Your savings are dead money. That's the uncomfortable truth about how money works that politicians don't want you to understand. In this video, I explain why UK savings — including ISAs holding over £700 billion and pension funds costing the taxpayer £70 billion a year in subsidies — do nothing for economic growth, don't fund investment, and don't create jobs.
This is about how banks create money and the banking system explained honestly. When a bank makes a loan, it doesn't lend your deposits — it creates new money from nothing. Your savings sitting in a bank deposit simply give the bank cheap capital. They don't fund wages, they don't fund taxation, and they certainly don't fund productive investment in the UK economy. The same applies to the stock market — well over 99% of share transactions are secondhand shares, meaning your money in stocks and pension funds investment doesn't reach companies either.
This matters because savings vs investment is the key question for UK economic growth. We spend £80 billion a year of public money subsidising saving when we should be subsidising productive investment. Understanding how money works, how banks work, and why fractional reserve banking means your deposits are actually at risk is essential financial education. If we shifted incentives from dead money to real investment, we could build a fairer, more productive economy.
[Please niote : this video was first issued in July last year]
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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Speaking to colleagues at work about ISAs, they are basically held to accrue interest for spending on holidays and other goodies by those with lump sums attached to pension schemes. As the final salary pension schemes wind down, there will be less of these lump sums around in the future to ‘invest’ in ISAs and then what?
No one seems to give a s**t what this money is used for other than for personal use at the end of term. It is so short sighted. You are asking a trenchant question; you are exposing stupidity when we are told there is a shortage of money; you are exposing the hyper-individualisation of savings at the detriment of the common wheal; an abuse of the tax system configured by those who hate tax.
Thanks
It looks like we are literally on the same page. The last 2 SCG articles about “investing in ourselves” have been published on the same page in The National as your articles. This is ours today Local government pension funds can afford to invest in our future | The National
Thanks
You have made the point about pensions that the bulk of tax relief goes to the already rich.
Given that as the ‘average’ savings in the UK for working age people at least is in the region of £10K there must be a few people making a lot of tax savings.
By comparison the £1K interest tax allowance while perhaps unnecessarily generous is at least limited
Are there any figures about how the tax allowances are distributed?
You are right. I’d provide some data in the Taxing Wealth Report. Many people in the top few percent of the income strata receive more in pension subsidy per annum than anyone can be paid under universal credit.
Just to reinforce your point about how money is created when a bank loans money, this post on the Bank of England is explicit https://www.bankofengland.co.uk/explainers/how-is-money-created
One question is whether something could be designed to make a more useful system of shares. For example, having shared issued with a condition that on sale a percentage of anything above the purchase price is returned to the company…
That would likely be difficult to administer, except through something like Blockchain smart contracts that enforce it.
Am alternative without be to consider some kind of share sale tax that’s returned to the company. While this could be set up for only a particular kind of shares, it would be more effective if it applied to existing shares.
An alternative would be a similar system that applies a smaller percentage on any sale, which would be easier to administer but might be seen as creating significant risk in buying shares as any purchase would have to gain more than the deduction before it breaks even.
Otherwise, what other changes might make shares more beneficial to a company post-IPO?
I’ve often wondered if governments are quite happy for money to be made inactive in savings accounts, or in tax havens, to keep down inflation. Or is the idea nonsense?
‘Sir’ Howard Davies ex chairman of Nat West etc etc on R4 Today programme was opining on the diminishing ‘headroom’ Reeves will have if she tries to mitigate the impact of rising oil and gas prices on low income households. He suggests govt borrowing costs – as signalled by bond markets are higher than in European countries and are the limiting factor<p>
Of course, no one ever asks what about Richard’s £80 billion dead money – ‘couldn’t we put that to use?’.<p>
To ask such a question would lie well outside the ‘managing consent’ tramlines .
We DO need more investment in the UK…. but you are right to disentangle “savings” from “investment”. Sure, it might make sense to encourage everyone to save – eg. a “rainy day” fund, a modest pension etc. and the tax system could be used to encourage this but the subsidies should be limited by both rate and volume. However, we should not kid ourselves that bigger subsidies promote more investment – ISAs (or PEPS/TESSAs) and private pension tax subsidies have been around for over 40 years and we still have chronic underinvestment.
I accept your point that bank deposits are “dead money” and that trading shares does not provide new capital they are an essential part of a broader ecosystem – Corporate bond market, Private Credit, Private Equity, Venture Capital etc. that DOES provide capital to private companies. One might like to consider this as larger version of Dragon’s Den and neo-liberals love this idea.
But, if you watch the programme you will note to things; first, the asymmetry of power between the those asking for capital and those that give it out and second, the ideas are being judged purely on profit potential for the Dragons.
This throws out two obvious things. First, we need to reduce the power that rentiers have over our economy and second, realise that government should have a much bigger role in investing in the things we really need and that are not necessarily attractive for the “Dragons”.
Easy to say…. not so easy to achieve
Well we could start with Richards suggestion that in exchange for the tax benefits that pensions receive that ~25% is invested in the UK in the real economy (see Taxing Wealth Report) that improves the wealth of the nation…. industry, infrastructure, energy, public transport, public housing, etc. In France most commercial banks offer a Livret de développement durable et solidaire (LDDS) account with a maximum threshold that is not taxed. The government uses this money to invest in social housing, ecological transition,… similar could be offered to the grand public in the UK.
Don’t know the details of the French system… but sounds good. No need for the UK to re-invent the wheel.
Of course, it does require a government that understands it responsibilities…… and that is a problem in the UK.
The deposit protection limit rose from £85,000 to £120,000 on 1 December 2025, for firms that fail from that date. For firms that failed before then, the previous limit of £85,000 still applies.
This is quite a big boost to the protection scheme (and is £240,000 for joint accounts). I wonder why they increased it by 41% – maybe just catching up with inflation.
Not only are we subsidising dead money at obscene levels, we are subsidising mainly the wealthy, as the more you save, the more subsidy you get. Those on lower incomes save less and get less subsidy.
I’ve been pondering for a while regarding the abolition of private pensions and the tax breaks that come with contributing to them. Maybe replaced by a final salary linked, but capped, state pension.
People who need it would have more money in their pockets.
Asset inflation would decrease.
Massive tax cuts for the wealthy would be eliminated.
Now just to convince the world that individuals saving for their retirement is not a good idea…
So how do you propose to abolish private pensions, which include workplace “2nd pensions” of both the DB and DC variety, which now hold total assets valued at close to £3tr?
Abolish is the wrong term. More that the end goal is for them to no longer exist. The how would come through disincentivising, both through provision of a strong state pension and the removal of as many of the benefits they bring as possible.
Thank you for repeating this, there are quite a lot of your previous blogs that justify rereading.
One question: since as you have frequently pointed out tax doesn’t “pay for” government expenditure and how to levy tax is a policy choice, why shouldn’t governments use taxation and tax exemption to incentivise things they favour? In this case an idea that people’s wellbeing would be served by having a reserve of personal savings, and being able eventually to supplement the meagre state pension.
Obviously you might disagree with that politically and say that there should be no tax favours for saving and pensions, but recognise that might mean a larger state-funded safety net. Others including me might equally validly think the principle is good but the execution is poor. (I would prefer ISAs to have a lifetime limit for deposits, and a lower annual limit on pension contributions, to achieve the aims without over-generosity to the already fortunate fraction of the population who can make full use of the current annual allowances).
You are right to say that tax is a policy tool, and in principle it can be used to incentivise behaviour, including saving.
The question is not “can it be done?” but should it be done, and with what effect?
There are three issues to consider.
First, incentives for saving tend to be highly regressive. The people who benefit most are those who already have surplus income. Those on low and middle incomes often cannot take advantage of the reliefs, so the policy widens inequality.
Second, encouraging private saving assumes that individuals must provide for risks, such as those from old age and ill health, that could instead be collectively insured through public provision. That is a political choice about the balance between private and public responsibility.
Third, the macroeconomic effect is ambiguous. Encouraging saving can reduce current demand, which may or may not be desirable depending on economic conditions. It does not automatically increase productive investment.
So yes, tax can be used to incentivise saving, and your suggestions about limiting reliefs are sensible. But we should be clear that such policies are distributional choices, not technical necessities. The alternative is to strengthen public provision so that reliance on private savings becomes less critical.
Thanks for the very full answer.
I am sure you are right that these tax benefits need to be looked at as part of a bigger strategy. No doubt George Osborne – who introduced the current high annual ISA limit and made personal pensions a flexible savings possibility for those with means – did not worry about the regressive effect of these schemes and would not have supported higher state provision as a way of universalising the safety net they provide to those able to use them.
Whether we ever get a Chancellor who takes the opposite approach is difficult to say, if nothing else it is notoriously difficult to unscramble an egg. At least Reeves has stopped people using SIPPs to avoid Inheritance Tax instead of their intended role of providing an income after retirement.
My one man barometer of your YouTube videos (ie husband) watched this one this morning by his choice. It generated a lot of discussion between us which was interesting and helped us to inform ourselves. We had to do some additional research ourselves on elements – and found it sometimes easy and sometimes hard to know whether we were in the realms of macro- or micro- economics. I’m not sure why he chooses which videos of yours to watch and which to skip but he really did enjoy this one and our subsequent talk – as did I. Incidentally this is the first video I watched without having read your blog first. So many thanks.
Thanks
I’m “with this” Richard. It’s a bit like those I meet busy creating and maintaining an “Estate” for the “next generation”. That’s bonkers – doing this does nothing but damage the person doing the hoarding. It forces people to put the quality of their death before the quality of their life. They’ll be forced to choose not to spend on something for themselves or others so their kids can use the money later. I take the view that “Warm hands are better than cold”.
Inheritance also hurts society. Funds maintained in an estate are generally kept in frozen investments that contribute very little to the productivity of the economy or for the immediate benefit of others (family, friends, a favorite charity, whatever). How negative is that?
Much to agree with
Jake L I completely disagree. Take a look at the proposals for “Pensions in an Independent Scotland” and “A People’s Wealth Fund – investing the National Pension Fund” both of which are downloadable from the Scottish Currency Group website at Publications repository – Scottish Currency Group | Scottish Currency Group
If money is based on something tangible, finite, and physical, then there is currently more money in circulation than there are present time resources to back up all that currency. Last I looked, we were circulating, loaning, accounting for, about 6 planets worth of money. The matter of mortgages, interest , etc. seems to come down to how much human labor is going to be available in 10 years, or 20 or 30. Meanwhile, the capitalist policy of seeing the planet and its air as fungible resources has fairly well killed the amount of resources available in 10 years, etc.
On the other hand, if money is not based on something tangible, finite, and physical, then on what is it based?
The demand for tax. That is what gives currency its initial value.
Relative labour rates then influence it
That’s about what David Graber wrote in his tome Debt, the First 5,000 Years.
In 2019, I wanted to look at peer to peer lending. I was concerned that, as you say money sitting in a bank account has no productive value. Not having significant capital, but enough to be able to take some risk, I tested the water and, having gained confidence in the model, I was looking at putting more of my savings into a peer to peer ISA, only to have the government offer the peer to peer lenders the money they were raising from retail investors. At this point the provider closed to the public investors.
it strikes me that peer to peer lending is a route for individuals to make a better use of their savings rather than cash ISAs or stocks and shares.
As always I am open to suggestions that I have misunderstood how this works.
Have you looked at Islamic Banking?
“Islamic banking is a financial system that operates in accordance with Sharia law, strictly prohibiting the collection or payment of interest (riba) and avoiding investments in prohibited sectors like gambling, alcohol, and weapons. Instead of interest-based lending, these institutions rely on profit-and-loss sharing and asset-backed transactions, treating money as a medium of exchange rather than a commodity to be rented out.”
It’s not limited to Muslims.