Greece represents the triumph of spend and borrow over save and invest – only saving will save us

It would take may Professors of Finance to define these targets, quantify investment risk, measure inflation and implement these policies. Who could possibly come up with such a complicated solution?

I think it would help the debate to differentiate between savers and investors. The statement “taxation of income from savings should decline with the increase in investment risk” is a classic case of confusing the two. By the way, people expect to take no risk when they save, so should the tax on their income be infinite?

The author’s policies make no sense either. For example, “policies that reward people for saving with a honest and reasonable net rate of return”. Why should saving generate a return? It is a deferral of consumption, not a means of profit. If “savers” lend their money to have it invested, but also expect the government to insure it against loss, then surely any rate of return cannot be called “honest”. Icelandic banks offered the highest returns for a reason! Whether a return is reasonable is highly debatable. Is 5% reasonable when it would mean people can’t pay their mortgage? Would it be more reasonable if the only reason people couldn’t pay their mortgage was because they overstretched themselves when 2% was what The Powers That Be considered reasonable? It would ultimately be a political decision, just like the Bank of England’s interest rate policy, and debtors would probably still win.

Essentially, savers and investors can be characterised thus:
- Savers want to save the value of a pair of shoes and buy a pair of shoes next year
- Investors want to invest (or lend) the value of a pair of shoes in (or to) a shoe factory in the hope that it will be worth more next year

We don’t need to protect investors. To help savers all we need to do is identify the reasons that buying the pair of shoes next year might require more money than it does this year, and eliminate them. We can’t do much about a disease wiping out cattle herds and raising the price of leather, but we might be able to do something about the increase in the amount of money in the economy. Doesn’t that come from the Bank of England and the fractional reserve banking system?

This chart (link below, page 4 of the PDF, page 41 of the document) shows that the period between the Napoleonic Wars and World War 1, when our coins were made of silver, was good for savers (although prices fluctuated greatly, the trend was downwards). So perhaps a Professor of Financial History can offer a better solution to our current problems. Having Professors of Finance tinker at the edges of a broken system will not bring prosperity!
http://www.statistics.gov.uk/articles/economic_trends/ET604CPI1750.pdf

The Cobden Centre was established to promote social progress through honest money, free trade and peace. Cobden lived during the period between those major wars. I’m not a part of the organisation but I think supporters of SOS might be interested in the information and opinions at its site.
http://www.cobdencentre.org/

Recommend (0)

Jimbo, I must take issue with a number of your points.

“By the way, people expect to take no risk when they save, so should the tax on their income be infinite?” Clearly people do take a risk when they save. They take a risk that they may not get their money back and that they may lose some or a great deal of the value which they have saved due to currency debauchment. (Only £50 000 in any registered group of financial institutions is protected by the FSCS.) If the tax levied on their income were infinite then there would be no propensity to save in any financial institution.

“Why should saving generate a return?” Saving should generate a return when money is deposited in a savings account because otherwise there is no propensity to save. There are options for storing money and unless there are different yields from those options then the lowest risk option will be chosen. The lowest risk option is not to deposit money in the fractional reserve banking system, thus the only reason that will be chosen is for a potential yield.

“Whether a return is reasonable is highly debatable. Is 5% reasonable when it would mean people can’t pay their mortgage? Would it be more reasonable if the only reason people couldn’t pay their mortgage was because they overstretched themselves when 2% was what The Powers That Be considered reasonable?” Why should any return be “reasonable” or not? Reasonable is a subjective term. Rates should certainly not be set just so that people who have over-reached themselves should be able to continue repaying their mortgage, to the detriment of everyone else! Any sensible individual should not take on any mortgage or other debt which they will not be able to continue to repay if the interest rate increases within the terms of the contract, or they become unemployed for up to 1 year, or for any other reason. That in classical risk planning is called planning with a margin of safety. The reason that some may not be able to continue to repay their mortgages if interest rates increase is that they have not included any margin of safety in their planning, but have over-reached themselves instead. Example: when I had a mortgage, in 1991 I became unemployed like many others. I was unemployed for just over 1 year, and interest rates went up to 15%, but I had planned with a margin of safety and was thus able to continue paying my mortgage out of savings. I thus did not lose my house, because I had bought one which I was properly able to afford! Another method of reducing risk is to choose a fixed rate mortgage.

Interest rates should be set according to existing inflation and market demand, not according to what any particular person thinks to be “reasonable”.

“We don’t need to protect investors. ” I disagree, and so does the government and the financial institutions. If there were no protection far less people would save with financial institutions because the risks would be too great. Savings up to £50 000 per registered group of institutions are protected. There is also some more limited protection on various other investments including pensions and equity-based investments. As you rightly observe, the fractional reserve banking system increases the risk, thus increasing the need for protection.

Finally, the government publication to which you place a link is yet another example of the dishonesty and smoke and mirrors used by governments increasingly since circa 1950. As you rightly observe this does show that there was previously a period of responsible government on the whole up to circa 1950, and apart from clear periods during various wars when inflation was used to part finance those wars in general inflation was fairly well controlled. Once the tricks began to be introduced, and inflation was used more and more by governments to finance their deficits caused due to their profligacy, the cost of living began to increase dramatically; its real increase however was increasingly concealed in government statistics by the growth of tricks and slight of hand used. To give just a few examples, if you look at staple items like beer, bread and housing, and compare the real increases in costs with government statistics, you can then see a measure of the ongoing level of deceit.

1965 cost of average house in Home Counties circa £3600.
2003 cost of average house in Home Counties circa £180 000.

(180000 – 3600) X 100
___________________ = 4900% increase
3600

1978 average price of bitter in Saloon bar in London £0.15
2003 average price of bitter in Saloon bar in London £2.50

(250 – 0.15) X 100
_______________ = 166, 567% increase
0.15

1957 average price of petrol per Litre 1.32p
2003 average price of petrol per Litre 117p

(117 – 1.32) X 100
_______________ = 8763.64% increase
1.32

….and so on!

The government statistics in this document show inflation over the period 1978 to 2003 to be circa 700%. I rest my case. To attempt or to purport to quantify inflation by only monitoring prices and then distorting the statistical result with all sorts of trick devices such as Hedonics (so as to pretend that inflation is less than reality) is total deliberate delusion.

Recommend (0)

RD, I think I’ve not explained my position well enough, especially in the distinction between savers and investors.

You say “clearly people do take a risk when they save” but a survey from the Cobden Centre (this was what first alerted me to them) found that 74% of people thought they own the money they deposit with banks.
http://www.cobdencentre.org/?dl_id=67
I won’t argue that we don’t take a risk when we save *in our current financial system* but whether we understand that or want it is another issue altogether. What I want when I save is for my money to be worth as much tomorrow as it is today, and I certainly don’t want to risk losing it. Our economy is based on a continual expansion of the money supply, even when the natural state for the economy is contraction. This means that I am forced to risk money which I want to save, and to call on taxpayers to refund me when I lose it. (I feel such a fool now for putting my money into a relatively safe bank at a low interest rate instead of putting it in an unsafe (Icelandic) one at a high rate and being able to claim from you any losses.) Being forced to invest savings when the economy wants to contract is obviously not a good position to be in. A contraction ought to spell opportunity for savers but those who plan our economy choose these times to ease the burden on debtors and to try to promote “growth”. For those of us who want to save in the old-fashioned sense of the word, there is no option. This is not a good system.

Saving should not generate a return because it should involve no risk. Our system has no alternative to taking risks (other than a government guarantee of bank deposits), and inflation means that we need to make money just to stand still. You mention the “propensity to save” and suggest that it comes from the returns available to savers. I believe that the propensity to save stems from the ability to consume less than one earns and the desire to consume in the future without having to work. It is the propensity to _invest_ which comes from the potential returns available.

I discussed “reasonable returns” only because they were mentioned in the article. It seems you think this a silly motion and I agree.

Investors are not savers, except that our financial system forces savers to invest. There is no need to protect investors – they are adults choosing what to do with their own money. Savers need to be protected but I believe it is better to protect them by eliminating inflation rather than by eliminating the potential for losses or guaranteeing inflation-protected returns within a financial system which obviously doesn’t work. As you point out, the inflation index is created by the government, which has a political agenda to follow. The use of substitution and hedonics means that a salary which can buy beef and a top-of-the-range TV can rise “in line with inflation” over a number of years and eventually afford only chicken and a middle-of-the-range TV. The same would happen to savings.

It’s interesting to note that you put “circa 1950″ as the end of responsible government because it was 1947 in which silver was removed from our coins. Until 1919 they contained 92.5% silver and from 1920 to 1946 they were 50%. Given that, here’s another price increase to consider (silver is currently £12.90/troy oz).

1919 shilling in 1919: 5p
1919 shilling today: £2.10

1946 shilling in 1946: 5p
1946 shilling today: £1.14

Putting your money under your bed used to be a valid option, but that didn’t stop people investing in the productive economy. I have money in both gold and silver, which I consider savings rather than investments.

In our financial system savers are essentially not required, because the possibility for money- and credit-creation is near infinite and interest rates can be manipulated to suit speculators. To save savers the system should change. You can’t save savers in a system in which they are redundant.

Recommend (0)

Hi Jimbo,

It seems that we do agree on most things then, but perhaps I misunderstood your previous comment.

I still must disagree however concerning a number of issues. Firstly “What I want when I save is for my money to be worth as much tomorrow as it is today, and I certainly don’t want to risk losing it.” Well we all want that, but if you understand Discounted Cash-Flow (DCF), which is the basis of all investment computation, then you will understand that to invest money with a Bank or other financial institution (FI) deserves usury, because that Bank or other FI may then lend your money on to make money on a margin, and because there is risk.

“Our economy is based on a continual expansion of the money supply, even when the natural state for the economy is contraction. ” That is true solely because of politicians. It is a very bad thing and does not lead to a sound, healthy economy.

“This means that I am forced to risk money which I want to save, and to call on taxpayers to refund me when I lose it. ” That is not true. You are not forced to save at all. In the present system it is not taxpayers who will redeem your loss if a FI becomes insolvent, it is the FSCS. This is funded by a levy on all registered member banks and BSs. Therefore if you save with any FSA registered FI up to £50 000 that will be protected by the FSCS – not the taxpayer. I think have confused the bailout of the banks with the protection of savings?

“Being forced to invest savings when the economy wants to contract is obviously not a good position to be in. A contraction ought to spell opportunity for savers but those who plan our economy choose these times to ease the burden on debtors and to try to promote “growth”. For those of us who want to save in the old-fashioned sense of the word, there is no option. This is not a good system.” Well, where can I start? You are not forced to save. If the economy is in a state of illiquidity, as it is now, then indeed it ought to spell an opportunity for savers. However, with left-wing neo-Keynesian politicians and economists manipulating the economic system everything is upside down! That indeed is not a good system.

“I believe that the propensity to save stems from the ability to consume less than one earns and the desire to consume in the future without having to work. It is the propensity to _invest_ which comes from the potential returns available.” I am sorry but I do not agree, for the reasons previously stated, and due to the theories for DCF.

“Savers need to be protected but I believe it is better to protect them by eliminating inflation rather than by eliminating the potential for losses or guaranteeing inflation-protected returns within a financial system which obviously doesn’t work. As you point out, the inflation index is created by the government, which has a political agenda to follow. The use of substitution and hedonics means that a salary which can buy beef and a top-of-the-range TV can rise “in line with inflation” over a number of years and eventually afford only chicken and a middle-of-the-range TV. The same would happen to savings.” Now you agree that savers should be protected! Eliminating inflation is not any longer a possibility whilst you have Zanu Tory Blairists in a coalition with Zanu Liberal Dems. They are slightly left of centre in the political spectrum, so it would not be expected that there will be any more rationality. Thus with the present BoE governor, who lacks any conscience whatsoever, and the left-wing MPC hand-picked by Brown, there is going to be rampant inflation.

“In our financial system savers are essentially not required, because the possibility for money- and credit-creation is near infinite and interest rates can be manipulated to suit speculators. To save savers the system should change. You can’t save savers in a system in which they are redundant.” I agree with that. The system is manipulated, as all Socialist-based systems have to be, to pay for the resultant profligacy from political ideology. I suggest you watch a lecture by Dr. Thomas Woods on http://vimeo.com/9857126. This I think will answer most of your misunderstandings about the relationships in real economics.

Regards,

RDF

Recommend (0)

RD,

The bank bailouts were needed because there were so many losing investments in the system. It shows that the taxpayer is where the buck stops.

Let’s suppose the economy is a zoo and inflation is a tiger. The visitors are savers. One day the tiger escapes and the visitors are in peril. You see the open door of the tiger’s cage and think “If we all hide in there we’ll be safe”. I’d rather try to get the tiger back into its cage, which is harder in the short term but a vastly better solution over all. I fear that Save Our Savers is campaigning for a more comfortable cage. I don’t think such a campaign is worth the effort.

You say “you are not forced to save at all” but it is not my argument that we are forced to save. I said that we are forced to invest if we want to save (putting money under the mattress guarantees a loss so I don’t consider it to be saving, as per the “shoes example” in my first post). This is clearly a bad situation.

You express surprise that I think savers should be protected, but to do so you have to ignore the difference between savers and investors and what I think savers should be protected from. They are currently protected from losses on their investments! The system categorises investors as savers, which is possibly why I am having trouble explaining my position to you. Do you not see how crazy it is for a non-investor to have to be protected against investment losses?

I do understand Discounted Cash-Flow – I have a degree in economics. However, this should have no relevance to a discussion about saving. I have gold in what might be called a bank. The bank is not allowed to lend it because they do not have my permission to do to (I remain the owner of the gold which is bailed with them). My gold is “savings” and because the supply of gold is limited it should retain its value over long periods (and increase in value at times of financial and political stress, which is why I own it). If money was gold then savings would be savings and investments would be investments.

Once the tiger is in its cage the system is simple and the reason for my purposeful distinction between savers and investors throughout these posts is far more obvious (although most people fall into both camps, designating some wealth as savings and some as investments). A bank becomes a place for savers to put money and access it via debit cards, electronic transfers etc. If we want to get a return on our money we can give it to a lending institution but might not get all of it back, or we can buy shares etc. Nobody needs to be protected by taxpayers or centralised insurance funds. There is no need for the risk panels and interest rate decision makers that the Professor suggests in the article. We don’t need to vote on growth and consumption rates (I’d vote for 20% and 16.3%, how about you?). Neither do we need to define an appropriate National Savings Ratio or a set of policies to reward savers. And of course, we don’t need bureaucrats to assess the honesty and reasonableness of returns.

The article describes how we can make the cage more comfortable. Would you like to comment on it? Are all those policies and panels the right way to go?

Recommend (0)

Hi Jimbo,

It is clear that we will just have to disagree. If you claim to have a degree in economics, you do not write like someone having a degree in economics. On the whole I do not find your arguments to be rational or rationally expressed as an economist would express them. I will not sully the discussion by listing my formal qualifications.

When you write “I fear that Save Our Savers is campaigning for a more comfortable cage. I don’t think such a campaign is worth the effort”, it makes one wonder why on earth then you are posting comments on here if you in principal do support the SOS campaign, unless it is just an attempt to beliittle the campaign? I still suggest that you have a look at the link I posted: http://vimeo.com/9857126.

Recommend (0)

RD,

Profesor De Luca’s standpoint in the article is that we need more government policies and constraints on markets to ensure that savers get a better deal. My view is that if we got rid of the current distortions then savers would have as great a deal as they had in the 1800s, when money was backed by precious metals and there were no deposit guarantees (for “savers” who invest their money with banks). So why oh why do you want me to watch a video on Austrian Economics? I didn’t mention my qualifications in order to sully the discussion, I did so to make you aware that I do know what I’m talking about. If you re-read my posts with an Austrian hat on, instead of viewing them through the prism of how our current financial system operates, then you’d know what I’m talking about too.

In particular, consider that my very first comment was “it would take may Professors of Finance to define these targets, quantify investment risk, measure inflation and implement these policies” (De Luca is a Professor of Finance). Isn’t this the sort of thing that would immediately stand out to an Austrian Economist on reading the article? Also, note that in my next paragraph I identified a difference between savers and investors. I did so because the system we have forces savers to invest and the terms “savers” and “investors” are often used interchangeably (and for some reason, “lender” is almost never used). I have already pointed out an example of this from the article above; for another, consider the article “Savers must prepare to defend themselves against tax attacks,” which mentions CGT in the context of saving (hint: savers do not make capital gains). Does my definition of a saver in my opening comment make sense from an Austrian point of view?

What is your definition of a saver? If it involves making an investment (or lending) then it would be helpful to know your definition of an investor too. Can you support Profesor De Luca’s proposals from an Austrian perspective? You’ve not yet commented on the article except to say that the idea of a “reasonable return” is impossible (you thought you were responding to me on that point when in fact you had simply misunderstood me. Where you have understood me you have agreed with me).

Having a non-mainstream point of view is not the same as belittling the campaign. If I call for 4-3-3 instead of 4-4-2 it doesn’t mean I want the football team to lose.

I found the video was dull and irrelevant to the point that I imagine you posted the link merely as a type of argumentum ad verecundium. There was nothing in it which I did not already know and I share the speaker’s view of economics. You write that I do not express my arguments as an economist would express them. I’m honoured, thank you.

Recommend (0)