- It’s no way to run a countryPosted 5 days ago
- The extraordinary political power of unelected central bankersPosted 11 days ago
- Should savers be scared of big, bad Canadian wolf Mark Carney?Posted 19 days ago
- Warning: low interest rates are seriously damaging your economyPosted 25 days ago
- Trust me, I’m a politician!Posted 36 days ago
Four years of savers propping up the banks and subsidising debt
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.