat my grandkids …………now i cannot

   Who wins ???????????? Bof E Pension Fund and the RICH

   Justice for the prudent

   FORGET IT

   Recommend (24)
3. Neil

   March 5, 2013 at 6:43 pm

   Just a postscript to my first comment which I should have added, but did include on a previous post and is worth repeating for the message it gives to illustrate the immorality of the current financial situation. In the last Sunday Times a married couple in their thirties related how “it was like a miracle” that their mortgage repayments had plummeted from £1,800 to £250 a month saving them nearly £50,000. Compare this to our 83 year old neighbour who has stopped having days out so that she can continue to heat her house as a result of her savings paying hardly any interest. Does no one in a position of influence feel the urgent need to do something about this?

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4. Techno

   March 5, 2013 at 7:45 pm

   Be warned.

   The media are heavily promoting a Labour politician called Rachel Reeves. If Labour win in 2015 she could well be Chancellor of the Exchequer. She has always been in favour of Quantitative Easing:

   http://labourlist.org/2009/03/labour-must-challenge-the-tories-on-quantitative-easing/

   If you vote Labour in 2015 you only have yourself to blame…

   Recommend (8)
5. Andy

   March 5, 2013 at 8:46 pm

   Watch what the BoE does not what it says!

   Over the last 4 years the BoE has constantly made noises about ‘unwinding’ but the reality is yet more QE. Unfortunately once started QE (otherwise known as money printing) is far too tempting to resist and probably the easiest ‘solution’ from a banksters point of view, so I fully expect the BoE will do everything to keep gilts at 300-year highs right up until the market cannot take any more, at which point we’ll have the crash proper. It’s clear the BoE thinks of pension fund and saver destruction as unfortunate but necessary preliminary ‘collateral damage’.

   Recommend (19)
6. Anne

   March 6, 2013 at 7:37 pm

   The whole idea of quantitative easing is to put money in to the economy by artificial means in order to create a situation of hyper-inflation,which deliberately bypasses giving workers a cost of living increase which in effect would put money in to the pockets of people and cause the economy to grow which is what the government is actually trying to avoid..Remember,the politicians were hoping that the economy would grow by people spending most or all of what they have,which most of us know would only provide a `quick fix` to the debt problem that the government themselves have created. But it would help in the governments ideology of helping us to offload any money we may have to help stave off the mess they have made. It is not our debt.It is the governments debt. Our role is to pick up the pieces of the mess they have made. (So the government thinks.) QE also has the additional benefit to the government of making money worthless in terms of value and buying power.In other words the money in our pockets is eroding fast – a quick and effective way of making us poor .The government has made a debt- hole so large that there is very little hope of ever filling it and as long as this country remains in the EU things will never change.A flat-lined economy is what the government wants.This way they can keep their destructive ball rolling until there is nothing left. It is only when the `claw-back` has been achieved that we will `miraculously` find ourselves out of recession.

   There IS a hidden agenda with this government and it began at least five years ago.

   Recommend (11)
7. Stephen

   March 7, 2013 at 4:52 pm

   It seems to me that the economy has come to a halt and the government don’t seem particularly bothered. Life is not easy for my kids and grandchildren and myself and my partner. What savings you do have earn very little in the Building Societies, taxation is at an all time high (for average people) , my kids are earning money and not getting rises, my partner works six days a week at the age of 63 just to try and keep going. Vince Cable talks rubbish, David Cameron is about as much use as a chocolate teapot, the EU costs us a fortune and for what? So we can be fleeced when we have to go into a home.

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8. AntiLIBLABCON

   March 7, 2013 at 6:02 pm

   It’s time to vote UKIP. The tories and Libdems have failed, as did Labour before them. Maybe all the money saved from being paid to the EU can be used to benefit UK citizens instead, including savers and pensioners.

   Recommend (20)
9. nigles

   March 8, 2013 at 10:30 am

   Well, well…it did’nt take long for the little Englander’s and the closet racists to blame all our economic woes on the EU once again! Our difficulties are home grown…get over it!

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10. AntiLIBLABCON

    March 8, 2013 at 1:42 pm

    @nigles. Well well, it didn’t take long for the EU brigade to get here did it. By the way, who is being racist? I see only one racist post on this site – yours referring to “little” Englanders.

    Remind me, how much is paid per year net to the EU? That money should remain within the UK in these times to help the suffering pensioners rather than be blown on wasteful and irrelevant EU “projects” and bloated salaries.

    Recommend (19)
11. Financially Responsible

    March 9, 2013 at 6:38 pm

    Response to nigles:

    I don’t see where anyone above has blamed the EU for the UK economic woes. If our difficulties really are home grown as you state (while under the 3 main Lab, Lib & Con governments), then surely you must agree that it’s all the more reason to kick all 3 main parties out.

    Regarding the EU, it’s not right that the UK is paying into the EU billions a year so that citizens of other EU countries can retire earlier and on better pensions. It’s just not right.

    Recommend (7)
12. Jason Riddle

    March 11, 2013 at 10:34 am

    Governments will spend as much money as they think they can get away with.

    However, if the government was to stop spending on X then it would probably spend more on Y – which could be equally abhorrent to some people.
    Discussions like these – whilst important to have – run the danger of distracting from the main issue this site was set up to raise and that is: that nothing will change until the Government starts to value savings and puts savers’ values at the heart of its economic policies.

    Recommend (6)
13. Me

    March 11, 2013 at 10:50 am

    @Jason Riddle

    I hear what you are saying Jason, but the question is HOW do you get the government to “value savings and puts savers’ values at the heart of its economic policies”?

    Just talking about savers issues on blogs and sending emails of complaint to members of the MPC and government doesn’t seem to have any effect at all. It’s been 4 years of this now and it looks like things are going to get worse before they get better, with more talk of QE rather than a rate rise.

    It will take something extrmeme, like riots, or the threat of being kicked out of office to get the government to change. Anything less will simply be ignored. The threat of UKIP has made them sit up and start to pay attention…

    Recommend (16)
14. Dave

    March 11, 2013 at 8:58 pm

    Here’s what Jim Rogers has to say:

    http://www.zerohedge.com/news/2013-03-09/jim-rogers-were-wiping-out-savings-class-globally-terrible-consequence

    Extract here:

    “Throughout our history – any country’s history – the people who save their money and invest for their future are the ones that you build an economy, a society, and a nation on.

    In America, many people saved their money, put it aside, and didn’t buy four or five houses with no job and no money down. They did what most people would consider the right thing, and what historically has been the right thing. But now, unfortunately, those people are being wiped out, because they are getting 0% return, or virtually no return, on their savings and their investments. We’re wiping them out at the expense of people who went deeply into debt, people who did what most people would consider the wrong thing at the expense of people who did the right thing. This, long-term, has terrible consequences for any nation, any society, any economy.

    If you go back in history, you’ll see what happened to the Germans when they wiped out their savings class in the 1920s. It didn’t lead to good things down the road for Germany. It didn’t lead to good things for Italy, which did the same thing. There were plenty of countries where it wiped out the people who saved and invested for their future. It’s usually a serious, political reaction, desperation in some cases, and looking for a savior and easy answers is usually what happens when you destroy the people who save and invest for the future.”

    It’s too late now for talking…

    Recommend (22)
15. coco51

    March 15, 2013 at 9:15 am

    Response to Nigles:
    Does it not seem ludicrous to keep paying taxpayers hard earned cash to an organisation that has NEVER had its accounts signed off? That means that this great behemoth cannot track or account for how and where the money is being spent – I would guess that a lot of it goes in expenses to fat cat Euro MPs. ‘The Law Says’ that pensioner couples need less that £220 per week to live on, so how is it that well paid MPs need hundreds of pounds a week for expenses alone? Let them live on this paltry amount and we would soon see changes!

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16. paul

    March 15, 2013 at 7:21 pm

    Savers have to get seriously tough now, action is needed.

    Savers have to tell their MP’s in no uncertain terms and use Twitter and Facebook etc that they will not vote at the next General Election or will protest vote via UKIP and stick to it.

    Savers get derisory rates on deposits so savers should en-masse threaten to withdraw savings fro financial institutions even placing the monies in the banks’ safe deposit boxes so thes funds cannot be used for either lending or to help this iniquitous Government and BOE out. Whilst this may reduce our paltry interest earned for a while it will soon focus the minds of the Gov’t, BOE and Institutions and rates will have to rise so making up any short term losses.

    Meanwhile we can all email George Osborne at: private.office@hmtreasury.gsi.gov.uk
    David Cameron at : david.cameron@conservatives.com (You can’t reach him unless via his contituency)
    Mervyn King at : mervyn.king@bankofengland.co.uk
    Nick Clegg at : psdpm@cabinet-office.x.gsi.gov.uk

    BEFORE Next Weeks Budget and Tell Them Our Intentions!

    Recommend (17)
17. Paul

    March 26, 2013 at 5:42 pm

    Stop Press 26th April : George Osborne says the Treasury is working on a ‘British Solution’ for the 13,000 UK customers of Cyprus Popular Bank (part of Laiki) who could lose a proportion of their savings above the 100k cut-off limit.

    This group who either chose to live in the sun whilst claiming Winter Fuel Allowance etc etc or, who bank in Cypriot bank branches in the UK are going to receive Government/Treasury help whilst the Government/Treasury/BOE does nothing to help the 24 million Savers who have been robbed of £220 Billion+ since 2009.

    At the same time, the Government/Treasury/BOE turn their collective blind eyes to those beneficiaries of Liars Loans (fraudulent mortgages) who benefit from the low interest rates as they pay their mortgages off early whilst our Savings erode early!!

    It beggars belief that the Marx Bros or should I say: Groucho = Cameron, Harpo = Osborne, Chico = Clegg, Zeppo = King, and Gummo = Cable
    all pick and choose their way around who is important enough to receive help, the minority (living abroad etc) or the majority (savers)

    Of course, if Osborne and the Treasury carry this latest barmy plan out it will set a precedent for the million + Brits who live in Spain, Portugal, France, Italy etc should their banks follow the Cypriot debacle.

    The UK tax payers cannot afford this, the UK is broke, lobby your MP’s please!

    Recommend (7)