We spend £80 billion a year encouraging people to save – but it doesn't fund growth, wages or investment. It just props up banks and financial markets. In this video, I explain why savings are essentially dead money and what a more effective economic strategy would look like.
This is the audio version:
This is the transcript:
Something I say quite often is that savings are dead money. And people always say to me, " How can that be true? How can savings be dead money?" And my answer is that they're money that's been put out of use in the economy and which does not therefore do anything useful for anyone, even though I fully accept that people have very good reasons for saving because they want to do so for some future event or their retirement or whatever else. That still means that the money is dead as far as the economy as a whole is concerned. So I think I need to explain that.
I need to explain it because politicians don't agree with me.
We have a whole political system in the UK that encourages saving.
We spend £10 billion a year to encourage people to put money into ISA accounts, and that's almost entirely dead money, and there's over £700 billion saved in those accounts.
We spend £70 billion a year encouraging people to put money into pension accounts, and yet the vast majority of that money is also dead money because it's saved in cash or it's saved in shares, which are bought secondhand, or it's invested in property, the vast majority of which was also invested in secondhand.
In other words, these savings don't create any new economic activity in the economy, and that's precisely what I mean when I refer to savings as dead money.
They do nothing at all for growth.
I'm actually making this video because one of the viewers of these videos wrote to me and he said to me - and it was a man - "aren't savings in banks recycled into loans, and then into paying wages, taxes, and building infrastructure?" And most people might think that the claim that he made is right.
But I'm making this video to explain that that is a total misunderstanding of what money is, how it behaves, and what banks actually do, and it also totally misunderstands what stock exchanges and even pension funds do.
So let me explain.
The big misunderstanding really starts with savings in cash. I'll mention the others, but cash is paramount here because there are almost £2 trillion, that's two with 12 noughts after it, a sum of money so big that you can't imagine it, that is saved in cash in the UK.
The problem is that people think money is real, tangible, and it's transferable. It's not.
You keep on thinking that money is a pile of notes and coins, and you can shuffle it from one person to another, and that's how money moves, but that's not true. Even notes in particular, and coins are pretty irrelevant these days, but notes are just a record of debt. And what you do when you make a payment with a note is simply transfer a debt from one person to another, and the fact is that all money is just a promise to pay. It's a debt, an IOU, and that's even printed on our bank notes. It does say, "I promise to pay the bearer on demand."
I keep on saying this, and people keep on not hearing it, so I suspect I'm going to be saying it for a long time to come. But the fact is, you must remember that money is debt, and debts are personal. You can't pass most debts around. You can in the case of bank notes, because they are what are called 'bearer bonds', but they're just about the only form of debt that exists in that way in the UK as a whole now; everything else is personal.
So, for example, if you put money in a bank in the form of savings, in other words, you put it in a deposit account, what you actually have is an agreement between you and your bank.
There's a contract in place, and the bank says, if you give me money, I will hold it safely for you and will return it to you either on demand or at some fixed date in the future, and in the meantime, I will pay you, but not anyone else, interest that is earned on that account.
Now, a bank loan is also about debt, only in this case, the bank lends money to someone.
In the case of a bank deposit, you lent money to the bank. In the case of a bank loan, the bank lends money to someone. But it's still personal. They can't lend your money to someone else because it's your money that they've got in your deposit account, and they can't say to you, "Sorry, you haven't got a deposit account anymore. We lent it to Jo over there." Whether Jo is male, female, or whatever else doesn't matter. "Jo's got your money now, and if you want it back, you'll have to go and talk to Jo about it."
That's not how banking works. Banking works on the basis of discreet and individual relationships between you, the depositor, and the bank who has your savings, and the bank and the person who borrows, Jo, in this case. And the bank creates new money to make the loan to Joe.
How does it do it? It's really very simple. If Jo comes in and asks for a loan, the bank says, 'Yes, we'll make one to you." If they think Jo is creditworthy, and what they do is increase the value of Jo's current account. It goes up from nothing, maybe, to £10,000, and they increase the value of Jo's loan account from nothing to £10,000.
Now, one of those is a positive and one is a negative; it doesn't matter which, and it doesn't matter in whose books you're looking because Jo's books and the bank's books are just mirror images of each other.
But the fact is that by simply marking up those two entries, money was created out of thin air because if Jo now decides that they don't want the loan, Jo will simply say to the bank, cancel what you put in place, and the bank will reverse the entries, and the money disappears again.
And what is more, the money will always eventually disappear again, because when Jo repays the loan, it will literally cancel the money that was created.
But in the meantime - and presuming that Jo goes ahead - there is money in Jo's current account, and Jo believes that they can spend it, and they can, and people will accept it.
And the interesting point then is that when Jo spends that money, somebody's got to bank it, and that creates a new deposit in a bank.
So when you get to the point where you wonder where the bank deposits come from and why banks take them, it's because they have to because they couldn't loan at a profit if they weren't willing to take back the money that they create as a consequence of making a loan by way of accepting a deposit from the person who receives the net eventual benefit of the loan that they've made.
But what does that deposit do? The simple fact is that it just sits there. And that's particularly true if we are talking about a deposit account.
Effectively, money put in the deposit account is removed from circulation in the economy.
It doesn't fund investment or growth.
It doesn't even fund current spending or consumption.
And it certainly doesn't fund wages in a business.
Nor does it fund taxation payments.
It's just dead, except for one thing, and that is that the money in question does provide the bank with whom it is deposited with cheap capital. It doesn't do anything for the wider economy, but it does let the bank feel a lot more comfortable about its own financial situation.
Let's just be clear about this. What's going on here is that the bank basically has now got your money, and you don't have it anymore. The bank has a liability to pay you, but that doesn't mean to say you've got money in the bank. The bank has simply acknowledged a debt to you, and it does that by printing a bank statement with your name on it and showing how much it owes you, and that's the end of it.
That's all you've got. You've put £10,000 in the bank and in exchange you've got a bank statement, and a little bit of interest if you're lucky, because the banks don't like paying interest, because they don't actually really want to take your deposit because they make all their money out of making the loan and not taking the resulting deposit back from you.
But if everything goes wrong, and in 2007, it did, in the case of Northern Rock, then depositors can lose their money. They literally form part of the capital of the bank, which is at risk if the bank fails, and they can then lose their deposit account.
And that's why banks do like holding deposits because they're the cheapest form of funding that they can lay their hands on.
And that is also why the government has to guarantee your deposit in a bank if it's up to £85,000, because frankly, why else should you trust a bank? They are using you.
So why else is there a deposit facility in a bank?
Well, actually, largely because bank regulation also requires it. Not only is there an economic imperative that, of course, the bank needs to take your money, because it's created it somewhere else, and if it didn't allow you to deposit it, they couldn't make a loan, but banks are also required by modern banking regulation to provide a banking facility. So that's what banks have to do. Simple, straightforward fact. There's no way around that. But in that case, let's be clear; money saved in bank accounts is withdrawn from the economy; it doesn't build factories, it doesn't pay wages, and it doesn't spur growth.
It just props up banks' cheap capital. But in that case, why are we so keen on savings?
Why have we got this so wrong when savings don't fund investment?
Why do we put the priority on savings when it's loans that create money, demand, and growth in the economy?
And why is it that we also make the same mistake when it comes to shares and pension funds? Because, after all, there are almost no new shares issued in the UK now. Almost every share that you can buy in whichever company you wish to buy it, is secondhand. If you go and try and buy a share in, I don't know, Marks and Spencers, whoever it is you want to buy a share in, they will sell you not a new share in the company, but one that was previously owned by somebody else.
The company itself gets no money at all as a consequence of you buying a share in it. That is something that very few people seem to understand. Companies don't get a single penny from a sale of their share secondhand. And since well over 99% of all share transactions in the UK are now secondhand shares, shares simply don't fund investment either.
And because pension funds hold cash and they own buildings, the vast majority of which are bought secondhand, and shares, the vast majority of which are bought secondhand, they don't fund investment either.
So we come to the situation where we have to reappraise saving, because this has been seen as a priority for growth in the UK economy, and yet since the end of the gold standard era in this country, which in its last gasp came to a close in 1971, there has been no economic at a macroeconomic level to suggesting that we should save as a country.
For individuals, I stress, saving still makes sense, but for the macroeconomy, it doesn't.
So why are we spending maybe £80 billion a year of government money subsidising saving?
Why aren't we spending money subsidising productive investment?
Why are we wasting money as a consequence?
Isn't it time that we reappraised all these incentives and stopped giving money to the holders of dead funds and instead started giving money to people who will actually invest it to create productive assets that will meet the needs of the UK economy?
And if they won't, isn't it time for the government to do that itself?
If we did do that type of investment incentive, we would have a vibrant and fairer economy.
This is at the core of reviving the UK, but at the moment, none of our politicians understand anything that I've just said, but you could now remind them of the truth. Write to your MP. All the links to do that are down below.
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Funny business isnt it.
They seem to have gone quiet after COVID but one interesting development was ‘Loan Exchanges’ where ‘savers’ ended up with a basket of loans or shares in loans and of course there is the ‘Bank of Dave’ aka Burnley Savings and Loans although I cant see how you save with them.
Why though dont we go back to the old style ‘Building Society’ model though – I am a member of one which doesnt do its own clearing so cant create money and which lends the money deposited with it, only this time not just for mortgages but commercial and infrastructure loans as well.
I tend to agree with this – for housing
Does the UK government actually bother to tot up per annum the amount of demand input into the economy minus the amount of demand withdrawn through savings and publish the net figure? My understanding of Keynes is that nearly 100 years ago he stressed this was an important consideration for optimising an economy. If I put what I’ve just written into Google AI I get a response that whilst the government monitors both demand and savings it doen’t publish it as a net figure but does follow the Keynesian argument that the government must adjust demand. Here’s what the AI overview said:-
“Yes, the UK government does track and analyze aggregate demand, including the impact of savings, but it’s not a single, directly published “net figure” in the way you might be thinking. Keynesian economics emphasizes the importance of managing aggregate demand for economic stability, and the UK government uses various tools, including fiscal policy (spending and taxation) and monetary policy (interest rates), to influence it.”
If I then type into Google AI – “Why does a government have to automatically balance its books?” I get the following response – “An AI Overview is not available for this search.”
🙂
My comment I forgot to add was prompted by this mindless article in the Guardian today:-
https://www.theguardian.com/business/2025/jul/22/uk-borrowing-rachel-reeves-budget-tax-rises
Excellent piece! And so the financial/economic WTH moment begins 🙂
‘The process by which banks create money is so simple that the mind is repelled.’ JK Galbraith (1908-2006)
In forecasting the 2008 crisis
‘It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world in which our policymakers have been living, and they urgently need to change habitat. The question that the economics profession now needs to address is – whereto? If our routine forecasting models – CGE models, mostly – failed to foresee this, where do we look for alternatives?
In Bezemer (2009), I document the models that got it right. The important question for economists is – how did they do it? What is the underlying model?
While there is obviously a diversity of approaches, one important strand of thinking is an accounting of financial stocks (debt and wealth) and flows (of credit, interest, profit and wages), as well as explicit analysis of both the real economy and the financial sector (including property).’
https://cepr.org/voxeu/columns/no-one-saw-coming-or-did-they
System Dynamics modelling (predator/prey/chaotic) gives a better macroeconomic overview than mainstream DGSE (Dynamic stochastic general equilibrium) neoclassical /neoliberal equilibrium based models:
Steve Keen’s Minsky /Ravel https://sourceforge.net/projects/minsky/files/Windows%20Binaries/ravel-3.5.0.exe/download Manual http://www.profstevekeen.com/minsky/
Tyronne Kynes
https://www.youtube.com/watch?v=WeuSAexH3-Q
Releaning Economics blog https://www.patreon.com/relearningeconomics/about?
Mike Radzicki blog Trending Cycles
https://www.youtube.com/channel/UCE_ejImZhXI2KXf0Swx3udw
What a load of tosh!
You deliberately focus on gross tax relief on pensions and ignore the tax paid on those same pensions in payment – the net amount is obviously much, much smaller.
People invest in companies because they know that there is a secondary market and, in due course, they will be able to sell their shares to someone else. And do the cycle continues. That’s how these investments support businesses – they provide a way for recycling of capital over time.
How font you understand this?
Everything else say is just nonsense suggesting that you think you know more about how peoples’ money should be spent than they do. Very communist.
If stock markets were funding real companies to do real investment your argument might make sense.
But at best they only ever fund M&A.
So, your argument makes no sense at all. There is no real investment from stock market activity. All you describe is a Ponzi scheme, as do I. All you are doimg is deluding yourself.
How do you save for your retirement, Richard, if you don’t invest in shares?
Weren’t you advocating buying bonds when interest rates were around 1% which then resulted in massive losses when interest rates increased?
Does that explain why you continue to regurgitate basically the same articles you’ve done for the last 10+ years, as you don’t actually have any retirement funds to live off?
Timmy, stock markets rise and fall, as do the businesses in them. Most people don’t have stock in a FTSE 100 company from when it started, they bought them sometime in between start up and peak and the current return might only be about 30% over the last 6-7 years with minimal growth. That’s pretty good, at least till the inevitable crash because stocks are massively over valued at the moment.
Remember pension funds aren’t in this game for 10 years, they’re in it for 50 years. The rise and fall of the stock market is incredibly risky, the safest place for long term stability and returns is to split between a risky stocks and shares and guaranteed government bonds which give you stable income and the money back. Do not forget, not everyone putting their money in a pension pot claims it. That’s who funds your pension, those that paid in but never got to claim the full pot.
I think this the Bank of England quarterly you have cited -if not or if not useful please delete
It is a 114 page document so only for the dedicated but it has nice diagrams!!
It explains the banks don’t lend deposits
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q1.pdf
Correct on all counts
What do you suggest people do to save for their retirements, Richard, if you think investing in shares is a ponzi scheme?
How have you funded your retirement?
The simple answer has been very cautious saving
Very good (as always), Richard. In my job I’m often explaining this to clients and they are perplexed until they think it through. There is, however, a psychological angle to this thorny problem – an individual’s “emotional response” to money (for want of a better phrase).
When I ask people “Why do you want to save?” or “Why do they want to spend?”, or “Why does money matter to them?”, they find it very hard to answer, in most cases. I suggest that they think about a kind of statement of financial purpose, rather then thinking about goals and purchasing financial products. One simple example will suffice, perhaps.
A client inherited a substantial sum when her mother died, and this money was held in insurance company investments. The face value had increased substantially over time. When I pointed out that she clearly didn’t need this money she was aghast. I said that if she had needed this money, she would have long ago spent it, which I think is merely a statement of fact. Thankfully, she didn’t use that dreaded phrase “I’ll keep it ‘just in case’ I’ll need it one day” – that day rarely arrives, in my experience, and the money ends up in the estate and often is then subject to IHT (a tax I fully agree with), which is silly.
We agreed to spend the money on the next generation, so her two children received enough of this dead money to become entirely debt-free and thus have a very substantial ‘pay rise’ as the mortgage and debt servicing costs were gone, and this money, the extra income, is being spent into the economy, which is good.
As long as people have sufficient income, they rarely need substantial savings, in my opinion.
Much to agree with. Thanks.
Thanks Richard. So is the concept of fractional reserve banking only really relevant for regulatory purposes?
Yes
And it should not exist then
Richard Werner’s take on the 3 theories of banking:
– Financial Intermediation
– Fractional Reserve
– Credit Creation (MMT)
https://www.youtube.com/watch?v=yXpZKpmkuas
His empirical study on what happens when a bank makes a loan :
https://www.sciencedirect.com/science/article/pii/S1057521914001070
As you say, savings do make sense to the individual, yes potentially for interest and / or investment returns, but also crucially to finance purchases and even more importantly cope with shocks (illness, job loss, bereavement etc). Of course, you can do those things via debt as well, which is sensible to a point, but with risks if repayments are not met. If people have no personal savings, then they are more likely to get into distress, which is bad for them, but also society more widely. If public services were better, and better resourced, then we would have more of a collective safety net, but even in that situation some personal financial resilience seems like a good thing to me. Higher wages make it easier to save, but there is still personal choice on whether to do so if you can.
So I would think there is a logic to government encouraging saving to a point. However, what seems completely wrong is the level of government encouragement, particularly for substantial savings. Being able to save £20k year on year in an ISA is a subsidy of the well off, ditto unlimited pensions etc as you have said before.
It’s a stretch, but maybe coin could make a bit of a comeback, in a different guise. I’ve written to my MP about it. I’ll keep you posted if you like.
Why would we want that?
This is a fascinating and much-needed challenge to conventional thinking on savings. The explanation of money creation and why most savings don’t contribute to real economic growth is eye-opening. Redirecting public subsidies from ‘dead money’ to productive investment could reshape the UK economy. Time for policymakers to catch up with modern monetary reality.
OK so I’d like to ask a few questions:
You say that banks don’t need deposits to make new loans or lend money. They simply create a new deposit against a new loan.
This so far is ok. But what then happens when the person with the loan withdraws their money from the bank (to use it)? How does the bank then fund that loan?
Basic asset/liability balance sheet accounting means that a bank has to fund that money from somewhere. My question to you is where?
You also say that “They can’t lend your money to someone else because it’s your money that they’ve got in your deposit account”. If that is the case, and every account is segregated, and that banks don’t need deposits, surely bank runs (like Northern Rock) would be impossible, as every depositor’s money would still be sitting in their accounts perfectly safe?
Doesn’t this also infer that banks DO indeed lend out depositor’s money?
Have you heard of central bank reserve accounts?
Read about them, including in the glossary to this blog.
Remember, everything is credit. That is all there is, and the govermment underpins it by supplying reserves.
Yes, I know what CBRAs are. In short they are DEPOSITS held by commercial banks at the central bank.
To borrow from the BoE you need high quality liquid assets to place with the BoE.
So not only does a bank need capital of it’s own to be able to borrow from the central bank, it is borrowing the excess deposits from other commercial banks. Net, the banking system still needs deposits.
Whilst the BoE can and does affect the availability of reserves through repo operations, it does so to maintain the base rate at a certain level. You seem to say that it just produces potentially limitless cash for banks to borrow, which is most definitely not the case.
When it comes down to it, once a bank makes a loan and that money is inevitably withdrawn to be used, the bank needs to cover that amount. This is basic accounting, which I would hope you understand. It can either do that through having the capital on had through deposits, or through borrowing (or typically a mixture of the two). The borrowing itself requires the availability of deposits from other banks.
Either way, banks do require deposits to operate, which is something you claim is untrue.
You also make the claim that bank accounts are segregated, which is not the case. bank accounts aren’t akin to electronic safety deposit boxes. Banks can and do use the money they hold in customer accounts. If what you say is true (which it isn’t) bank runs would simply not happen as a bank would simply not be using any customer deposits. As we know, bank runs do happen. So I am not sure how, declaring yourself as an expert, you fail to realise this
It is also clear given your lack of a real answer to my question that you are trying to avoid giving a proper answer. I can only assume this is because it is very clear that you are simply wrong in making the claims you have.
To be quite clear: Banks do need and lend deposits.
1) Banks never lend deposits. The double entry of banking proces that is impossible, and all banking is comes down to double entry accounting for debt. So you are wrong.
2) I never said banks would not take deposits – I made exactly clear why they would – to provide capital, cheaply. Can’t you read? Actually, I can answer that: almost everything you said I said I did not say, inclduing your complete misrepresentation of my position on capital.
3) You clearly do not undertsand central bank reserve accounts. You do realise almost all are deposits, don’t you, and those were more than 90% created by the Bank of England? Appare ntly not. And when banks borrow from the BoE the securoty is not deposits? Do you know aything about this?
And do you realise there is no such thing as money, per se? It is all just debt that exists in a double entry ledger? Your language suggests otherwise. Read the BoE First Quarter Review for 2014, I suggest.
Then show me the double entry on how a bank may use my deposit to make an advance to someone else. You can’t, I know.
Pleaase don’t call again: you are wasting my time with your ignorance and falsehoods.
1. Banks regularly lend deposits.
If they didn’t they would be receiving nothing on those deposits yet paying interest. They are a cheap form of funding and simply if the didn’t, why would deposit protection be necessary and why would bank runs be possible.
You refer to double entry accounting, as I have. If a loan is made, and the money then withdrawn from the bank, how is that double entry maintained? Surely, as anyone with a basic knowledge of accounting knows, it will have to replace it (normally by borrowing it). Just try asking “google do banks lend deposits” for example.
What you are doing is confusing the credit creation system (where a bank doesn’t need deposits to make a new loan) with the basics of balance sheet accounting (where the bank does need capital, usually deposits) to make the loan. Unfortunately for you, making sure the balance sheet is whole is a precursor to any ability to loan, as if the banks cannot borrow to make its books whole it is bankrupt. Just try and run a bank with no capital and find out for yourself.
2. You regularly say banks don’t need deposits to make loans. They clearly do, even if only as part of their capital base. You also claim bank accounts are segregated and banks can’t use the money held within them. Which is clearly false.
You seem to tend to avoid answering the points I put to you and instead answer whatever you feel like answering – as answering my points would show you are wrong. Clearly that is something you cannot tolerate.
3. Again a quick google search might have helped you here.
What are central bank reserves in the UK?
The role of central bank reserves
The Bank of England’s balance sheet plays a crucial role in the UK economy. The Bank’s main liabilities are central bank reserves in the form of deposits from commercial banks and building societies. These reserves are the ultimate form of money and liquid asset.
They are deposits. Now the level of deposits has increased because of QE (as Gilts have been swapped for cash) but that cash is still a deposit. Before the liquidity deluge of QE all reserves were in the form of traditional bank deposits. I get the feeling you don’t understand the basic principals of what the BoE seeks to achieve but paying interest on excess reserves is – to maintain the base rate of interest.
Either way, if a bank is forced to borrow from the BoE CBRA then they place high quality liquid assets with it as collateral. Regardless, those banks are still borrowing deposits. Just because they come from a reserve account at the BoE doesn’t change that.
Fundamentally, you make so many basic errors about banking that I can’t see how you claim to be an expert. You’ve never worked in the field, so what gives you the credentials to claim you know more than the many thousands of people who work in the industry every day?
Good piece again, this is exactly the sort of campaigning we need as an excellent counterpoint to gary stevenson’s work. I would really like to see a government shift towards creating genuine investment in our own economy, the sovereign wealth fund idea seems to have gone nowhere and there seems no good news whatsoever.
Ok I’m slowly getting my head round dead money etc. But if banks don’t really want your deposit why do they compete with each other by offering favourable interest rate deals?
You’d think the opposite would be true, ie. They’d try and outdo each other by offering worse interest rates to customers than their competitors.
They don’t compete – unless on the peripheries of the market, is the answer.
And note what I say – there are regulators and they know they have tio take desposits or they can’t make loans.
Bank deposits do not make capital for banks – this is simply not true.
You were picked up on this previously and Clive Parry confit ed you were wrong then, so why do you persist with this lie?
I assure you they do. They are unsecured credits, just like share capital, and they are lost when a bank fails. This is capital and that is why the government has to guarantee deposits. You are wrong. The substance is exactly what I say.
No, that’s not what bank capital is. Deposits are liabilities, not capital.
Bank capital is something very different as explained in banking regulation which you clearly have no understanding of.
Surely as a former accountant you can understand basic accountancy concepts?
Oh dear. You’re reading the regulation and not looking at the reality.
Good accountants look at reality. We call it ‘substance over firm’.
If deposits aren’t capital in reality, which can be lost in a crash, tell me why governments need to guarantee them? Precisely, please?
[…] So they use their money to protect that privilege, and that's why they fight governments. And this matters. There is a real cost to their behaviour, not only in the undermining of regulation and everything else that goes on, and the methods that they use to fight fair taxation and all of that, but there's also a cost to something else, and that is the cost of their hoarding, because remember, they hoard money. That's how and why they're wealthy. If they didn't have hoarded money and value, then of course they couldn't be considered to be wealthy, but as I've explained in other videos, most of saved money is dead money. […]