How long will people choose to hold any wealth in cash given it’s losing value thanks to negative real rates of interest…?
PEOPLE don’t always do what policy-makers expect or demand of them. And a good job, too.
“The household saving rate is likely to rise,” said Bank of England governor Mervyn King in May 2008 – “part of a rebalancing of the UK economy, away from spending and importing, towards saving and exporting…”
But not quite. Not with you slashing the base rate and thus dooming the Pound to a sharp decline, as BullionVault said at the time.
The green line above shows the quarterly change in UK households’ bank-account holdings, measured as a percentage of their disposable income over the same 3-month periods.
It represents, in short, the proportion of take-home pay kept as cash in the bank. Which is worth comparing with the “savings ratio” – that proportion of disposable income not spent on current consumption, and mapped in both the chart at the top and again here, this time in blue…
First, see how cash piled up – just as it did during the late 1980s – even as the household savings ratio sank during the go-go housing bubble of the mid-Noughties.
Between 1987 and 1990, cash accumulation averaged a huge 230% of UNSPENT disposable income. Between 2006 and 2007 it averaged a massive 340%. Because all that money sucked from the international money markets and lent against the future income of new home-buyers had to end up somewhere, right? Most obviously in the cash accounts of older retirees trading down and realizing their gains in bricks’n'mortar.
But second, see how the unspent portion of the UK’s take-home pay leaps…while the volume of new cash savings sinks…when the economy tips from bubble to bust? Both at the start of the ’90s, and again since Northern Rock collapsed 29 months ago, the rate of cash saving falls even while spending collapses.
What gives? Most likely, the gap between unspent income and cash-saved income shows people paying down debt. But since, during the booms, it’s the wealthier households who held the whip hand – hoovering up the cash borrowed by other households to buy a home – how they choose to hold their savings will also prove significant. Especially if, driven nuts by negative real interest rates worse than at any time since the late ’70s, they begin to disdain cash entirely…
Of course, since US households are pretty much the wealthiest households on earth, it makes sense to ask – when trying to second-guess whether, say, gold or bonds make a better bet in 2010 (i.e. do we get inflation or deflation) – where they might choose to put their money in the near future, too.
And one place that US household are not keeping their income right now is cash.
Contrast with the UK patterns, and you can see that US households aren’t big fans of cash (and the other near-cash instruments included above) anyway. But you really can’t blame them today.
“High real interest rates discourage speculation,” as Marc Faber reminded the Financial Times last month. Whereas low real interest rates after inflation…such as the UK and US now both endure, courtesy of near-zero nominal rates from the Bank of England and Federal Reserve…do the opposite.
“Look, let’s say I give you a million US dollars,” the Asia-based, party-loving, doom-n-gloomin’ advisor advised. “You don’t get any interest on your deposit at the present time. So by holding interest rates at zero I essentially force you to speculate – I force you to go and buy some real estate, or go and buy some stocks, or trade currencies or what not…”
Speculating in real estate, stocks, currencies…even gold bullion…might look the preferred outcome for Federal Reserve and Bank of England officials. How else to stem the deflation in asset prices that threatened the end of the world as we knew it barely 12 months ago?
But “the whole problem is that artificially low interest rates lead to a complete misallocation of capital, they lead to credit bubbles…” as Faber went on. And if (or when) the negative returns paid by zero-rate policy suddenly tip households over the edge, flipping them from mere speculation to fleeing cash entirely, a flood of money will suddenly start chasing consumer goods – as well as housing, stocks and precious metals.
Adrian Ash
for Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com
{ 3 comments… read them below or add one }
But “the whole problem is that artificially low interest rates lead to a complete misallocation of capital, they lead to credit bubbles…” as Faber went on. And if (or when) the negative returns paid by zero-rate policy suddenly tip households over the edge, flipping them from mere speculation to fleeing cash entirely, a flood of money will suddenly start chasing consumer goods – as well as housing, stocks and precious metals.
yeah but here in aus we get 6.3%
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HHHEEEEEEEEEEEEEEEAAAAAAAAAAARRRRRRRR!!!!!!!!!!!!!!!!!!!
Etch – On the face of it, that is true. However, the damage to your house is being done by the white ants. Inflation and taxes will still do your cash in in the end. Watch inflation, but you cannot trust the official figures in terms of the CPI. 3% official CPI probably understates the real dilutionary action by the printing presses behind the scenes by at least a further 2 – 3%. Impossible to tell, and that is no accident.
At the same time, M3 growth of over 15% is probably overstates inflation, as it needs to be adjusted by wage growth and GDP, which itself is a heavily doctored product of the ABS, which means that at the end of the day you are lucky if you can tell which way is up, let alone which way is West. We have had this discussion only recently.
To cut a long and impossible story short, I would say that even with 6% on our deposit, we are lucky if we are treading water after inflation and taxes. Having said that, the government guarantee on our deposits is worth a premium. How much, I cannot tell. But the bottom line is that, even with our much higher interest rates, savers are probably not that far away from the edge. Plus, how long can our rates stay up while just about everybody else’s looks set to remain in the gutter? Again, I cannot tell, but you gotta wonder. Being in paper for too long with your savings is probably not very smart, not even here in Australia.