Wednesday, September 29, 2010

Quit griping and spend your savings....now!


Those of us who thought that saving for our retirement was a good thing got some rather surprising news this week from someone who should be quite knowledgeable about such things.  This new paradigm  informs us that we have been wrong all along.

The rather aptly named Mr. Bean, the Bank of England's deputy governor, is trying to encourage "older households" that they should not expect to live off of their interest and that they have already benefitted from increases in the value of their properties.

Here's a quote from an interview that he gave to Channel Four News in the United Kingdom earlier this week:

"Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit."

"Very often older households have actually benefited from the fact that they've seen capital gains on their houses."

Basically, Mr. Charles Bean is telling U.K. seniors to put up, shut up and spend, spend, spend!

He also stated that savers had benefitted from high interest rates in the past and that the Bank of England had deliberately lowered interest rates to force savers to spend.  The typical savings rate on a U.K. savings account has fallen from roughly 3 percent before the Great Recession to roughly one-quarter of a percent today, cutting income for many seniors who were relying on the interest from their low risk savings account to supplement their pensions.  So much for the idea of saving for your own retirement!

The idea of forcing savers to spend is a rather interesting one.  Seniors, many of whom are intimately acquainted with the economic woes of the Great Depression, tended to save for "rainy days" and have been generally less likely to use credit for items other than mortgages.  

As a carrot to get savers to spend, Mr. Mervyn King, the Governor of the Bank of England stated that while low interest rates were implemented to return the economy to normal levels as soon as possible, once the economy returns to a reasonable level of activity, interest rates will return to normal levels.  Basically, get out there, spend your capital and we promise that interest rates will eventually go up.  Of course, you'll have no savings left but that's not the Bank of England's problem, is it?

The idea that the governor and deputy governor of the United Kingdom's central bank lowered rates to help British savers spend gives me pause to ponder whether Mr. Bernanke, Chairman of the United States Federal Reserve and Mr. Carney, Governor of the Bank of Canada were part of a grand scheme to help relieve both Americans and Canadians of their savings by deliberately lowering interest rates to multi-generational lows.  Although they have never publicly said so, my suspicion is that they share a similar philosophy with the Bank of England.

As well, pardon me if I'm wrong but wasn't it overspending and excessive use of credit that got us into the Great Recession in the first place?  With attitudes like those of Mr. King and Mr. Bean, it is no wonder that our fiat currency world is in such financial straits.

As an aside, Mr. Bean and Mr. King are hardly suffering.  Mr. Bean's promotion in 2008 rewarded him with a 54% salary and benefits increase over the past year and he is now receiving £252,497 annually, very close to the average income for most U.K. pensioners I'm certain.  As well, his pension has accumulated a cash equivalent of £1.97 million.  While his boss, Mr. King, has refused a further salary increase for 2010 and 2011, his pay package stands at £305,368 and his pension has accrued £5.36 million, also quite close to the amount in an average savings account.  On the upside, neither the Governor nor the Deputy Governors qualify for bonuses.  Poor fellows indeed.


13 comments:

  1. The economy runs on transactions. It doesn't matter who is spending, an active economy shows lots of spending a depressed economy does not.

    Unfortunately, in '08 a lot of the money that had been used in transactions disappeared along with the devalued securities that backed up an excessively hot real estate market.

    There is no quick way to bring that amount of money back into the economy. The problem is that even 'normal' spending is below where it should be for a growing economy. That's all that Mr. Bean is trying to do, bring spending to normal levels.

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  2. "The idea that the governor and deputy governor of the United Kingdom's central bank lowered rates to help British savers spend gives me pause to ponder whether Mr. Bernanke, Chairman of the United States Federal Reserve and Mr. Carney, Governor of the Bank of Canada were part of a grand scheme to help relieve both Americans and Canadians of their savings by deliberately lowering interest rates to multi-generational lows."

    Of course it is. Savers are being used to reduce the losses of the idiots who bought into the moronic bubble of the last decade - perhaps to zero.

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  3. START HANGING BANKERS from HIGH TREE with SHORT ROPE!!!

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  4. I have a tree, you bring the rope

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  5. Of course they want us all to consume more, buy, buy, buy! Isn't that the way of the world nowadays? Technology changes almost monthly. Got a cell phone from last year or even just six months ago? It's junk, you have to have to newest model. Same with computers etc etc. How long can this go on?! The whole thing is going to implode. It's not sustainable.

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  6. Anonymous #1 said: "The problem is that even 'normal' spending is below where it should be for a growing economy. That's all that Mr. Bean is trying to do, bring spending to normal levels."

    Two problems:

    1. Only the now dictates what normal levels are. Since pre-2008 spending levels were artificially high you could argue that the spending levels circa 2010 are were they should have been all along, i.e. normal.

    2. Tell any physicist you have constructed a system relying on constant growth and you will be laughed at. Unfortunately we modeled our future on this notion. This crisis is merely a natural correction, reaching for equilibrium between debts and incomes, whether they may be the debts and incomes of individuals, corporations, or sovereigns. None are immune from mathematical reality.

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  7. BAD DEBTS

    The currently available low interest rates on low risk instruments and to an extent, government and corporate bonds, are indeed reducing income from investments. In addition, the interest rates from many S&P 500 stock dividends are not terribly high either. However, CPI core inflation is only 1% (previous 12 months), and may eventually turn negative.

    So, in our demand-constrained economy, safety of capital, not income, may turn out to be the most important concern for retail investors for the next few years, at least. If deflation occurs, many bonds will default, possibly including some Muni-Bonds. It is not worth it to get an income stream paid from your original capital.

    So far, Ben Bernanke has tried many of the same approaches that the Bank of Japan implemented in their so-called "lost decade" (1990-2005). None of them worked. This analogy may be debatable, but the possible risks to bond holders of total loss of principal if actual deflation kicks-in are not.

    Safe cash kept in safe institutions is necessary to keep some of your money. However, some losses may end up being largely unavoidable.

    H. Craig Bradley

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  8. They will not be able to save the world as long as we continue to use interest based monetary system and fractional reserve banking. Banks create money out of thin air and demand interest for it making the rest of us slaves of bankers trying to pay interest with our hard earned money:

    http://www.kondratieffwavecycle.com/credit-inflation/

    It is a corrupt system that is bankrupt by design. The money to pay total debt, principal + interest does not exist in the economy. Thus if borrowing stops, borrowers cannot possibly earn enough to pay their debt. This is why foreclosures happen, many go bankrupt.

    Gross injustice of printing money and giving it to the few favored ones is not going to fix it. It only makes the crash take longer and accumulates the wealth in the hands of the few. Rich gets richer, poor gets poorer.

    The solution is to abolish the FED, accept that banking system is bankrupt and nationalize it, give the right to print money to the people (the treasury of the gov), fully fund the banks with new printed money, and make the fractional reserve requirement 100% (daily fluctuations for flexibility is ok).

    If people borrow, they should be able to borrow from "other people" and interest should be paid to "other people", not the bankers. Bankers create money out of thin air, we can do so as well!!! The government can lend the money to the borrowers via nation's banks. At the same time, the government can immediately print and spend an amount that is equal to the interest that the borrowers are expected to earn and pay back in the near future.

    This way we can avoid deflation because there will always be principal + interest amount of money supply available and it won't deflate.

    At the same time, when interest is paid back to the banks (aka the government) it should be destroyed. Because that amount was already printed and spent earlier. This will make inflation impossible on the long run.

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  9. Voodoo economics.

    Wealth is created by saving which leads to investment, capital growth, higher production and finally more consumption. Simply consuming more means you are starting at the end of the chain with no foundation beneath you to support it. When goverment intervention is inevitably pulled back, the whole thing collapses back to market levels.

    What the Fed is doing in the USA is robbing savers, stoking up inflation and creating new bubbles in emerging markets and commodities. The US dollar is crashing. Just wait when the day comes that foreigners will no longer fund our public debt.

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  10. Put up, shut up and spend till you have to go get a reverse mortgage on your house. These guys are always in touch with how they've basically messed up the economy, now they want you to follow suit.

    Do your duty.

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  11. This crisis is not merely a natural correction its the result of exceptionally low lending standards due to fact that A) The Fed took the rates down to 1% in 2003. No rational investor would have made lending conditions easier when the risk was increasing. Low and short rate led many to borrow short term to finance long term commitment. B) Several Bank regulations are meaningless if the loan where guarantied buy the government. Remember when people got better rate in savings & loans , No risk = No due diligence needed. Fannie Mae Bond where safe where they not ? No need to look at there balance sheet its all Government guarantied.

    What we have now is a transfer from savers to losers. Investment Bank have higher spread to recapitalizes them self.

    It is wrong to say this will make holder folks spend more. The money they do not get from interest income will deplete there saving by the same amount they would have spent or most probably less. However the interest that the bank are making with that free money they get from not having to pay interest is often moved right out of the economy and invested at higher rates in other emerging countries. "Carry Trade"

    Its as if borrowers are taking the savers income. Rates should not be manipulated.

    Unfortunately people are not always rational in a free market but at least they tend to constantly adjust there behavior and learn. Central planing don't until it's to late and it implodes. That there leaders pay them self more for engendering such financial disaster also shows there hypocrisis and how much they care about there citizens.

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  12. Savers are being used to reduce the losses of the idiots who bought into the moronic bubble of the last decade - perhaps to zero.

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