A feature of the credit crunch era has been the fall and some would say plummet in quite a range of interest-rates and bond yields. This opened with central banks cutting official short-term interest-rates heavily in response to the initial impact with the Bank of England for example trimming around 4% off its Bank Rate to reduce it to 0.5%. If we go to market rates the drop was even larger because it is often forgotten now that one-year interest-rates in the UK rose to 7% for around a year or so as the credit crunch built up in what was a last hurrah of sorts for savers. Next central banks moved to reduce bond yields via purchases of sovereign bonds via QE ( Quantitative Easing) programmes. In the UK this was followed by some Bank of England rhetoric heading towards the First World War pictures of Lord Kitchener saying your country needs you.
Here is Bank of England Deputy Governor Charlie Bean from September 2010.
“What we’re trying to do by our policy is encourage more spending. Ideally we’d like to see that in the form of more business spending, but part of the mechanism … is having more household spending, so in the short-term we want to see households not saving more but spending more’.
Our Charlie was keen to point out that this was a temporary situation.
“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.
Mr.Bean was displaying his usual forecasting accuracy here as of course savers have seen only swings and no roundabouts as the Bank Rate got cut even further to 0.25% and the £79.6 billion of the Term Funding Scheme means that banks rarely have to compete for their deposits. This next bit may put savers teeth on edge.
“Savers shouldn’t see themselves as being uniquely hit by this. A lot of people are suffering during this downturn … 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.”
In May 2014 Charlie was at the same game according to the Financial Times.
BoE’s Charlie Bean expects 3% interest rate within 5 years
There is little sign of that so far although of course Sir Charlie is unlikely to be bothered much with his index-linked pension worth around £4 million if I recall correctly plus his role at the Office for Budget Responsibility.
I add this in because the UK saw an establishment move to get them back into buying houses. This involved subsidies such as the Bank of England starting the Funding for Lending Scheme in the summer of 2013 to reduce mortgage rates ( by around 1% initially then up to 2%) which continues with the Term Funding Scheme. Also there was the Help to Buy Scheme of the government. I raise these because why would you save when all you have to do is buy a house and the price accelerates into the stratosphere?
The picture on saving gets complex here. Some may save for a deposit but of course the official pressure for larger deposits soon faded. Also the net worth gains are the equivalent of saving in theoretical terms at least but only apply to some and make first time buyers poorer. Also care is needed with net worth gains as people can hardly withdraw them en masse and what goes up can come down. Furthermore there are regional differences here as for example the gains are by far the largest in London which leads to a clear irony as official regional policy is supposed to be spreading wealth, funds and money out of London.
There is also the issue of rents as those affected here have no house price gains to give them theoretical wealth. However the impact of the fact that real wages are still below the credit crunch peak has meant that rents have increasingly become reported as a burden. So the chance to save may be treated with a wry smile by those in Generation rent especially if they are repaying Student Loans.
This is a by now familiar situation. If we skip for a moment the issue of whether it involves an investment or saving as it is mostly both we find yet another side effect of central bank action. In spite of the recent impact of the North Korea situation stock markets are mostly at or near all time highs. The UK FTSE 100 is still around 7300 which is good for existing shareholders but perhaps not so good for those planning to save.
There are various ways of looking at the state of play or rather as to what the state of play was as we are at best usually a few months behind events. From the Financial Times at the end of June.
UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years. According to new figures from the Office for National Statistics, 1.7 per cent of income was left unspent in the first quarter of 2017, the lowest savings ratio since comparable records began in 1963.
This compares to what?
The savings ratio has averaged 9.2 per cent of disposable income over the past 54 years,
Some of the move was supposed to be temporary which poses its own question but if we move onto July was added to by this.
In Quarter 1 2017, the households and NPISH saving ratio on a cash basis fell to negative 4.8%, which implies that households and NPISH spent more than they earned in income during the quarter.
The above number is a new one which excludes “imputed” numbers a trend I hope will spread further across our official statistics. It also came with a troubling reminder.
This is the lowest quarterly saving ratio on a cash basis since Quarter 1 2008, when it was negative 6.7%.
As they say on the BBC’s Question of Sport television programme, what happened next?
The United States
We in the UK are not entirely alone as this from the Financial Times Alphaville section a week ago points out.
Newly revised data from the Bureau of Economic Analysis show that American consumers have spent the past two years embracing option 2. The average American now saves about 35 per cent less than in 2015……….Not since the beginning of 2008 have Americans saved so little — and that’s before accounting for inflation.
One of the features of the credit crunch was that central banks changed balance between savers and debtors massively in the latter’s favour. Measure after measure has been applied and along this road the claims of “temporary” have looked ever more permanent. Therefore it is hardly a surprise that savings seem to be out of favour just as it is really no surprise that unsecured credit has been booming. It is after all official policy albeit one which is only confessed to in back corridors and in the shadows. After all look at the central bank panic when inflation fell to ~0% and gave savers some relief relative to inflation. If we consider inflation there has been another campaign going on as measures exclude the asset prices that central banks try to push higher. Fears of bank deposits being confiscated will only add to all of this.
Meanwhile as we find so often the numbers are unreliable. In addition to the revisions above from the US I note that yesterday Ireland revised its savings ratio lower and the UK reshuffled its definitions a couple of years or so ago. I do not know whether to laugh or cry at the view that the changed would boost the numbers?! I doubt the ch-ch-changes are entirely a statistical illusion but the scale may be, aren’t you glad that is clear? We are left mulling what is saving? What is investment?
But we travel a road where many cheerleaders for central bank actions now want us to panic over an entirely predictable consequence. Or to put it another way that poor battered can that was kicked into the future trips us up every now and then.