One thing that very seldomly gets mentioned in all the discussions about the GFC and all the world’s other financial problems is this: Those with savings in the bank are getting screwed. And many of these people are elderly.
When the GFC hit, all the reserve banks around the world (USA, Canada, Australia, UK, New Zealand and many others) all dropped their equivalent of the official cash rate (OCR) we have here in New Zealand.
And this is done to protect from a crash and stimulate growth. It helps a lot because everyone’s mortgage payments go much lower and borrowings to start up new businesses etc. becomes a lot cheaper.
But it also means term deposit rates paid to savers go way down as well. This leaves these savers with 2 options, 1) Just wear it and try to ride it out i.e. wait until the respective reserve bank raises rates again and term deposit rates go back up, or 2) Take your money out of the bank and put it somewhere else where you can earn a higher return – which usually means taking on more risk.
And this is something the reserve banks want also. Instead of that money sitting around in the bank not really doing anything, they want it used more productively. So for instance, in the sharemarket or used to start up a new business, or as funding for an existing business or anything else that produces jobs and adds to GDP growth. So this is a second way the reserve banks are stimulating the economy.
Back in early 2008, I had a decent chunk of cash in the bank and I was getting 8.75% per annum paid monthly. This was very sweet! It was easily enough to live one, I didn’t have to worry about tenants in properties or any other business type hassles. And the tax on the interest was deducted before I saw it, so I didn’t have any tax to save up for, or any GST, FBT, PAYE or provisional tax issues to worry about. Life was good.
But then our reserve bank, in it’s infinite wisdom decided to reduce the OCR from 8.5% to 2.5% which mean term deposit rates fell to around 3%. So my income had been more than halved overnight in a totally unprecedented move by the reserve bank. Thanks guys.
Never before have the rates been reduced so much. And it was done very quickly too. And this happened around the world.
Everyone with a loan cheered and everyone with savings in the bank looked like they had been whacked in the face with a wet fish. Essentially what happened was that those who were profligate, spent all their money on consumerist crap and added it to the mortgage, were rescued by the reserve banks and those who were sensible and saved money away for a rainy day – or even more sensible, had a little nest egg they were living off in their retirement after decades of work and saving, were basically shafted.
Now what sort of message does this send? That’s a rhetorical question but whilst answering that, consider the messages coming out of various government departments around the world. Which were along the lines of “People need to spend less and save more.” and “We all need to learn to live within our means.” and so on.
So hang on, we’re supposed to save more, but if we do, all we’re being treated like fools because we can’t earn anything much at all on that money – because the reserve banks around the world have basically said to them “Oops, sorry, you’re term deposit rate will go to near zero but we have to do this.”
And as I said earlier many of those savers are elderly people who have worked their whole lives to build up a little nest egg which they can live out their days on. Well in Britain, 4 years after this was done, they are starting to talk about this. This article in the Telegraph is quite interesting. They are discussing the elephant in the room.
Time to reward elderly, say MPs
Pensioners and savers who have been ‘penalised’ by the Bank of England’s money-printing operation should be compensated by the Government, MPs to announce.
Saga, a campaign group for the over-50s, estimates that more than a million pensioners have retired with permanently lower incomes because of the impact of the Bank’s emergency policies Photo: Ian Jones
By James Kirkup and Christopher Hope
10:00PM BST 17 Apr 2012
The Treasury select committee warns that “quantitative easing” (QE), a policy that has led to the creation of £325 billion of new money, is “redistributing” money from savers to borrowers.
Bank Rate has also been at a record low of 0.5 per cent since March 2009, with interest payments to savers reduced by more than £470 billion as a result.
Saga, a campaign group for the over-50s, estimates that more than a million pensioners have retired with permanently lower incomes because of the impact of the Bank’s emergency policies.
The Bank insists that its measures are necessary to prevent Britain slipping back into recession, and claims that pensioners have benefited from the wider effects of the policy.
Now if what I’ve said above isn’t bad enough for the poor retired folk, the money printing that goes on in countries like the UK, USA, Japan etc. is even more detrimental to these savers.
Because what happens is that the value of the currencies in these countries is being reduced as well. More money added to the system makes each dollar, pound etc. worth a little bit less. So your nest egg is actually devaluing at the same time the return from your nest egg has been slashed.
So basically savers are being absolutely screwed! What a stupid, untenable situation.