Cheap money policy does not fool citizens

Fed Chair Janet Yellen and ECB President Mario Draghi chat during a meeting of central bankers and finance ministers in Japan
Akiu, May 20, 2016: The world’s two most powerful central bankers – Janet Yellen of the U.S. Fed and Mario Draghi of the ECB – meet at the G7 in Japan (source: dpa)
  • Preoccupied as they have been with consumption, central banks ignore the importance of investment and savings
  • Citizens rightly distrust the policies of low or even negative interest rates; instead of spending they have been increasing their savings

The socialist idea of a planned economy is gradually being made a reality by the monetary policies of central banks, such as the United States Federal Reserve and the European Central Bank. The idea is also promoted by a considerable number of western economists and politicians.

The conventional wisdom within that group is that economies are driven mainly by consumption. They blissfully ignore the importance of investment and savings – even of the kinds that help people set money aside for retirement.

The purported logic behind the banks’ current monetary policy is that extremely low to negative interest rates will discourage savings and boost consumption, fanning economic growth. This is superficial, short-term thinking from ideologically misguided people.

The policy, if successfully applied, would lead to an increase of the indebtedness of households in the affected countries. Indebted peoples tend to be less free than societies with savings, which give individuals freedom and independence. One is tempted to start suspecting that a hidden agenda might play a role here – a politically motivated desire to push private households deeper into debt in order to gain better control of consumption and to be able to centralize investments by institutions. This would amount to a triumph of economic planners over markets.

Indebted peoples tend to be less free than societies with savings, which give individuals freedom and independence

Fortunately, people have not been responding as expected. Citizens understand mathematics and they know that they need a financial cushion in hard times, and for retirement. They are aware that low to negative interest rates are eroding their financial reserves and the value of their nest eggs and retirement entitlements. Those negative effects are exacerbated by planned inflation. Inflation is biting already, but that is obscured by statistics that do not reflect the purchasing structure of a typical middle class household. Rightfully, people worry of being impoverished in their old age.

And they are acting on their concerns. Demonstrably, people in the countries with extremely low to negative interest rates have been saving more. They are bucking the trend that many politicians and central banks are irresponsibly trying to spawn.

The savings rate (the ratio of the disposable income that private households put aside as reserves) increased in Sweden from some 5 percent in 2006 to more than 16 percent in 2016. In Denmark during the same period, it shot up from a negative rate to more than 8 percent, and it has remained stable in Germany at around 10 percent. Even the U.S., normally not a savings champion, has seen a stable savings rate of some 5 percent. Switzerland, on the other hand, long a nation of big savers, increased its savings rate during that decade from about 15 percent to some 20 percent.

A danger exists that once the misguided monetary policy fails, as it must, some of the money-hungry governments will then try to confiscate large chunks of these savings. They also may be wiped out by inflation as soon as the huge money supplies created by central banks hit the economies.

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