Wednesday, 28 May 2008

"Consumers struggle to save"

"Encouraging people to save" via tax-favoured savings schemes - TESSAs, PEPs, ISAs, Child Trust Fund, Individual Savings Account, Pension funds (and depending which bunch of morons fails to lose the next General Election, either Lifetime Savings Accounts or Savings Gateway) - is one of those mantras that economically illiterate politicians like to trot out when they can't think of anything else interesting to say.

UK banks* love this, of course - people are so bedazzled by the thought of earning interest 'tax free', that instead of doing the sensible thing and paying off their mortgage as fast as they can, they commit some of their disposable income to 'saving'. Banks of course are just middlemen - they pay depositors 5% and charge borrowers 6%. So a 'responsible saver' with a large mortgage and some money in an ISA is in fact paying the bank 6% interest on debts he could have paid off in order to earn 5% on money that he could have used to pay off the mortgage ...

Let's face it, this is all crap.

The economically literate person will pay off debts and/or save (i.e. spend less than they earn) when they are working, and will run up debts and/or use up savings (i.e. spend more than they earn) when they aren't working (i.e. while studying, unemployed, at home with young children or in retirement). The 'cost' of foregoing £1 of spending when you are earning is far less than the 'benefit' of being able to spend that £1 when you aren't. That much seems uncontentious.

Similarly, some people are naturally cautious, and end up dying with £[loads of money], they have saved too much. Others fritter away each pay-cheque within a day or two and spend their last days alone, shivering in a council flat, they didn't save enough. That's just human nature, which no amount of social engineering can change.

There is a balance to be struck here - glossing over the natural desire to leave a few bob to your children or grandchildren, or to have some rainy day money - the ideal savings rate (taking the population as a whole - bearing in mind that people at different stages in their lives will be saving and dissaving at the same time) that would maximise the utility of each individual (and hence to society as a whole - society merely being the sum total of all of us) is thus, to the nearest whole per cent, absolutely nothing, nil, zero, nix, nada, niente, rien**.

* Yes, the Nationwide is a building society not a bank, but their 'research' is what sparked this off.

** The fact that with a growing economy, The People as a whole become wealthier with time is another topic.

17 comments:

Anonymous said...

Don't give a tit about all your big words and long phrases. Why does governments of either persuasion, disuade people from saving? How? By taxing the interest on their savings!

A fractional reserve banking system with inflation inherent in the system, loading the dice against 'prudent' ( sorry, isn't it sad, as soon as a leftoid gets hold of a decent word is feels dirty ) behaviour.

Simple fact is, when the government taxes the interest you receive on your deposit, and then destroys the principle in the bank with deliberate inflation. What is the point of being frugal?

Better to be a spendthrift, get into debt and live it up.

Mark Wadsworth said...

That's rubbish, I'm afraid, on lots of levels.

The Great Simpleton said...

Just about the story of my life. I took every opportunity to pay down my mortgage, usually by not reducing payments when interest rates when down, and finally paid it off 5 years ago when the company I worked for went in to liquidation. Its a great feeling.

I now save and take every opportunity to maximise my tax position, the latest wheeze being "salary sacrifice".

I do think that Anon has a point, though. Here'sme saving for a rainy day and when it comes I won't get any state aid because of means testing. Yet those who, for want of a better phrase, piss their salaries up a wall, will get the benefit of the taxes I pay nmy savings.

Mark Wadsworth said...

I have said many times that I would end means-testing, which savagely punishes the prudent and thrifty.

Trooper Thompson said...

I agree with the post, but anon does have a point, because due to fractional reserve banking, there's always more debt than money, our money being based on debt. Therefore, although being prudent works for the individual, if everyone did it, there'd be no money.

Mark Wadsworth said...

TT, have you not just contradicted yourself twice?

1. The point about 'fractional reserve banking' is that there is, give or take, always exactly the same amount of 'debt' as there is 'money'. The only way banks can afford to pay interest to depositors is to on-lend it to borrowers.

2. As you say, if we all tried to save at the same time, things would grind to a halt. Ergo, the correct balance is between people saving and people dis-saving at the same rate. Which is what actually happens (there is always the same amount of money as debt).

Trooper Thompson said...

Mark,

No way. The very point of fractional reserve banking is that it allows the bank to lend multiples of the money it has on deposit. The bank only needs to keep a fraction of the total it has lent - based on the general principle that not everyone will turn up demanding their savings at the same time. So if the fractional reserve ratio is set at 1:10, there will be ten times as much debt as savings.

Mark Wadsworth said...

TT, exactly not. e.g. bank lends £400,000 to Mr B to buy my house, that's a debt of £400,000, quite clearly.

But I, the vendor, take the £400,000 sales proceeds and put it on deposit with the bank, that's my 'savings'.

The bank is just a middleman!

See my post explaining FRB here.

Anonymous said...

If you look at the false inflation figures they put out you'll soon realise saving is a mugs game. People are wiser than you think.

Mark Wadsworth said...

The fundamental point of saving is not to earn interest or make capital gains! It is to spread consumption more evenly over your lifetime.

Sure, high real interest rates (or increasing share prices) make it more advantageous, and negative interest rates make it less advantageous, but that is a secondary issue.

Trooper Thompson said...

Mark,

I will read through the link, but the question is:

Where did the bank get the £400K to lend the seller?

The answer is... they created it out of nothing, or rather they had a fraction of it and created the rest.

The bankers are not the middle men they are the priests of this age. Behind the curtain, through a mysterious process, they create more and more debt which can never be paid back because there isn't enough money ever to do so. The banking system is a pyramid scheme.

Mark Wadsworth said...

"Where did the bank get the £400K to lend the seller?"

Effectively they got (most of) it from the seller! All will become clear once you have read the link.

Trooper Thompson said...

Nope. Not buying it. It's smoke and mirrors. The banks create money out of thin air, we borrow it and spend our lives working to pay it back like indentured servants. And if ever the system unravels, we - again - are forced to bail out the banks through taxation.

This is the rotten heart of our economic system.

Mark Wadsworth said...

Agreed, the banks create assets and liabilities out of thin air, but for every £1 they lend a borrower/purchaser, they have to create a deposit of £1 that is effectively owed to the vendor.

The bank is just a middleman.

In my worked examples, you see that WBL's share capital (its true net value) is not affected however much it lends (OK, its profitability goes up as it takes on more risks, different topic)

I once tracked down the stat's; the total level of personal bank deposits and corporate bonds issued by banks is (as expected) roughly equal to the total level of household (and corporate) borrowing from banks.

Just look at some bank balance sheets - on the one side (assets) are vast amounts of money they have lent to borrowers, and on the other side (liabilities) is an equal and opposite figure representing the vast sums of money that the bank in turn has borrowed (or taken on deposit - same thing) from investors, savers and depositors.

There is a heck of a lot of double counting going on, but if you look at banks as a whole, it really is that simple.

Trooper Thompson said...

Well, I'm sure that the banks can balance their books - but you're not considering the effects that creating limitless supplies of money has on the money that already exists, which is to devalue it, which is why the era of fractional reserve banking has seen massive inflation.

Consider what a dollar bought in 1913 and what it buys now. Consider what a silver dollar (i.e a 1oz silver coin) still can buy.

You are right in one respect, that it's very simple: simple fraud and theft.

Henry North London said...

If we all did a run on the banks they wouldnt have enough money to give us all we have saved

Ergo there isnt enough money in the system

The banks have only a tenth of real money ( ie printed notes)

The rest is just numbers on a computer

Mark Wadsworth said...

NB - Notes and coins in circulation (as at April 2006) £45 bn. (Half of which is already in our pockets, not in a bank vault - why would banks hold on to non-interest bearing assets?)

Total bank deposits/loans to banks (as at July 2007) was £3,396 bn.

So it's nearer 1% than 10%. And UK banks probably only have enough notes and coins in their drawers to pay us half-a-percent of our bank deposits.

Notes and coins are, in other words, largely irrelevant and could easily be phased out altogether if we all used debit cards for everything.