Will the debt monster eat your savings?

 With house price growth and house sales slowing down; I sometimes begin to wonder what other crazy plans the government could invent in order to prop up the housing market. If house prices still begin to fall after Help to Buy, Funding for Lending, bailing out the banks, printing £375,000,000,000 and holding interest rates at 0.5% for six years; what would they do? How bad would things have to get before we would see even more extreme market manipulation?

They could reduce interest rates even further so that they become negative. This would reduce the cost of servicing debt but I suspect that savers would have something to say about paying a bank to hold their money! There could well be a mass exodus of capital out of UK banks and possibly social unrest.

As the whole fiat monetary system is based on growing levels of debt, maybe the debt monster will soon consume all bank deposits. The following scenario may seem extreme but we now live with a western economy that already has unsustainable debt levels, increasing volatility and signs of currency wars.

Savers deposits are replaced by debt of equivalent value due to a collapse in economic growth and deflationary pressures. This helps keep mortgage rates low because an artificially engineered demand for the debt would have been created. Savers are paid a small amount of interest (yield) for holding the debt but would never be able to draw out any of their original capital as it would no longer exist! Virtually all money in existence represents debt and savers become mini bond traders. Capitalism without the capital.

Should savers do more to help borrowers?

 There are many people in the UK who have, over the last fifteen years, decided to borrow too much money. As the economy has turned sour The Bank of England has tried to help out these over stretched borrowers by keeping the base rate at the historic low of 0.5% for four years. Additionally it has pumped £375,000,000,000 into the ‘economy’ (QE) which has helped to sustain house prices. The UK government has also come to the rescue by providing up to £80,000,000,000 of ‘cheap’ money to banks (FLS) so that they can offer even cheaper mortgages.

Unfortunately the Funding for Lending Scheme has had a negative impact on savers because banks no longer have to rely on attracting depositors. Thanks to low interest rates and FLS the current rate of return being offered on savings products is appalling. Most savings accounts offer a rate which is far below inflation. Effectively savers are losing out on billions of pounds of interest whilst the cost of servicing mortgage debt has been reduced significantly.

As we are ‘all in this together’ I think savers should do even more to help out over-stretched borrowers. Perhaps a proportion of the interest paid on ISA’s could be redirected to mortgage accounts to reduce the cost of borrowing even further. After all it’s not the fault of highly indebted consumers that we are all in this economic mess. They were under pressure to take on more debt by the banks; it was very difficult to say no. The overwhelming desire to compete with the neighbours leads to a re-mortgage, a new car, house extension or exotic holiday. I’m sure many savers feel deep sympathy over borrower’s unfortunate circumstances.