Why we need sound money and a restoration of savings

Politicians, bureaucrats, academic economists and their disciples in public service broadcasting all fundamentally misunderstand the workings of a global modern economy. Together they have wrought the greatest peacetime debt crisis the world has ever seen.

Let me explain where we have gone wrong and how it might be put right. It is not possible for an individual, a family, or a small business to permanently spend more money than it earns. Applied to the nation state, money can only be raised legitimately through taxation or borrowing. Too much of either burdens an economy, stifles growth and eventually leads to bankruptcy. Technically, this has already happened – current UK debt is £97,000 per head and we are not alone, although we are one of the worst offenders.

The current crisis has been caused by a complete disregard for the fundamentals of money. Money is merely a medium of exchange, invented because the alternative, barter, is a cumbersome and inefficient means of facilitating trade. … Continue Reading

Prime Minister is wrong: Credit card debt is still rising

Remember the kerfuffle over David Cameron’s speech at the Conservative Party conference? The Prime Minister had planned to say: “The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills.” After a panic, it was changed to: “That is why households are paying down the credit card and store card bills.”

It turns out that both statements were wrong. Households are NOT paying off their plastic debt. True, headline totals have fallen. But that’s only because the banks have written off bad credit card debt.

According to the Bank of England, in September total outstanding credit card debt was £57 billion. That was £2.1 billion less than a year earlier but, over the same period, the banks wrote off over £3.9 billion in bad debts.

The reality is that, over the year, borrowers put another £1.75 billion of debt onto their credit cards. Perhaps that’s not surprising when it’s still so easy to borrow at 0% interest on credit cards. … Continue Reading

Economists slug it out over savings

Although Economics is considered a science, it sometimes appears an inexact one, given the variety of “expert” opinions about how to boost our economy. No wonder President Harry S. Truman once said he wanted a one-armed economist so that he couldn’t say, “On the one hand…on the other”.

It’s rare to encounter anything to do with economics that is both enlightening and amusing. So we were delighted to come across “Fear the Boom and Bust”, a video dramatising in musical form an argument between rival economists John Maynard Keynes and Friedrich von Hayek.

Keynes, who advocated that governments spend their way out of recession, coined the phrase “the paradox of thrift”. He believed that, in hard times, saving was unhelpful and that savers should instead be spending to help boost the economy. Hayek, on the other hand, was more of a free-market man who saw savings as a force for good.

What is particularly impressive about the video, other than the high production values, is how entertainingly the views of the two economists are represented. While Keynes wants to steer markets, Hayek wants to set them free. Of particular relevance to us are Keynes’s views on savings: … Continue Reading

The vicious anti-savings circle

With Government policy sometimes appearing to be devised on the hoof – and abandoned just as quickly if it proves unpopular – you could be forgiven thinking that nobody in charge is looking more than a short time ahead. “Let’s just get through the next choppy bit,” seems to be the attitude, “And if we keep our fingers crossed, everything will probably turn out all right.”

Fortunately, we have the Office for Budget Responsibility, set up last year to provide independent economic forecasts. Its first Fiscal Sustainability Report examines whether UK public finances are sustainable over the long term. It makes for uncomfortable reading.

They use figures from the Office of National Statistics which show that the proportion of the population aged 65 or over will increase from around 17% to roughly 26% in 2061. As a result, the OBR points out, state spending on public health, state pensions and social care will mushroom over the next 50 years. Without a change of policy, they predict that the budget deficit will worsen and put public sector debt on “a continuously rising trajectory as a share of national income. This is clearly unsustainable.” Substantial extra tax increases and spending cuts will be needed within a few years or Britain will be in serious trouble. … Continue Reading

Putting savings at the heart of the economy

The Office of National Statistics recently reported that, based on its Wealth and Assets Survey 2006-08, households headed by 50 to 64 year olds held £2.2 trillion pounds in savings, 73% (£1.6 trillion) of which was pension saving. When you consider that the same survey reported total savings in the UK (excluding property wealth) to be £5.5 trillion, with total pension savings at £3.5 trillion, the sheer disproportion in the accumulation of wealth across the generations becomes glaringly apparent. 40% of the country’s savings is held by 50 to 64 year olds, the group approaching retirement.

This disparity is being made worse by a lack of saving. Last week Scottish Widows reported that 36% of people are not actively saving money; compared to only 20% in 2009. Of those who are saving, there was a distinct focus on the short term over the long term. A week earlier, HSBC found that 6 in 10 Britons had no financial plan for their retirement and labelled them the “ostrich generation”. … Continue Reading

UK – 5th lowest level of saving in Europe

According to the World Bank the UK has the fifth lowest level of gross savings as a percentage of Gross Domestic Product (GDP) in Europe.

With gross savings at 12% of GDP the UK is only ahead of Iceland at 11%, Portugal at 10%, Ireland at 9% and Greece at 3%. Even Spain at 20% and Italy at 16% are ahead of us. The list is topped by Norway and Switzerland which both have 32%.

How much are we saving?

The household savings ratio – which is basically the percentage of disposable income that people save or use to repay loans – for Q4 2010 has come in at 5.4%. To put this into perspective the average savings ratio for the last decade is 4.3%. But compare this to the 90’s, which averaged 9.2%, and the 80’s which averaged 8.7% and it is easy to understand how the UK has come to have one of the lowest levels of saving in Europe.

On the face of it we are starting to save more. The Bank of England’s Housing Equity Withdrawal report for the same period reported that £7 billion of mortgage debt had been repaid in the same period. Also there was an increase of £11 billion in household cash deposits for the quarter, which grew to a total of £1.096 trillion at the end of December 2010. … Continue Reading

Sacrificing savers: the short-term politics of long-term pain

Pre-election, both David Cameron and George Osborne were pro-saving; they were going to rebuild the economy on a recipe of exports, investment and savings. But rather than nurturing and rewarding saving, they now seem intent on bleeding savers dry in order to support growth in an unbalanced economy.

The last decade saw record low savings with a booming economy fuelled by massive consumer debt. Now we have an economic policy that is designed to penalise savers, encouraging them to spend rather than save; our diminished savings are being sacrificed to prop up a semblance of economic growth. However at the same the Government realises that we are saving too little and we are seeing the introduction of initiatives such as NEST to encourage us to save more!

The result of this schizophrenic approach, which as ever sees political expediency triumph, is to undermine the long term financial security of millions of households. Providing the economy does eventually pick up, the retired – who contributed least to the financial crisis and are the most badly hit by current Government policy – will be the least likely to benefit. … Continue Reading

The budget for growth must be built on a stable foundation of savings

This week’s budget has been labelled a budget for growth. Cuts and tax rises have been ruled out; tax breaks for industry, enterprise zones and vocational training are in. But you don’t get economic growth without investment and the money for investment comes from savings. If this is to be a budget for lasting growth it must also address the issue of the UK’s troubled savings culture.

In decline

Saving in the UK has been in decline for years; in fact if you exclude employer pension contributions then overall we have had negative saving since 2003.  The result is that the level of gross national savings has fallen to 12.2% of GDP. This is 6% less than the European Union average and as Mervyn King has pointed out, is the lowest it has been since the Second World War. … Continue Reading

The incredible shrinking pound and your savings

It is now widely predicted that the Bank of England will raise the base rate sooner rather than later. Inflation is on the increase and the base rate can’t remain this low for ever, can it?

When Japan reduced its base rate to 0.5% in 1995 nobody expected it to remain at that level or under for the next 16 years, but there it is today at under 0.1%. I’m not saying that our economy is heading the way of Japan’s, just pointing out that the unexpected can and does happen. After all, how many people truly foresaw the banking crisis?

Inflation and the base rate have led us all on a merry dance over the years. In 1980 the base rate reached 17% and inflation peaked at 21%. During July and August 1982 the base rate was being adjusted twice a week in an attempt to meet the economic demands of the moment. In 1990 the base rate rose to 14.88% while inflation stayed below it at 10.9%. The current situation of a base rate being 4.6% below RPI is extreme, but by no means unprecedented. … Continue Reading

If the Bank of England won’t support savers, then the Government must!

We have moved from an era where the ethos of saving was destroyed in the pursuit of economic growth, to one where the rewards for saving are being destroyed in the fight against economic decline.

By financing our economic boom through borrowing, we were in fact paying a premium to the finance industry for the pleasure of instant gratification. The “instant gratification” was mutual; we got what we wanted now, without having to save up, and the finance industry made a profit.

The more we borrowed the more successful they were. So in order to maintain this success they made it easier and more tempting for us to borrow. In any case saving just didn’t seem to fit in the multi-media, online, instant access web-enabled world of the new millennia. … Continue Reading