Early this month Mark Carney and the MPC announced that monetary policy would remain the same, as it has done for the last 15 months. This was positive news for the markets and borrowers but part of the ongoing blow for savers.
The environment for British savers is still not an attractive one and the arrival of Mark Carney has done little to reassure us that things will change.
The Bank of England itself states that ‘it sets interest rates to keep inflation low to preserve the value of your money.’ This doesn’t seem to be the case however, since Mervyn King moved to the top of the bank in 2003 consumer price inflation has been (on average) running more than one percentage point higher than its 2% target.
According to Tim Price, never before has the base rate been so low since the founding of the central bank in 1694. A long low-term base rate is super news for borrowers (those desperate to get on the housing ladder) but it is bad news for those keen to start any kind of financial planning and are on fixed incomes or hoping to put money aside.
No one seems to be holding our central bank to account over the issue of inflation and the growing cost of living. But if anyone is going to, it should be those of us who currently put our money in the banks.
Are things looking up?
Too often when the plight of British savers is mentioned they are quickly referred onto UK house-prices. Supposedly a protector of wealth they are instead a more pernicious example of inflation than the consumer price inflation measure.
One has to question where the government and Bank’s loyalties lie when the financial crisis was in part caused by the housing market. One wonders if our central bank believes the success and health of an economy is based purely on house prices.
We all know this is not the case, a financial crisis triggered by a housing bubble will not be solved by yet another one.
And for all the tales of growth, the type that the UK economy is facing is one that continues to be driven by consumption – both household and government. We have returned to an era where we live beyond our means.
If you want to know how much of a country’s output is being invested rather than consumed look at the gross fixed capital formation. Last year has the lowest gross capital formation, with just 14% of our GDP being reinvested in the economy.
It is clear that we are not saving and investing to ensure the prosperity of our families and of country. This isn’t a new problem, countless UK governments have been faced with this situation for decades yet not one has decided to do anything about it.
We, along with the government, continue to spend more than we can afford. The squeeze in disposable incomes, thanks to inflation and pay-freezes, is being countered with borrowing more or dipping into savings.
Do they care about savers?
At the end of September Carney offered a crumb of comfort to savers when he said that he could not see the case for nor offer support for quantitative easing (note, he didn’t rule it out). But this isn’t something savers can rejoice about just yet. In his famed attempts at forward guidance he is yet to provide a mere sniff at increasing interest rates or of how he plans to unwind the £375 billion of gilt purchases.
King and now Carney are fully signed up members to a central banking system that pays lips service to savers but in reality is there to lend to and stimulate our degenerate banking system. No matter how much ‘sympathy’ Carney feels towards savers no-one can escape the reality that a combination of near-non-existent interest rates and high inflation is slowly eating away at their wealth.
It’s not even our own central bank governor who has no understanding of the saver’s plight. Upon the sale of Royal Mail shares, ordinary British savers missed out in favour of overseas investors and hedge funds. Book runners Goldman Sachs and UBS purportedly ran a marketing campaign aimed at institutional investors rather than the ordinary people who set aside a conservative amount each month.
What can savers do?
What can we do about it? Diversify, look for something that the central bank are unable to affect the availability of and stop thinking in terms of the price of something or the returns on it. The key thing to protect when considering long-term savings is value.
This is when I of course turn my attention to gold.
Given the ‘ster’ in sterling comes from old German meaning ‘strong, stable, reliable’ whilst this may be the case in terms of trust in the British pound sterling and the banking system, the same cannot be said for its value.
Interest rates and inflation aside, the British pound is losing value. Since 2000 the British pound has lost 78% of its value against gold. Whilst this isn’t the worst it has been in the last 12 and a half years, it is by no means the best.
And what about the British pound as a competitive currency? Often seen as a safe haven, it has benefitted from the financial crisis and our easy monetary policies. Gold has also continued to climb for the last decade. Yes the price may be down this year, but it’s certainly outperformed the pound’s value in the same period.
And all may not remain well for the pound in the foreseeable future, after all the gilt market is starting to show it’s not comfortable with Carney’s plans and has shown that it does not quite believe Carney’s pledge that interest rates will stay low until a solid recovery is in place.
A 2012 Lucey et al paper concluded that gold can be regarded as a safe haven against the British pound. They find that gold acts as an ‘anti-currency’ against sterling, which ‘provides further support for its role as a monetary asset.’
British savers have no choice but to interact with the British pound and the banking system. But they do have a choice as to where they invest their money. The government and central bankers have lost their raison d’etre but that doesn’t mean British savers must follow them down dead-ends.
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