The basic rules of life don’t change. Eat sensibly; exercise; save money; do whatever the wife tells you.
Lately, however, one of the most basic rules of beneficial financial behaviour has indeed changed, probably forever. The decision by Alan Greenspan, Ben Bernanke and their acolytes in central banks around the world to cut interest rates to little or nothing have changed the most basic of rules.
Let’s dispose in a few words of the charges against the Greenspan mob. Realising that they had failed to manage the economies they were paid to manage, they conspired to rob the financially prudent of their savings. The financially prudent often means those who live in the Olderhood.
A lifetime of financial prudence led many of us to forgo some of life’s pleasures, in order to accumulate savings as a hedge against old age. Saving money made sense if you thought you might live an averagely long life. Your savings would earn a little to defray the costs of being retired.
In one foul swoop, Greenspan set in train a series of interest cuts that have led to most savings accounts paying little or no interest. The global economies, Greenspan would argue, benefit from people spending their money, thereby creating jobs and driving things forward.
It was easy enough for central banks to cut interest rates. It will be all but impossible for the rates to be put back up again — ever. With the majority of most populations indebted, what politician is ever likely to increase interest rates?
This might, or might not, ease the pain for the global economies, for a while. But it will blight those same economies for generations to come. Saving is critical not only to the individual, but also to the financial institutions who rely on a net inflow of deposits to fund their lending activities. A bank with no savings in it isn’t a bank: it’s just a collection of ATMs.
Bernie Madoff was sentenced to 150-plus years in jail for robbing some rich people. Greenspan, as far as I know, is still at large, although his economic crimes dwarf those of Madoff, Ponzi and all the other swindlers added together.
How has all this changed the rules? Well, it used to be that in calculating the true cost of alternative options, one factored in what was known as “opportunity cost”. Say you wanted to buy a shirt for $100, and it took you a year to save another $100. Say interest rates were at five percent. If you took the money for the shirt from savings, the shirt ‘cost’ $105: $100 for the shirt, plus $5 of lost interest.
With interest factored out, Greenspan reckoned, you’d buy the shirt and damn the consequences. What he overlooked is that savers would rather have $100 in the bank and no shirt. Most savers already have a shirt.
Greenspan has, however, taken the new shirts off savers’ backs. History will record him as perhaps the greatest economic villain we have ever had to endure.