It was the question under discussion on @5live’s Wake up to Money this morning. The BBC’s coverage of the new monetary policy is excellent and for all their background press here
Mark Carney’s announcement yesterday shocked the City because it didn’t guarantee rates would stay lower for longer while for angry savers it was proof that the Government had got it in for him.
Mark Carney would argue that his is an independent voice from Government’s but nobody seems to believe that.
Poor old Mark Carney, Osborne’s poodle, disappointing the City, angering pensioners….not much of a honeymoon (mind you he did have a long engagement).
Faced with the biggest squeeze on incomes we have seen in Britain in decades, introducing a semi-compulsory savings system (auto-enrolment) is tough love indeed.
I’d turn the question round.
Why bother to save? Why not invest instead?
Saving money has both negative and positive implications. While prudence is a virtue, wreckless caution is a vice!
The bible story of the talents contrasts the saver (who buries his money in the ground) as the villain while the investor, who creates more wealth through graft and risk-taking, is rewarded doubly.
Despite the City’s short-term disappointment at some of the BOE’s get out clauses, it is in buoyant mood. Markets are at or close to record highs and sentiment is that they have a long way to rise. It’s good, the UK Equity market has fallen in real and absolute terms since over the last thirteen years, we are only now returning to the highs created by the tech bubble of the late 90s.
But this time , the investment in the markets does not feel speculative. I am a net saver and have been investing my savings that were in cash, into equities over the past year. I have done so , party because I see more risk in cash – inflation eating into my savings- than in equities – which will deliver me growth in line with an economic recovery which I hope is happening.
I am investing for the long-term, I am 51 and my life expectancy is 40 years (slightly shorter if I put my Brentford postcode into my longevity calculator). Over the next forty years I expect to see a couple of market crashes and maybe a 2008 style meltdown.
I’ve no idea what will cause the crashes but I know that in the longer terms, investments beat savings- the bible tells me so!!
So , if by savings, we mean putting money under the bed, I don’t think savings are a good idea at the moment. Unless you really do need the money , in which case liquidity is everything and inflation adjusted losses not so relevent.
Quantitative Easing encouraged investment and so does the new policy of “forward guidance” does much the same.
The new economic growth will fuel inflation making savings even less attractive. Investment in companies, especially in their equity, makes more sense now than ever (and it has always made sense to invest over the long-term in real assets like shares and property).
This is not the time to spend for the sake of spending, we are still in hard times and profligate spending on sex, drugs and rock n roll is not going to sort the problem. What this policy is about is getting people to invest in real assets for the best interests in society.
Which still leaves one glaring question, what are we going to do about annuities. Another three years locking into negative real interest rates- forever?
If you want a policy failure- that’s it!