Monday, January 12, 2009

War on Savers

That's pretty much what the following article by Anatole Kaletsky advocates:

Times Online: Punish Savers and Make Them Spend Money

Wow. I don't know where to start. Let's go with this:

I believe, in line with the vast majority of non-socialist economists, that Mr Cameron's campaign for savings is completely wrong; that “borrowing our way out of debt,” paradoxical as it sounds, is exactly the right prescription for our present problems.

Did you know that if you're saving money, you're a socialist? And that borrowing 'til the banks say "no mas" is the path to freedom? Yeah. It was news to me, too.

This paradox is easily explained: if governments or wealthy individuals increase their borrowings they replace weak debtors - bankrupt hedge funds, struggling businesses or repossessed homeowners - with strong ones and this helps to stabilise the financial system and sustain economic activity and employment. The country can borrow its way out of debt.

I understand the "replace weak debtors" theory, but it's crap. You're asking savers (which does not describe the U.S. government at all, by the way) to step up and borrow. Profits from this "stronger" borrowing then eventually "pay" the bills of the weak debtors — they "take the losses" that the banks cannot, as it were.

If that's what it takes to stabilize the financial system, you can count me out. It's time for a full-on reset.

...the US and British governments, despite their reputations for reckless borrowing and fiscal imprudence, have managed their finances better than most other countries and entered this crisis with substantially lower public debt levels than Germany, France, Italy or Japan.

Right. Which is why U.S. public debt tallied over $530k per household.

In 2007.

Sounds like someone has confused "well-managed" with "well-expanded." Here's one difference: Well-managed debt won't bring about insolvency if (when!) interest rates rise. Well-expanded debt, on the other hand...

What then is the outlook for economic policies in the US and Britain? And how will consumers, businesses and voters react? The second question is imponderable - and may depend on whether Mr Obama and Keynes look more credible to voters than Mr Cameron and Marx - but the answer to the first is quite clear. Governments and central banks on both sides of the Atlantic will do whatever they can to increase spending and borrowing.

More reinforcement of the idea that saving is a Marxist thing to do.

Meanwhile, the central banks in both countries are trying as hard as they can to make people save less. In the US, interest rates on bank deposits have been cut to zero and the Fed has just announced that it may buy long-term government bonds to squeeze five-year and ten-year rates as close as possible to zero.

Well, he's right on this part. It is indeed a race to the interest-rate bottom. Good thing there are never any unintended consequences for this sort of policy.

Assuming interest rates are reduced to about 1 per cent today [in the U.K.], it will make little difference to savers if they fall all the way to zero. To all intents and purposes, income from bank accounts will be reduced to nil.

Well, the interest rate on my ING Direct Electric Orange checking is now .5 percent. So yeah, that might as well be zero.

But with my savings collecting 2.5 percent, I'm at least content. Those savings aren't about "income," and never will be. They're about being prepared. They're about stability. Things which the bailout-begging debt-bingers Mr. Kaletsky seems so enamored with will never understand.

The next logical step, although it may be politically controversial, would be to ... tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets - or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump.

That's a tremendous idea. Do it, and I guarantee you every penny I have in any bank comes out and goes in the mattress. You want bank runs? Guess what — you got 'em.

In the absence of a savings tax - and even Mr Obama would probably balk at anything so controversial - there are plenty of other measures to boost consumption and investment. Most obvious are direct government spending on infrastructure; public guarantees and subsidies for business loans or home mortgages; or tax cuts and handouts, especially for those on low incomes who tend to spend all their money. The beauty of such policies in a world of zero or near-zero interest rates is that they are effectively cost free.

Cost free? I've got news for you, pal: There are always costs. They just may not be of the interest-bearing sort.

At some point, the more a debtor — whether it's your next-door neighbor or that profligate entity in D.C. — needs low-interest financing, the less it will be available. Risk will surface somewhere, and lenders will require that they be compensated for it.

As I write this, 10-year U.S. treasuries offer a yield of 2.41 percent. The 13-week t-bill yields .07 percent. In historical terms, these figures are "on the floor."

Low yields like these mean the prices of those bonds have headed for orbit; i.e., folks are willing to pay up in order to have the AAA-rated safety offered by the U.S. Treasury and its current and future taxing authority. (They're front-running the Fed, too, who as mentioned above have said they'll be buying long-dated bonds in order to further depress rates. Can't allow credit rates to be priced correctly for any increased risk, can we?)

One might argue (with validity, IMO) that this country, after so many years of living beyond its means, is at an important juncture: We can no longer function without (1) dirt-cheap credit, and (2) a bubble existing somewhere.

That current bubble, some maintain, is in government debt (t-bill yields low = prices high).

When this bubble pops, interest rates and debt-carrying costs will rise substantially. Perhaps very quickly. Even the most heretofore highly-rated debtor countries will have big, big problems on their hands.

Their lenders will, too, though. It's mostly a matter of who flinches first.

"If you owe the bank a hundred bucks," the old axiom goes, "and you can't pay, you have a problem. If you owe the bank a hundred million bucks and you can't pay, the bank has a problem."

If you're a saver and owe nobody, you're mostly out of that loop. You have no problem. Except, of course, for the fact that your socialist savings habits will have to be taxed into extinction by entities who never met a spending project they didn't like.

I only thought Fred Thompson, in his "We can't afford to save" video, was being facetious. Turns out I had it all wrong.

No, the guy was prescient.

Mr. Kaletsky, obviously, would attest to that.

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— Posted by Michael @ 8:35 AM



Of course, following this theory of taxing savings: If you (and most of the savers I know, myself included) make a run on the banks, where will we put this money? In our homes somewhere. The media will go on and on about how much cash is floating around in our neighborhoods. Crime rates will go up as people try to "help the economy" by spending the money that they find in our closets while we're out at work. More police patrols and security systems will be required to stem this rising tide, so ultimately, we will have job creation (police and security specialists) and all of our money will be floating around Best Buy somewhere.

This could work...


The best thing I saw related to this article happened to be the comments section. Over 180 comments and growing, and 99% of them gave this financial hack the rasberry. At least the readers were able to recognize gross, self-serving stupidity when they saw it. Mr. Kaletsky is infamous for being dead wrong with his financial preditions. With an attitude like this, is it any wonder? (The wonder is why he's still the financial page's editor after all this time...)

Anonymous Dragon Lady
, at 12:28 PM, January 12, 2009  

"politically controversial"?

The word he's looking for is "boneheaded".

(Ohhh... I like my verification word: norocent. It's like being innocent of noro, which amuses me, because Noro is a yarn company that makes fairly distinctive yarns. At the moment, though, I have plenty of yarn, so I won't buy any in the near future. No matter how much my savings is taxed.

Whoops. Posted too slowly. I like my second word too - quidnest. If I lived in the UK, I would totally refer to my savings account as a quidnest.)


Denise, you need help. :)


I totally agree with your posts about the War on Savers. However, your money is not safe anywhere. The stocks have been hammered down, so are the real estate and many other previous safe havens. As you say, if you were to put your money into the Mattress Bank, you risk that money being stolen and/or decreasing in value as the feds prints more and more money, etc, etc. Also, if the push comes to the shove and the dollar gets devalued, that also becomes another headache. Since the dollar is not backed by anything other than the words "This note is legal tender for all debts, public and private" all you are holding are a bunch of pieces of paper with a promise; a promise that is getting increasingly hard to keep.

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
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