Pay to save
When Quantitative Easing (QE – printing money) was introduced some of us thought it daft. We considered money to be a symbol of goods and services. Money created out of thin air clearly could not be symbolic of goods or services. So what was it symbolic of? The answer is debt. It’s the same as borrowing against a note of promise to pay back. It isn’t real until it has been paid back. Every dollar issued as part of QE, and there are many trillions of them, must be repaid one way or another.
QE has failed to stimulate the world’s economy. We are now in a worldwide manufacturing recession. Inflation, which QE was supposed to nudge up without letting it get out of control, is at an all-time low. Substantially negative rates would be an even braver or more fool-hardy adventure than QE. But negative rates are here already and they are creeping into your account – at first indirectly, later fully. So the lessons you learnt about saving and being prudent – were they for real? Indeed they were because we have no other way to provide for that proverbial rainy day, for our old age, for others who may become dependent on us. It is a stupid world in which the responsible get punished for the profligacy of the irresponsible.
With negative interest banks will not flourish, indeed they will decline. They already have to devote considerably more resources to shoring up their capital positions than in the past in order to prevent a bank collapse in a crisis. Quite right, but we still need banks in a capitalist world to lend money to start and finance new and changing business models. Banks need to behave better, as many senior bankers of the world admit, but they also need to flourish.
The Bank of International Settlements (BIS) has made the most intelligent comments on the present situation. In a recent statement it said: “Rather than just reflecting the current weakness, low (interest) rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.” William White, the former BIS Chief Economist, says that the impact of substantial negative interest rates is somewhat unknown – in the macro sense. The saver who pays for the privilege of lending the bank money knows it now.
Truth is that confidence in the Central Banks’ ability to control the economies over which they preside is waning. Confidence and trust are what banking is all about. Trust took a beating in the last nine years. Can the system cope with a loss of confidence too? I doubt it.
To be honest I think the politicians have lost control of the situation and they need to regain it. Voters feel the same way, even to the extent of nominating Donald Trump as Republican Presidential Candidate, the biggest laugh we’ve had for a long time. But his and other politicians’ incredibly strong positions tell a story of disenchantment with present leaders.
I make no apology for saying that it all comes back to leadership. Standards of leadership have slumped in the last twenty years.
It is time to raise them, seriously.