THE PENALTY FOR SAVING

by
Claudio Grass
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In previous articles, we have outlined in great detail the many faults of the current monetary policy direction of major central banks and the large-scale economic impact of keeping interest rates artificially low. Among the worst offenders is the ECB, that is unapologetically persistent on continuing this exercise in absurdity that are negative interest rates. Over the last few years, the effects of this decision have been felt by pensioners and by responsible, conservative investors, who were forced to increase their risk in order to achieve reasonable returns. However, by now, we start to see the real-life implications and practical consequences of this policy direction affect every single normal citizen with a savings account.

Zero interest on savings accounts

Overall, saving accounts in Europe have been increasingly plagued by constantly diminishing interest rates and Switzerland is no stranger to this issue either. In fact, as the SNB is rejecting calls by economists and shareholders to rethink its stance after over four years and instead persists on its negative interest rates policy (NIRP), the toll on savers, the banking sector and pension funds is only getting worse.

Starting in June, UBS, Switzerland’s largest bank, will stop paying interest on its adult savings accounts. To be fair, this move hardly represents a tectonic shift, as UBS already offers zero interest on savings accounts with over half a million Swiss francs. Also, the rates offered so far by UBS and by its peers for average savings accounts are already almost negligibly low, with an average of 0.0.7%. However, this decision, long anticipated by the critics of NIRP, does have an important symbolic and signaling significance. For one thing, it will not only affect adult saving accounts, as UBS also plans to cut rates on youth savings accounts and on retirement and pension accounts. Much more importantly, this transition to zero interest by the country’s largest lender is very likely to give the green light for other banks to follow suit as well. And while savers already get a raw deal, seeing zero interest accounts become the new normal will not only exacerbate the problem, but getting used to it will also make it a lot more difficult to come back from this anchor point and return to positive rates.

Wider implications

As the “wisdom” of central bankers has now moved from theory and settled into practice and as the everyday citizen feels the impact of their decisions directly, the effect of absurd policies like NIRP is only going to be even more amplified. One of the main and most dangerous consequences of penalizing savers lies in its practical manifestations, in the daily decisions and financial planning of households and individuals. While ultra-low interest rates might have pushed some savers into riskier territories in search of yield, most normal people, especially in Europe where the average saver is unfamiliar with the investment world and wary of stock markets, were content to take the hit and keep their accounts, rather than experiment with new instruments. However, seeing their returns fall to zero, sends a very strong message, even to responsible citizens that like to plan ahead and be financially independent, that this behavior offers no benefit. Spending today, rather than saving for tomorrow, is now financially more sensible.

The implications of this shift on a larger scale are tremendous. As Ludwig von Mises put it in his seminal work, “Human Action”: “There cannot be any question of abolishing interest by any institutions, laws, or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalist to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

We already know what happens in the corporate world when reckless spending is incentivized, as we saw corporate debt pile up in the US and junk ratings spike, posing a serious threat to the entire economy. This threat is bound to be considerably worse as it trickles down to the general public. A society consisting of households without a reliable savings buffer is at great risk of being financially wiped out during the next crisis, which by many accounts is less than two years away.

Preparing for what lies ahead

This trend that sees savers and pensioners get punished increasingly harshly is very unlikely to be reversed anytime soon. If anything, it is bound to get worse, as the scenarios of even negative rates on bank accounts is by far not as unrealistic as it might have seemed a couple of years ago. Banks have already been subjected to it, but normal bank account holders could be next. As surreal as it might sound and as contrary to common sense as it might be, the idea of paying to lend has now entered the conversation as a realistic scenario.

The reason for this is simple. Central banks are not only unwilling, but also unable to reverse their policy trajectory at this point. What was supposed to be a short-term remedy has turned into an addiction. Central banks, especially in Europe, have been unable to wean their economies off it without risking a dangerous slowdown, sending a strong signal about the actual state of fragility of the economy. Thus, like any other addiction, there comes a point where tolerance builds up and the dose needs to be increased to trigger the same effect. Injecting more liquidity into the system seems to be the go-to solution, as we have seen in a decade of QE, an option that has been left wide open by ECB President Draghi. The ultimate result, of course, is that central bankers will have no tools left to fight the next recession, as I outlined in my recent article on the matter.

In these times of monetary surrealism and rising uncertainty, simply being responsible is no longer enough to ensure future financial stability, nor does it help protect one’s wealth. The only reliable way to plan ahead in a concrete way is to look for solutions outside the banking system and isolated from these systemic risks. Physical precious metals provide this much needed insurance and can work as a solid hedge against the many dangers of monetary manipulation.