
Inflation is hitting savers harder than they realise (Photo: Alamy)
First, let’s see how much savers have actually lost. The banking crisis has been going on since mid-2007. Let’s call that four years. The natural equilibrium rate for UK interest rates – the rate that would be set if policymakers were not trying to manage short-term macroeconomic disturbances – is about 5 per cent. The inflation target is 2 per cent. If inflation had 2 per cent and interest rates 5 per cent for the past four years, then £10,000 invested in 2007 in an account paying out at Bank Rate would now be worth about £12,200, or about £11,200 in real terms (at 2007 prices).
In fact, interest rates have average just 2.3 per cent in real terms over the past four years, whilst CPI inflation has averaged 3.3 per cent. So £10,000 invested in 2007 at Bank Rate would now be worth £10,900 or £9,600 in real terms (at 2007 prices). So in real terms, savers’ money is only worth about 86 per cent (£9,600/£11,200) of what it would have been worth had policy been neutral and inflation kept under control – a loss of 14 per cent.
In 2007, the first £2,000 of depositors’ money was insured 100 per cent, and the next £33,000 was insured 90 per cent. If depositors had been preferred creditors of banks, as they should be, then no depositor could conceivably have lost a penny in 2007, and the state insurance scheme would not have been called upon. But let’s ignore that for now, and consider a case in which your deposit insurance is required. Then our £10,000 saver would have lost 10 per cent of the difference between £10,000 and £2,000, i.e. £800. So she would have recovered 92 per cent (or lost 8 per cent) – well ahead of the 86 per cent value (14 per cent loss) she has experienced under our low interest rates/high inflation policy.
Consider a more extreme case. Suppose that there hadn’t been any deposit insurance and that depositors hadn’t been preferred creditors. Then what? Well, in the early 1930s banking collapses in the US, typical depositor recovery rates were above 80 per cent. So if there had been no insurance at all, depositors had not been preferred creditors, and the UK banks in 2007-9 had been just as bust as the US banks of the early 1930s, then depositor losses would have been about the same as they have been over the past four years under our low interest rates/high inflation policy.
One of the implications of all this is that if you were a saver in a bank that wouldn’t have collapsed, such as HSBC, you have made a very considerable loss from this policy. Depositors in robust institutions have a clear interest in opposing bailout/low interest rate/inflate away the debt schemes.
Andrew kyambadde
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