The difficulty in all this is multifold. First, cash saving is essentially a negative act. In times of low inflation it is a safe act and, with deposit guarantees, broadly secure but it yields next to nothing and, as importantly, does nothing for the economy. Saving in cash effectively takes money out of active use. It is a loan to a bank that then forms part of its capital (it no longer remains your money: it does belong to the bank once deposited and all you own is a loan recorded in a bank statement) but what we now know is that banks do not then lend this money on: all the loans they create are made out of new money created for the purpose. They do not therefore, effectively, need deposits to make loans.
That’s just fascinating, isn’t it? So no bank can ever suffer a run, can never go bust, can never have a mismatch between deposits and loans. It’s a wonder that Northern Rock ever went under actually.
Or, alternatively, Northern Rock did go under because it needed deposits to fund its loan book and couldn’t do so. And thus banks do need deposits and Ritchie is wrong.
Tough one to decide over really, isn’t it?
Gilts are a surprisingly hard to access savings mechanism for the average person
Really? You fill out a form and send off a letter. And payment, of course.
But why are we doing that? This stock market trading is almost entirely about redundant money: almost as useless as cash in its economic impact. When you buy a share it is almost invariably a second hand piece of paper you are acquiring: someone else sold a property right in a company to you and (although many people seem to think otherwise) the company that created the share that has been sold gains or loses not a penny in the process. In the case of many companies it is also many years since they created any new shares: the stock market in shares is now rarely used as a mechanism for raising money for investment, which is a process undertaken almost entirely through corporate bonds, which few smaller investors have any knowledge of, and which are almost entirely institutionally owned. So, the truth is that the stock market, and saving in it, does not produce new investment funds. It is almost as hopeless in this regard as saving in cash.
So, lessee. The stock market is returning the profits being made to investors, rather than raising new cash for investment. This makes the stock market a really bad place for them to stick their money, because all that happens is that they get a share of the profits currently being made.
There might even be a bifurcation of the Trousers of Time where this makes sense but it ain’t this one.
But having made these points let me be clear. What they reveal are three things. The first is the difficulty people have with understanding savings. Very few people have any real understanding of the mechanisms they use to save or what the impact of those mechanisms on the real economy is. This leads to serious errors of judgement, mismatched expectation and to exposure to mis-selling, loss and even fraud.
Quite so, but I think we might want to ponder whose errors of judgement.
Second, most ‘saving’ is unrelated to any investment activity, meaning that little economic gain arises from it.
Third, saving in these largely economically useless ways allocates vast amounts of energy to supporting this activity when in many cases little or no return is actually generated as a result of that activity.
Last, and perhaps most important, given that the most important reason for saving is, without doubt, to provide for old age, the fact that many of these savings mechanisms cannot actually generate the returns needed to support people in their old age means that in large part they are unsuited for that purpose. There is massive market failure as a result.
That the market isn’t miraculous does not mean that there is market failure. If you save 10% of your income and the market doesn’t let you finance a 20 year retirement on that it’s not a market failure. Maybe you should just have been saving 15% of your income?
And so let’s go back to the China problem. China’s boom was caused by people seeking to save in mechanisms of which they had little understanding with outcomes that were uncertain, risks hard to calculate and a likely mismatch with their real need.
Hahahaha…..snigger. Jeez. China’s savings problem has been caused by China’s financial repression. And if you don’t get that then you’re really no business commenting…..
Then he suggests his Peoples’ Pensions again. And still missing the point that he’s got no equity slice there. Meaning that there’s no risk takers there.