Tuesday, 27 May 2014

How Central Banks Are Waging War on Your Savings

Guest post by Mark Thornton

Martin Wolf is the chief economics commentator at the influential Financial Times. Mr. Wolf has only deteriorated in my estimation over time. He has reached an all time low with his recent editorial (“Wipe out Rentiers with Cheap Money,” 5/6/14), where he argues that the cheap money policy used by central banks is here to stay, so get used to it.

What makes his conclusion so tainted is that he understands the consequences of this policy. He even invokes the famous remark of Keynes regarding the “euthanasia of the rentier” where he supported the ruination of people who earn interest on their savings.

He sees the problem as insufficient aggregate demand. Wolf considers the pre-2007 unsustainable credit boom a temporary fix, rather than the cause of the crisis brought about by central banks. His argument is that low interest rates and quantitative easing policy have been an insufficient policy response to the crisis. His preferred solution remains some type of massive public works program financed by government deficits. However, he believes that governments will refuse to borrow in order to build “productive assets.”

This is classic Keynesian logic: solve the problems of debt and monetary expansion by engaging in more debt and monetary expansion. With governments reluctant to expand spending further he concludes that we are stuck with the second-best solution of a cheap money policy consisting of ultra low interest rates and quantitative easing. Besides, he notes, the “cautious rentier no longer serves a useful purpose.”

Wolf is the unabashed mouthpiece for the ruling power elite. He clearly and correctly describes what this policy actually accomplishes — cheap monetary policy hurts most people in the economy, particularly workers and savers and redistributes wealth to the ruling elites. The losers from easy credit policy include the broad categories of insurance, pensions, and households (a long-known result recently confirmed in a study by the McKinsey Global Institute, referenced by Wolf himself).

The losers from cheap money policy are:

  • Insurance is far more important than most people think. Insurance protects us against the loss of life (life insurance), our health (medical insurance), our homes (home, flood, and fire insurance), and our vehicles (car insurance). There is also general liability insurance and various types of business insurance. Insurance companies even offer incentives to be better drivers, to maintain safer homes, and to live healthier lifestyles, and they strive to eliminate moral hazard. Insurance companies are hurt by cheap money policies because their interest return on investments are now lower than required to meet their payout obligations. This hurts the companies and their policyholders because it requires higher premiums and raises the possibility of bankrupting insurance companies.
  • Pensions and retirement savings accounts are also hurt by easy credit policies. These institutions arose to address the problems associated with increased longevity brought about by increased prosperity. By saving during your working career you provide income for your retirement. Cheap money policy and low interest rates discourage saving and also makes it more difficult for pensions to earn returns on their investments necessary to make future payouts to retirees. The same is true for individuals who have retirement savings accounts.
        In order to achieve higher returns, pension funds and people saving for retirement have been forced into more risky investments. Savings accounts, money market mutual funds, certificates of deposit, and short-term government bonds earn less than 1 percent, and after taxes and inflation they are losing purchasing power. Hence, central banks have been forcing these people to invest in the stock markets and junk bonds and the possibility of large loses in the future.
  • The class labeled “households” is basically everyone except the small number of people who benefit from cheap money policy. Households are harmed in a variety of ways, including the weak job market, declining real wages, and the negative impact on savings. It has also harmed them by encouraging households to take on extremely high amounts of debt, much of which comes with much higher interest rates.

The winners from cheap money policy are:

  • the government,
  • large corporations, and
  • large banks.

Low interest rates clearly benefit borrowers with lower interest rates and governments, banks, and corporations are the biggest borrowers. In general, artificially low interest rates benefit capital and hurt labour. Cheap money policy by central banks helps banks, like subsidized flour policies would help bakeries. Banks are also helped by most forms of government bailouts.

The easy money policy makes it easy for large corporations to borrow large amounts of credit at very low interest rates. It also forces stock prices up as alternative forms of savings, such as certificates of deposits, yield a real negative return. It has also made it very cheap for corporations to buy back their stock and to leverage their balance sheets.

The stock market bubble is the direct effect of the cheap money policy of the central bank.

Mr. Wolf and central bankers around the world have the idea that cheap money policies can increase stock prices and that this will lead to sustainable increases in investment, consumer spending, and increased aggregate demand. In reality, cheap money policies cause economic bubbles that are inherently unstable and subject to crash. It should be obvious that harming the workers and savers of society to benefit the wealthy ruling class is no way to get the economy back on track. Therefore, cheap money policy is a scam of gigantic global proportions.

Achieving economic recovery and growth requires first knowing what caused the problem in the first place. A lack of aggregate demand is the effect, not the cause. A lack of aggregate demand is the crisis, not the cause of it. The cause of the crisis is easy money policy and runaway government spending and debt. Continued easy money policy and government spending will only make the negative consequences of the crisis even worse.

The solution consists of:

  1. Central banks should have no monetary policy and they should not interfere with interest rates.
  2. Government budgets should be balanced and reduced over time.
  3. Government regulations, subsidies, and taxes should be eliminated.
  4. Land, labour, and capital should be transferred from the public sector to the private sector. And,
  5. Programs that burden future generations should be ended.

The horrible irony here is that when Keynes wrote approvingly of the euthanasia of the rentier class, he was speaking of a powerful class of monopoly capitalists and aristocrats. When Mr. Wolf speaks of the euthanasia of the rentier he is actually targeting “insurance, pensions, and households,” with a policy that has enormous financial benefits to the class of people that Keynes was targeting for extinction!

In 1789 Marie Antoinette said “let them eat cake.” In 2014, Mr. Martin Wolf tells us to eat “cheap money.”

Photo of Mark    ThorntonMark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory.
This post first appeared at the Mises Daily


  1. Oh dear.

    What a sad situation it is when even the libertarians fall back on the old chestnuts of implying there is something sinister about banks, large corporations, rich people et al. to try and win an argument.

    Shock! horror! a sinister large corporation may borrow money cheaply - (I can just hear the losers and envious and socialists orgasmically wetting their pants).

    Mr Thornton forgot (or did he?) to mention they use the money to create employment, build new plants, bring out a new product range, replace their machinery etc - but why let facts get in the way of important matters.

    Then there was puritanical tut-tuting at the old chestnut of consumer spending - a very close relative of that other evil which so annoys socialists....enjoying yourself.

    And tops it off with sinister overtones of - 'the wealthy ruling class' - where everyone is supposed to cover their mouths with a hanky and shake their head in disgust like a Vicar who just saw sex on television.

    Before lashings of nonsense about "it harms workers" (as if Mr Thornton has ever met any of them! haha!)

    Mr Thornton will never have heard of either Russel Norman or David Cunliffe but their recent speeches could have been written by him. How sad.

  2. Whilst I agree with the gist of the article, I take exception with the following:

    "In general, artificially low interest rates benefit capital".

    If capital is defined as "wealth productively employed" (Prof. George Reisman's definition in 'Capitalism'), surely the above statement couldn't be further from the truth? Is it not true that the lower the return on investment, the less incentive there is to employ wealth productively and the more incentive there is to consume that wealth?

  3. @Terry: Yes, I wondered about that too. I can only imagine he intended to say "borrowers of capital," meaning in this context 'money capital.'

    @Mr Lineberry: Neither implying nor suggesting. His context is that when banks are constituted on sound money, they are as you say engines of employment and production. When constituted however on central bank fiat money, with a fractional reserve, and with interest rates artificially suppressed by the central bank, they are the engines of destruction he describes.


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