Mervyn King misleads on household debt

In October, Bank of England Governor Mervyn King warned that we could be suffering our “worst financial crisis ever”, more serious even than the Depression of the 1930s. Two months later, just as it is confirmed that the UK has dipped back into recession, he’s more cheerful, telling us not to despair: “There is no reason to despair… All crises come to an end”.

One thing in particular struck us about the speech he gave yesterday evening. He said: “The increase in households’ borrowing came to an abrupt halt in the 2008/9 recession.”

While that may have been true at the time, it gives the very misleading impression that UK households have stopped borrowing. This could not be further from the truth. A look at the Bank of England’s own figures shows that British households are as indebted as ever and that the only reason headline totals have fallen is because the banks have written off so much bad debt.

Take total consumer debt for instance. This stood at at £1,461 billion in November 2008 and £1,452 billion in November 2011. It seems to have declined slightly and yet the banks had written off £26.7 billion. So the total excluding bank write-offs has actually risen by £18.4 billion.

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Are low interest rates the answer – or the problem?

There is a near universal belief among economists, politicians and the public at large that low interest rates encourage economic growth. In the UK, we have had 0.5% bank rate since March 2009 and City economists keep putting back their estimates of when it might rise. The current consensus is that it will not happen until November 2015!

Having painted itself into a corner with interest rates, the Bank of England conjured up Quantitative Easing to further stimulate the economy. QE has not been without its detractors, both for its inflationary impact and because some think it benefits the banks rather than the real economy. The Bank of England admitted that the first bout of QE increased CPI inflation by 0.75% to 1.5%, but claimed that it boosted the economy by between 1.5% and 2%, reducing yields on medium-dated gilts by 1%.

The Bank of England gets its sums wrong

But was the Bank of England right? The Bank of International Settlements – the central bankers’ bank – thinks not. Instead of 5-25 year gilt yields falling by 100 basis points (1%), the BIS believes QE pushed them down by just 27 basis points (0.27%). And while the Bank reckons that the second bout of QE will be as effective as the first, the BIS disagrees: “It may be harder to achieve the same degree of effectiveness as with the initial programmes once the surprise or novelty element wanes”.

We have been arguing that the Bank is not only wrong about QE, but also about the effect of long-term negligible interest rates. On The World at One before Christmas, Bank of England Deputy Governor Charlie Bean was challenged on this. Less fluent than elsewhere, he stammered that, “Had we tried to rein inflation back sharply this year that would have led to too sharp a contraction in activity and what we would also find is inflation dipping well below the target next year.” … Continue Reading

Why the MPC has failed

Members of the Bank of England regularly give speeches. Often they are technical and dry and go so far over our heads, they are practically in orbit. Less so last week’s speech by Spencer Dale. The Executive Director of Monetary Policy and the Bank’s Chief Economist gave a talk with the zippy title “Prospects for monetary policy: learning the lessons from 2011”.

The section most heavily reported concerned savers. It is only a little over a year since Charlie Bean caused outrage by saying that savers should stop complaining about low returns and instead go out and start spending. More recently, however, the Bank has softened its stance. After Save Our Savers demonstrated outside the MPC’s October meeting, Governor Mervyn King expressed his sympathy for savers. Shortly after our December carol protest, Mr. Dale offered this consolation:

“I have the utmost sympathy for the hardship faced by many pensioners and other households dependent on the flow of income from their savings. They played no role in fuelling the financial crisis, but have been badly hit by the reduction in interest rates that followed. I understand that the burden of interest rate cuts falls most heavily on savers. And I can understand why, to many, it seems unfair that those with high levels of debt and borrowing should now benefit from lower rates.” … Continue Reading

Carols at the Bank

Come and join us on Thursday, December 8th from 11am until around 12.15 at the Bank of England.

Inside the Bank, the Monetary Policy Committee will decide the latest paltry level for bank rate.

Outside, savers, pensioners and others will gather to show the human face of those adversely affected by the Bank’s policies.

We will have a few placards with us but feel free to bring your own. Bring mince pies too, if you wish, and mulled wine or soup in flasks.

Most importantly of all, though, bring your voices. For this is to be a protest through song. We will be amending the words of some of the more secular carols and seasonal songs to reflect our views and opinions of the Bank of England, its anti-saving policies and its newly-knighted Governor.

We aim to follow this very social protest with a very social meeting. We will adjourn afterwards to a nearby Wetherspoon pub, The Green Man, where we can get warm and get to know each other.

Lyrics for savers

We’ve been working on some lyrics ourselves, such as this:

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The Bank of England is killing savers – and the economy

RPI inflation is its highest for 20 years; at 5.6% your money will halve in value in 12 years. CPI has shot up to 5.2%, even though the target rate – ignored by the Bank of England with the complicity of the Chancellor – is 2%. On top of that, we are getting another £75 billion of Quantitative Easing to add to the earlier £200 billion.

The Bank of England is not just failing savers and pensioners; it is failing the country. With no apparent room for manoeuvre on interest rates, the Monetary Policy Committee thinks QE is just the ticket to restore growth to the UK economy. If QE is the answer, why stop at £75 billion? Why not double or quadruple it and really get things humming?

However fancily you dress it up, QE conjures money from thin air to “inject” into the system. The earlier dose of QE did not lead to the hoped-for splurge of bank lending. On the contrary, the banks snaffled the money to rebuild their balance sheets and pay themselves exorbitant bonuses. QE did not spur business investment or improve anything in the “real” economy.

What it did boost was inflation. Even the Bank of England admits that QE has already pushed inflation up by as much as 1.5% and this new tranche will swell it still further. According to one of the Bank’s own leaflets: “It’s the Bank’s job to maintain the value of money by keeping the rate of inflation at a low level.” Yet the more money there is, the less the money that we already own will be worth.

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Rebalancing our economy: the myth of low interest rates

Our Government seems intent on squeezing prudent savers until the pips squeak! Does the government imagine that low interest rates will stimulate the economy by encouraging spending ?

Let us examine this a little. Those whose livelihood depends on an income from their savings now have precious little to spend.  Those about to retire have seen their pensions savaged by the low returns on annuities. So they will be slow to spend.  Many of those with debt are not going to be spending either.  They are taking advantage of low rates to pay off their debt whilst it is cheap to do so. As interest rates continue to remain low and inflation creeps up, borrowers will count their blessings – and savers their losses.

The truth is that abysmally low returns for savers do not just discourage saving. They also discourage spending in the present precarious state of the economy. People are wary about spending and their wariness reflects deep distrust about the economy and its management. Interest rates that provide a reasonable return, in relation to inflation, will encourage people to save. In the longer term, the confidence that comes from an economy that is better balanced between saving and spending will encourage people to spend. … Continue Reading

Government target for savers

Save Our Savers wants the Government to set a critical long-term savings target for all – at minimum a 6% savings ratio nurtured by a fresh mesh of policies and incentives.

Yet a key part of that aim must be crystal-clear communication: ask any soul – family, friend, colleague, passer-by – what they know about the savings ratio and I’ll wager a fiver you get a vacant stare in return.

The UK’s household savings ratio – whose official name is charmingly redolent of five-year economic plans, pig-iron targets and Orwell’s Big Brother – is sadly shrouded in mystery.

One reason this vital economic signpost is under-publicised is that hardly anybody can grasp what it is, and no wonder.

Here’s how the Office for National Statistics (ONS), the body that calculates and tracks the ratio, lovingly describes it on its website;

“The household saving ratio is household saving expressed as a percentage of total resources which is the sum of gross household disposable income and the adjustment for the change in net equity of households in pension funds.”

Blimey. Got that? … Continue Reading

Mr Gordon Cameron-Clegg

Gordon Cameron-Clegg is a regular guy. Married with two children both in full time employment and off his hands, Gordon has just retired. He has never been in debt but has spent what he earned.

He believed in following his Government’s lead and implied guidance. He has never bought a house; the curtailment of mortgage interest tax relief guided him here. He opted out of his employer’s pension scheme; the removal of c£5 billion a year ACT recovery from pension funds sent him a clear message. He had inherited some gold based shares but he sold these when his Government sold the national gold reserves thinking the timing must be right. He never fancied putting his hard earned taxed income into a stock market that could crash nor saw the point of cash investments, which were eroded without tax relief by Government planned inflation, yet were taxed on interest earned: often a negative net return.

Who will now pay for Gordon’s food and housing, his escalating medical care with expensive drugs and the long period nursing care resulting from his medically extended life? Although Gordon is debt free, his Government has borrowed extensively to fund current running expenses. They have borrowed for him. Who will repay the principal and interest on this debt? The simple answer to both questions is the same. The current and future generation of productive workers will pay for Gordon’s and their own upkeep plus repay Gordon’s debts, all from taxes from money they have yet to earn. The business equivalent is a company that contracts to pay its employees healthy pensions and plans to pay for them from profits it has yet to make.

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Living on the never never

As a nation we have deceived ourselves in believing that we could go on spending beyond our means. We have allowed consumerism to become our idol, no matter whether we had the income or not, a credit card was always there to feed our need for instant gratification. Why wait when you can have it now- instant credit, buy now pay later was the cry. With such an environment why bother to save. The result we have the highest level of household debt at 160% of national income, higher than Europe higher than the US.

One of the underlying causes of the credit crunch was the huge borrowing by the West from the likes of China, to finance our lifestyles and property bubble.

What is really disappointing in the Government’s response to the economic crisis is there has been no recognition of this. The government boasted that it had presided over 10 years of uninterrupted economic growth. The truth is a good part of this has been fuelled by debt. Its response to the bust has totally ignored the personal debt issue and the misery that uncontrolled debt can be become. Where is the encouragement to rebuild savings? Interest rates are at their lowest ever, tax relief on pensions for the more highly paid is being restricted and the implementation of the new National Pension Savings Scheme is being delayed so that it won’t be in force for all until 2017. … Continue Reading