In my latest video, I argue that savings do not create economic wealth. They have a use in terms of financial security, but they rarely create useful economic activity. So why does the government spend £70 billion or more a year subsidising them?
The audio file is:
The transcript is:
Savings are dead money.
There's nothing useful about saved money. I know that you'd like to think there was. I know that personally, you think if you've got some savings, you feel more secure. And I do not doubt that. I think, in fact, having some savings is an extremely useful thing for everybody to have in their possession, if they can.
Why? Because it provides an element of security in the event of some unforeseen disaster that, frankly, helps a lot. People manage their lives and so of course people need to save but that doesn't mean to say that the money that people save by putting cash into bank accounts or, frankly, money into shares is of any use to the economy at all.
Let's use the two examples I've just mentioned. If you buy shares with your saving you buy second hand shares. So, for example, if you want to buy some shares in Marks & Spencer PLC, Marks & Spencer PLC hasn't issued any shares for a long time, to the best of my knowledge, which is a fact true of almost every company on the London Stock Exchange.
Instead, if you want to buy some shares in Marks & Spencer PLC, you'll buy some second-hand shares in Marks & Spencer PLC. In other words, ones that somebody who now owns those shares, wants to get rid of to somebody else. Now there's nothing wrong with buying secondhand items. I would encourage it in certain parts of the economy because that's called practical recycling, but recycling secondhand financial products adds absolutely precisely no value to the economy at all.
Well, except to the extent that somebody takes a bit of commission and lives on that commission as the return for their job in buying and selling those between the people involved, but that's tiny. It doesn't create new investment. Marks and Spencer's don't even benefit from the transaction directly.
They might indirectly, in terms of the director's bonus scheme, because the share price stays up because you bought some more shares, and most directors of large companies in the UK are incentivised for keeping their share price high. But in practice, the company itself really doesn't benefit. Gains nothing.
So that is dead money. The money you saved simply went to somebody else in the economy. What they do with it is up to them. But you can't claim that your money created benefit in their hands, because you don't know that.
The same is true if you put your money in a bank. If you put your money in a bank, all you have done is move money out of your current account into a deposit account at the bank.
This is simply an electronic transfer between two balances in the bank's bookkeeping system. The bank then pays you interest, which it might not have done on the current account, but otherwise, precisely nothing has changed. The money in the bank was dead when it sat in your current account. It became interest bearing when you put it into a deposit account, but the bank doesn't do anything with it.
It does not, in particular, lend it to anyone else.
It can't because it owes it back to you. It can't take the money that it owes back to you and say, well, I don't owe it to whoever you are now, and I'll put it onto somebody else's account because you'll say, hey, what have you done with my money? Where is it? It's got to stay on your bank statement to record the fact they owe you. They can't transfer your bank statement to somebody else's ownership.
And that's all that having money in the bank means. It means you have a balance on your bank statement. Nothing else at all.
When they lend money to somebody else, it's new money that they create for that purpose. So, saving in a bank, is absolutely dead money, totally and utterly. It does not produce any new economic activity.
So there's a really big question to follow this up. Why do we spend so much money in the UK, around £70 billion a year, encouraging people to save in secondhand shares and bank deposit accounts?
In other words, why do we encourage people to put so much money into their pension funds or into ISAs? Because that's the amount we spend on encouraging saving.
It's more than what we spend on schools in England and Wales.
It's more than we spend on the defence budget for the UK as a whole.
And yet, it doesn't produce any net real economic worth for the country at all.
It will make some people feel richer, that's without a doubt.
But is that what we should really be using government spending to do?
Or should we just be saying, “Save if you wish. Please do. We'll provide protections to make sure that whoever you save with is not going to run away with your money.” Most certainly, that's a job for government to do. But should we be actually subsidizing the placement of money into redundant activity, which is what most saving accounts are?
I don't think so. So why are we doing it?
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I agree with what you say, Mr. Murphy, about savings being ‘dead money’ for most. I have always believed that the purpose of making an ‘investment’ is the purchase of an income. Most people, when they think about it, need income streams to sustain them, not capital. The capital they have, whether cash deposits, NS&I products, or stocks and bonds, may given them a feeling of security (rather a nebulous thing) but isn’t of much help day-to-day with living expenses. Unless it provides spendable income.
As long as people have sufficient income, preferably on a guaranteed lifetime basis, they simply don’t ‘need’ piles of capital ‘just in case’. Indeed, those people I work with who have secured their income, particularly in later life, enjoy the freedom of giving excess capital to family (or others) to help with their debt burdens, for instance, thus improving the next generation’s cashflow.
People needlessly worry about tax in later life, in my experience. They need to concentrate on ‘net pay’ – which is, after all, what they live on – and forget the deductions. If the net pay is sufficient (and hopefully increasing a bit each year), then they are free of worry.
Thanks
If banks don’t lend out deposits, why do they need deposits in the first place and why do they pay interest on those deposits, given the costs incurred in managing the accounts?
This simply doesn’t make sense.
Because at one time it did make sense for them to do so
Now we have fiat currencies – and have done for nearly a century – it does not
BUT convention requires this, as does regulation – where your deposit is effetcively treated as part of the capital of the bank that it might lose – hence the government guarantee on it
Why pay interest? Have you noticed how relucant they are to do so without government pressure?
It seems that there’s an opportunity for an individual retail bank to enhance its profits.
It doesn’t accept any new personal accounts and let’s the existing ones expire – people either die or change banks over time. Offering personal banking is a loss maker, all those debit card transactions, occasional cheques, cash withdrawals, staff, servers, physical infrastructure, telecoms, faster payments, direct debits, it’s all a pain.
The bank could still make money on lending for mortgages and business start ups, and would gain custom by offering a fraction of a % better rates. And that would generate economic activity, possibly more so if they expanded their lending a smidgeon.
Why hasn’t any for profit retail bank successfully done this? There must be a reason. The customers could all go to the not for profit sector for their personal day to day banking.
Regulation would not permit that
That is such a helpful explanation, thank you.
At the moment the government pays the Bank of England base rate on bank reserves. If people make deposits, savings, and if they pay less than base rate, then banks make a profit.
So, at the moment, banks make a profit if people save with them.
This may change if, as I hope, the bank changes its policy on paying interest on reserves. If this happens it will be interesting to see what effect this has on savings accounts.
“why do we encourage people to put so much money into their pension funds or into ISIS?”
Did you mean ISAs?
Yes
Thanks
Changed
How do you expect the private sector to save for their retirement if not through pensions and ISAs?
I am not withdrawing tax relief
I am just attaching conditions that help to guarantee there will be a future
That seems quite useful to me
Richard,
At the expense of both of us going on about it…………
Might I suggest that we need a range of ‘Financial Products’ that either as Citizens we can all access equally or provided via National Insurance to get around this ‘savings’ issue.
I suggest
1. A level of Life Insurance provided via National Insurance to ensure our dependants are provided for on death
2. Some sort of Mortgage Insurance for home owners funded via a levy on mortgages
3. An ‘Earnings Linked’ element to the State Pension and possibly the ability to buy some extra pension
4. A range of savings accounts that would allow everyone to build up a reasonable amount of savings. I suggest (have suggested) that those on certain benefits should have contributions made into this for them
Clearly the savings accounts could be provided via Banks and Building Societies as well as National Savings
An interesting idea…
Why do banks take deposits if they don’t use them and it costs them to do so?
Because at one time it did make sense for them to do so
Now we have fiat currencies – and have done for nearly a century – it does not
BUT convention requires this, as does regulation – where your deposit is effetcively treated as part of the capital of the bank that it might lose – hence the government guarantee on it
Why pay interest? Have you noticed how relucant they are to do so without government pressure?
The government guarantee is for the depositors, not for the banks. Deposits are liabilities and have nothing to do with the bank’s capital.
The provide banks with liquid capital
Do you have any idea at all aboiut how a balance sheet works?
There have been a lot of very stupid comments on this issue from Worstall trolls, of which you, no doubt, are one. Tell him to learn some accounting, will you?
Do banks still lend savings deposits on the overnight and short term markets ?
No
They balance their liquidity needs on these markets
The double entry of banking makes it impossible to lend a depositor’s money to someone else – because it is still the depositors
There is no such thing as physical money – which lending one person’s money to another person implies. There are just ledger balances. That is it.
Also worth pointing out that excessive house and land prices are dead money
My objective for 2024 is to persuade Richard that not only is money created from thin air, but that it can simply disappear back into thin air. It does not necessarily need to be cancelled as tax. If this heresy were correct, it would mean that “balancing the books” would always be impossible.
Richard’s idea of dead money suggests that he may be starting on a slippery slope. Once you start to acknowledge dead money, you have to ask whether all of it it can be brought back to life.
I have argued elsewhere that a lot of private debt is secured against assets, whose value depends on them not being realised. (The Mysterious Case of the Burnt Banknote. https://sussexbylines.co.uk/politics/the-mysterious-case-of-the-burnt-banknote/). If too many mortgages default, too many repossessed homes will come on the market, prices fall, and not all the money that the bank lent on those homes is still there.
Possibly the Burnt Banknote hypothesis is too extreme for even an MMT supporter, but it is worth asking two questions:
1) How much of Richard’s dead money a fully accessible? And how much only has value if it is not realised? Is there a great pool of half-dead money?
2) When the Bank of England raises interest rate to the level that mortgages start to default, is it indirectly destroying money?
People clearly fear poverty in old(er?) age – especially those without children or those with children from whom they may not expect any support. Hence they save, longer-term, and/or put money into ‘secure assets’ (houses, since they look at the long-term inflation/salary-adjusted prices and see them rising, notwithstanding booms and busts on occasions. They just hope to ‘time the market’ as best they can…).
If there were adequate state provision rather than the current paltry level of basic pension, combined with a reliable earnings-related element and/or optional additional savings (with some guarantee the government wouldn’t force a ‘haircut’ on the fund to pay for some other debacle!); plus much better provision of social and nursing care, based on need and not payment…
… this ‘paradox of thrift’ could be avoided or at least reduced.
The lack of trust in government and collective provision for those in need, combined with the continual neoliberal mindset drilled into everyone that ‘you need to get on your bike, look after yourself and your family; and don’t expect free stuff from incompetent government agencies…’ and ‘tax is a burden’… makes me wonder if we could ever achieve this, above the current minimal levels (or ‘triple lock plus’!). Only if we overcome the ‘no such thing as society’ mantra.
However, changing the mechanism for provision for the elderly raises the question of how such state provisions would be sustainably funded: yes, in the short term ‘fiat currency’ government spending would pay; then requiring additional taxation in so far as inflation needed to be controlled. But would we need to switch to a ‘savings’ model of government pensions? (I understand that’s how it is in some European countries with much higher state provision.) Would that effectively sterilize the process and lead to ‘dead money’, simply in a different account (government, cf private funds)? Perhaps a sharper mind than mine, on monetary economics and accounting, can advise?!
Richard – well done!
I assume the 70 billion is the delayed tax revenue. Another loss is that subsidy is to saving that often is offshored. – reducing necessary investment in the country that has delayed revenue collection. Why would we have a subsidy to saving that is not directly helping the nation?
No, it is an absolute tax loss now
Who knows if there will ever be tax revenues, and when – and what they will be worth?