The Looting of Savers

by Martin Hutchinson {www.investmentrarities.com}

One of John Maynard Keyes principal crimes against sound economics was his demonization of savers.  Calling for the "euthanasia of the rentier", he proposed the paradox of thrift, whereby savers in a recession are supposed to damage the ability for the economy to recover by depressing demand.

Like Keyes equally spurious calls for increased government spending as a stimulus, this Demonization of savers has been used by intellectually dishonest politicians of the left to justify policies that have the effect of robbing savers, whether through inflation, excessive taxation or repudiation of government debt.

In reality, saving is the essential precondition for capital investment and therefore for economic growth.  Societies with inadequate savings cannot generally pull themselves out of poverty, however abundant their natural resources.  Middle class saving is the key to enterprise formation in any society.  Nurturing middle class savings is thus the most important task of government.  John Locke said, "Government has no other end, but the preservation of property," and he didn't overstate the position by much.

Worldwide monetary policies, in place now for almost four years, are uniquely unkind to savers.  By forcing interest rates, both short-term and long-term below the rate of inflation, they force savers to receive a negative real return or take large risks to receive a positive one. The latest Keynesian solution to the unwillingness of debt markets to finance further bouts of government spending is to spend yet more money, and to finance it by monetary expansion and partial repudiation of debt.  This would get debt levels down, but would close the market to further debt issues, since investors are not so foolish as to lend to borrowers who have already defaulted on their obligations.

There is however an alternative approach, which currently appears more and more attractive to distraught Keynesians and that is financial repression.  Under this technique, which was most successfully applied by the British government to work down its excessive debt level at the end of World War II, regulations are used to prevent domestic savers drom moving their money into international assets.  Monetary authorities are then encouraged to promote inflation, to the extent that domestic interest rates are kept below the rate of inflation.

Using this technique governments can run deficits for a generation or more, while thew value of their debts is reduced by inflation. Add in a stiff income tax, to penalize further the nominal interest returns of savers foolish enough to buy government debt and the government's debt position can be retrieved quite nicely -  at the cost of the nation's savings and the rest of the economy.  Needless to say savers, especially those fool enough to believe in the government's promises to maintain a sound currency, were robbed blind and ended their lives impoverished.

"..It is almost certain that large numbers of pesioners and households will find their savings are wiped out directly or inflation erodes what they have saved all their lives. The potential for political turmoil and human hardship is staggering." - Peter Boone & Simon Johnson, Money Managers