For many, savings are very personal.
You might take a peek at your nest-egg from time to time, say, to see how it’s grown, or switch them from account to account in the hunt for better interest rates,
Yet, on a national scale, your savings are far more crucial: they’re a critical source of capital – essential for the UK’s own economic growth
They may sit in your local bank or building society but, in reality, they’re being used far more usefully – and lent to help people start new businesses and enterprises that, in turn, create jobs and new work opportunities. They can help existing businesses to expand, modernise or smooth out their cash flow which, in turn, can then fuel other new growth in employment or income generation…
It can be a virtual circle that helps a nation to grow its commercial and economic muscle organically without recourse to the world’s debt markets.
Alternatively, your savings can be loaned to others like yourself, in the shape of mortgages or personal loans. Y ou probably won’t be surprised to learn that, in the UK, banks have simply not had enough cash savings to meet all their lending requirements and so have borrowed on the wholesale funding market….
As we have seen during the tumult of the 18-month banking crisis, this source of money has its absolute limits and can be withdrawn at very short notice – with a brutally disruptive effect on the financial stability of the banks and economy.
It emphasises just how interlinked each of our savings are with the overall health of the UK…
Since this cheaper so-called ‘global money market’ debt funding has not returned and is barely at the ‘trickle’ stage, the only other source of cash to lend remains our savings. In turn, the lack of these has had a woeful knock-on effect on the mortgage market – more expensive loans, higher fees – and dwindling commercial loan availability for small businesses, as banks become more chary about handing out loans to higher-risk enterprises.
As a consequence, it’s prompted the Government to issue ‘gilts’ – or Government bonds – to raise funds to help get the economy moving again.
Gilts – short for “gilt-edged” stock – are critical to the economy and are simply giant loans effectively given to the government (by pension funds and banks, for example) agreeing to pay a set income for a fixed period, usually 10 to 15 years or more.
Today, gilts are in high demand because of their comparative safety to the post credit-crunch turbulence – with high prices, this, in turn, has pushed down the ‘yield’, or return. And the Bank of England’s policy of “quantitative easing” – snapping up huge numbers of gilts from financial institutions to, in turn, allow them to free up cash for cheaper lending to consumers and businesses – has pushed yields down even further.
This matters because critical institutions like pension funds depend on gilts to be able to pay our retirement – and when gilts pay less yield, that means less money in the pot for payouts, which can lead to reduced payouts for pensioners in the future…
It’s astonishing to see how far your savings – no matter how small – reach into the UK economy and their effect on monetary and economic policy.
Meanwhile, the bottom line for the economy remains the same.
Unless the banks have cash to readily lend, then the housing market – like that for other major purchases such as cars – will not be able to pick up and will scratch along the bottom.
As a result, as credit remains tough to come by, buyers will be forced to pay larger deposits for major purchases such as houses, cars and consumer durables.
It’s worth remembering that much of the trading on the London Stock Exchange is from your savings, if not directly in shares but indirectly via pension funds, individual savings accounts (ISAs) and other investments such as bonds and exchange-traded funds.
The stock exchange enables companies to effectively raise money from our savings, and the shares traded define the ownership of the businesses, while the returns from these investments are needed to provide the necessary profits to successfully fund our pensions.
If we are unable to fund UK investment ourselves, then the sadly inevitable consequence is that we end up relying on foreign companies for major investment. When this happens, the end can look like this:
- Strategic decision-making moves abroad
- More profits move abroad
- Capital can be more easily withdrawn
- Small and start up businesses struggle as they become more disadvantaged with less access to investment resources
It might sound apocalyptic but, ultimately, if we don’t invest in our own UK industries, others will – and we’ll be in severe peril of ending up poorer, losing control over the economy and, eventually, our own destiny.