Screwing Savers

So the Deputy Governor of the Bank of England thinks savers should stop moaning and start spending. He says:

"Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit... Very often older households have actually benefited from the fact that they've seen capital gains on their houses."

So now we know. Savers should not expect the Bank of England to protect them against the ravages of inflationary finance. The Bank's official advice is to spend your savings pdq before they disappear.

According to the Bank of England's own stats, the average interest rate on High Street savings accounts is a derisory 0.23% pa. Yet inflation is currently running at 3.1% on the CPI measure and an eye-watering 4.7% on the RPI measure. So after taking account of inflation, the real rate of interest is somewhere between -2.9% and -4.5% (the chart above uses the RPI).

As we've discussed many times, inflation is the ultimate stealth tax. It is a tax imposed by governments on those holding its debt (or at least its debt that isn't specifically indexed against inflation). And anyone holding their savings in a simple savings account at a bank or building society - still more anyone holding their savings in £20 notes under the mattress - is paying towards that tax.

And let's just remind ourselves of the Bank's shocking record on inflation. Since 2003, when the 2% pa CPI inflation target was first set, inflation has averaged 2.5%, and at times during the last couple of years it has been far higher:

And the prospects for future inflation don't look a whole lot better. Sure, the Bank regularly tells us that the current inflation overshoot is temporary, and that "inflation expectations remain well anchored", but frankly they've been singing that same tune for months now. And every time they publish a new Inflation Report they postpone the moment when inflation is expected to return to target. Just as a reminder, see if you can spot the difference between these successive forecasts:

Chart 1 - Bank of England inflation forecast February 2009

Chart 2 - Bank of England inflation forecast February 2010

Chart 3 - Bank of England inflation forecast August 2010

Spot it?

Yes, that's right - back in Feb 2009, just before they put the printing press into overdrive, they reckoned inflation now would probably be between 0% and 1%. A year later in Feb this year, they reckoned it would be between 1% and 2%. But now we're actually here, it's turned out at 3.1%.

Yet despite this dismal forecasting failure, they still continue with pretty much the same old story - there's no need to worry about that roaring printing press because inflation is about to fall below target.

Well, frankly, roaring printing presses should always worry us. And they should always worry savers in particular.

Of course we're not alone in our concern. The excellent Liam Halligan has consistently warned of inflation disaster ahead, and there are others. And now even those who have previously supported the roaring presses are starting to worry.

This morning we get a startling recantation from the Telegraph's Ambrose Evans-Pritchard. He is now alarmed by recent statements from the US Fed, seemingly intent on debauching the dollar:

"I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.

We now learn from last week’s minutes that the Fed is willing “to provide additional accommodation if needed to … return inflation, over time, to levels consistent with its mandate.”

NO, NO, NO, this cannot possibly be true."

Well done to Pritchard for apologising to those of us who have always taken the other view, but I'm afraid it may be too late. Those of us who recall the 70s remember only too well the global inflationary havoc caused by a soft money Fed intent on monetising the post-Nam post-Big Society Federal debt.

So what to do*?

First, get rid of your savings accounts. Don't wait for the Bank of England to rob you of your savings - do it now.

You need either to switch into index-linked gilts (although note that short maturities are priced to deliver a negative real return - so you'll still lose some of your capital), or switch into a real asset. You're probably too late for gold or grain futures, but the struggling UK property market - yes, that old one - might be worth a look. Cam's government have made it quite clear planning restrictions will be maintained, so if you can drive a fire sale deal, long-term supply shortages (at least in the South East) are far more likely to protect your savings than a building society account on 0.23%.

Of course, if you're a widow or an orphan dependent on the income from your savings, then you're stuffed. Just like always, you are set to be the schmucks who have to pay for the mess visited on us by a bunch of vainglorious incompetent politicos.

Why do we elect these people again?

*Terms and conditions apply. The value of investments can go down as well as up, and Tyler hereby affirms amd asserts that he is in no way qualified to offer investment advice to you or anyone else. Including himself.