I had a look at the FT's round-up of latest savings rates this morning. It's not something that I do that often. But the message on this occasion was loud and clear. It is that if you can make 0.5% on your cash savings you are very lucky indeed, and probably should not expect it to last.
My suggestion in that case is a simple one, given that there are record cash savings at present. And that is that people do not save for income any more. And what is more, the old arguments about liquidity preference and the time value for money all look rather meaningless.
To put it another way, the zero bound, as it is called, where interest rates equate to near enough nothing (or, in real terms, less) has changed behaviour in the microeconomy as much as it has in the macroeconomy.
My suggestion is that it is time to rethink the economics of saving. People don't change their plans as to when they wish to consume, or not, because of financial inducement. When it comes to saving they do not consume now because they simply do not want to, knowing that they would prefer to do so at another time. And they draw upon their savings because the time has come when they wish to do so, and not for anything to do with the financial return on offer.
We do, in other words, save for almost entirely non financial reasons. And when we do so security ranks very high in most of our priorities because the social goal for saving dominates all else. And our consciences may play a part if, and only if, we are persuaded to save when not wholly understanding why, which is almost entirely true with regard to pensions.
In all this I exclude from consideration the very wealthy, because they do not save in any meaningful sense. They put aside excess wealth knowing that they can always do what they want, which renders the idea of saving meaningless in any ordinary sense.
I also caution that saving and borrowing are not the flip side of each other. The psychology is almost entirely different.
But saving does matter. It does impact the economy . And I would suggest almost all economic theory on it is wrong, as is much financial advice. We save for specific reasons unrelated to return. This crisis is showing that. We really do need to remember it.
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I am not an economist…. but have they thought about it in any other way? If they really thought that the level of rates altered savings behaviour then they should get out more – or just consider the behaviour of their friends, parents children etc.. Older people save for the day when they can no longer earn, young people save for a house deposit etc. Demographics drive savings, not rates…. and it was ever thus.
Rates clearly DO matter when deciding HOW to save and the bigger the savings “pot” the greater risk an individual might be prepared to take.
Rates DO matter for borrowers. Can I afford repayments on a mortgage? Is a new business project viable at a given level of interest rates etc.
The means two things.
First, tax incentives to save are not needed to encourage saving (except at a low level)
Second, we know that high rates restrain investment but that lower rates do not encourage it in a symmetrical way (you can’t push on string). At the current level, rates are not driving/preventing investment decisions but they are driving the decision of where savings get directed – and we see that in asset prices.
So, interest rate policy should be directed to achieve orderly asset and savings market (ie. preventing asset price bubbles, not encouraging excessive risk taking by savers etc) with fiscal policy being used to drive the real economy.
This brings me back to my view that BoE policy should not “pick a number” as to how many gilts they buy in its QE programme but buy (or sell) gilts to keep rates at a level that keeps an orderly market for assets. Say 1% for short rates 2% for long rates.
Much to agree with there
“Older people save for the day when they can no longer earn, young people save for a house deposit etc. Demographics drive savings, not rates…. and it was ever thus.
Rates clearly DO matter when deciding HOW to save”
I really like this argument (crisp, simple and relevant), and I do not think it conflicts with ‘safe asset’ theory, as far as I can see.
My point was that the rate does not determine the why, or when, or even the amount
It just determines the how, and that’s a minor issue
Hi Richard
For many years the the Tories used the the analogy that the economy was like a ‘credit card’. We spent to much, the logic went, and now we needed to tighten our belts and repay what was owed. I’m going to go out on a limb here, and suggest that this was a lie to justify austerity. However, if the economy isn’t like a credit card, what would be a better analogy?
Money, our flexible friend
Richard,
It seems to me that MMT needs to address the question of what I might loosely call savings, investments & Pensions.
All of us should have some sort pf savings, if only to deal with the depreciation of our essential ‘capital’ items – cars, white goods etc. Should we have some sort of ‘Savings Allowance’ perhaps with a preferential interest rate?
Thinking about it I suppose because of the drop in real wages, both in absolute terms and as a percentage of GDP it is harder to replace things like white goods from our earnings hence the need for savings.
Then ‘Investments’ When a Company sells a share it lasts as long as the Company, should we be looking at bonds instead with a fixed redemption date, or something else. How might we look at setting the interest rate for business loans to reflect the likely profitability of the enterprise?
Finally of course Pensions, should we be looking at a better basic state pension, possibly including Life Insurance? Going back to the idea of ‘National Insurance’
I have tackled this in Money for Nothing …..
It’s people with a decent wage who can afford to save who save.
So one way to promote saving (as well as spending and borrowing) is to have decent, well paid jobs for everyone in society as a principle topped up with universal contributory income of some kind.
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
It appears that many of the older and / or wealthy are ploughing money into housing as in any sort of savings account it is losing value. The housing market has gone insane – most in the south west are selling within days of going on the market and gazumping is in full flow. So much for a housing crash post Brexit / Covid.
And with the various incentives for this Government to support house buying this insanity doesn’t look to be ending any time soon. Far from any levelling up this is just driving the divide between the haves and have nots even more.
Agreed
So up the taxes….