The Governor of the Bank of England, Sir Mervyn King, has shrugged off the plight of savers and said that saving by households had been one of the reasons for the recent flat-line in Britain’s economy.
Speaking at the quarterly inflation report press conference Sir Mervyn said that he felt a ‘deep sympathy’ for those long suffering savers who were unconnected to the causes of the recent financial crisis but “These are consequences of the painful adjustment prompted by the financial crisis and the need to rebalance our economy”.
Going on to say that everyone was suffering he said that no single group could be singled out for special help.
He could raise interest rates to help savers but that would stifle consumer spending putting us back into recession he said.
So, there you have it, savers must stop being unpatriotic and make the sacrifice at the altar of growth so that people can go and buy more ‘stuff’ to kick-start the economy. When more ‘stuff’ is bought, businesses can then look to expand and will go to the banks for loans and savers will then gradually see better returns.
The trouble is that there is likely to be a very long gap between the spending now and the recovery in savings rates in the future. Many savers and pensioners may never see the benefits.
There is also the problem that many households are in no mood or even position to spend so we may be in a bit of a Catch 22 situation.
So what do we do, just grind on in the hope that more and more QE together with more and more public sector cuts will help us out of this desperate situation. Remember Einstein’s phrase that doing the same thing time and again but expecting a different result is a sign of insanity?
Actually no! There may well be a very good way for us all out of this mess. And it revolves around a jubilee. No, not the Royal one but a ‘modern debt jubilee’ as advocated by Steve Keen in debtwatch.com.
As he says “The economic and financial crisis has been caused by unenlightened self-interest and fraudulent behaviour on an unprecedented scale”. With that we have reached a situation where we have huge debts and, as Keen points out “Michael Hudson’s simple phrase that “Debts that can’t be repaid, won’t be repaid” sums up the economic dilemma of our times”.
To undo this he proposes that instead of giving the banks the proceeds of Quantitative Easing (QE), the money should be printed and given directly to the people on the condition that the money pays off any personal debt first. That way everyone benefits to the same degree and banks’ balance sheets are not hurt.
Keen says that:
The broad effects of a Modern Jubilee would be:
Debtors would have their debt level reduced;
Non-debtors would receive a cash injection;
The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;
Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off; and
Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.
What a great time to do it too, a modern debt jubilee during the year of a modern Royal Diamond Jubilee. But this would take foresight and courage by our politicians ……. well that’s put the kibosh on that one then!