72% Less Income for Savers and a Right to be Angry

Finance competition

Overnight Goldman Sachs releases a report saying there’s more hurt in the iron ore price. Oil has fallen back to US$43. The Aussie dollar has softened to US$0.72 cents. The US markets are a touch off. Gold is steady at US$1,166 and bond rates are flat.

The world watches and waits to see what impact these lower commodity prices are having on companies that borrowed heavily a few years ago to ramp up production. Supply is greater than demand. Someone is going to blink and say ‘that’s me, I’m done’.

Global uncertainty is the excuse banks are using to raise home loan rates. They need to strengthen their capital position to withstand another GFC-type event — OR they’re taking the chance to make a few dollars from their captive customers, to give to their shareholders.

Either way, it’s become a bit of a political hot potato. And why is that?

Opposition Leader Bill Shorten said customers had a right to be angry because they were being ripped off by banks that had been given the “green light” to raise interest rates by Mr Morrison and Prime Minister Malcolm Turnbull.

“The banks see Scott Morrison and Malcolm Turnbull as a soft touch — and borrowers are paying the price,” Mr Shorten said.

Sydney Morning Herald, 22 October 2015

Billy boy got a real head of steam over the banks deciding to raise interest rates by…wait for it…a whole 0.15%, to 0.2%.

Now those with a loan might be thinking it may only be a slight increase but ‘it is a big deal’.

Depending on the loan size, it’s estimated the monthly sting from the increases range between $50 and $100.

Check out Billy’s rhetoric — ‘right to be angry’ and ‘ripped off’ and ‘borrowers paying the price.  Imagine what he’d say if interest rates went up 2%? Outrage with crimson face and foaming at the mouth fury. Any reporter in the front row would need to wear a raincoat to protect themselves from the spray.

Here’s the path of the RBA cash rate since 2008.

Source: The Australian

Back in early 2008 the official cash rate was 7.25%.

Let’s look at the flipside of the interest rate equation…through the eyes of a saver.

In 2008 a saver was receiving $7,250 for every $100,000 invested. Today the same $100,000 gives our poor (and getting poorer) savers a measly $2,000.

A 72% reduction in income.

What an outrage. When Billy boy was a union man I guarantee you he wouldn’t have stood for this. Then again, the other side of politics have also sat idly by. Allowing savers lose three quarters of their income earning capacity.

With this assault on savers, where are the crimson faced, foaming at the mouth politicians spitting out words like ‘right to be angry’ and ‘ripped off’and ‘savers paying the price’?

Scour the internet and you’ll find there’s not even a peep on the topic of ‘political outrage over falling interest rates’.

Why is that?

Well we live in a world where debt trumps savings by a factor of at least five to one.

Politicians know where their bread is buttered, and they go with the numbers.

An economic model that relies entirely on more and more debt for growth largely ignores the plight of savers. It’s all about creating policy to accommodate more borrowing and spending. Don’t take my word for it; these are extracts from the latest RBA statement on interest rates (emphasis is mine):

‘Overall, the economy is likely to be operating with a degree of spare capacity for some time yet…

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months.

In other words, the economy is a bit sluggish so we’ll keep dangling the low interest rate carrot to support borrowing and spending. Which means the impact on savers is irrelevant. The system needs more debt and that’s exactly what they’re encouraging.

Perhaps persecuted savers could take a leaf out of Billy boy’s union book and start a ‘Savers of the World Unite’ movement. Street rallies can be held with the leaders chanting:

What do we want?

Higher interest rates!

When do went want them?


Wave placards with slogans like: ‘How would you like a 70% pay cut?’ and ‘Please SAVE us’. The difficulty with getting this movement off the ground is savers, on balance, tend to be a conservative lot and are more inclined to suffer in silence. They’ll bring the belt in a notch or two and get on with life.

The problem is that at some point, savers have no more notches left.

While politicians and central bankers are out there doing all they can to make life easier for borrowers, they are making it more difficult for savers. This is where it gets dangerous.

Savers start looking for higher yielding options — hybrid securities, fully franked shares, property trusts, mortgage funds, junk bonds.

What we have is a system that is completely out of whack.

On one side, the system actively encourages a greater uptake of debt (adding more debt to a world that is already over-indebted) and on the other side, it forces savers to take on unknown capital risks so they can generate a ‘decent’ return on their hard earned.

Risk is being built upon risk. There is no counter-balance. This is a stupid system.

But we are past the point of no return. Central bankers and politicians are locked in, whether they like it or not.

To correct the system now would require the opposite of what they are doing…interest rates would need to be raised.

This would do a few things:

  • Rein in borrowing
  • Soften the housing market
  • Force some over-indebted borrowers (business and private) to the wall
  • Slow down the economy even further
  • Bring about a fall in the share market
  • Take pressure off savers having to find high yield alternatives (with unknown risks)

And folks, there you have it — five to one reasons why the authorities WON’T take my advice and raise interest rates.

You see, the world is entirely dependent on interest rates staying low and, if need be, going lower.

Raising interest rates is too counterintuitive to what society has been conditioned to believe. A frothing Billy Shorten & co would be all over it in a flash and forming a ‘Borrowers of the World Unite’ movement to march on Parliament House. Protesting for their rights to pay less interest, denying savers the right to earn more.

If you had the political nerve and economic foresight to raise interest rates, you’d need the politicians to have balls of steel to weather the storm of public hysteria.

If such a rare and almost extinct breed of politician did exist, they would — in the longer term — have diverted society from its current course of self-harm.

Given that this is not going to happen and borrowing will stay cheap, risks — on both sides — will continue to grow.

Eventually something will give. And you can bet your bottom dollar — and that is all some people will have left — the crimson faced, foaming at the mouth politician will be out there jumping up and down with some hare-brained scheme to ‘save the system’.

Seriously, why would you want to save a system that has failed so miserably?

Start a new one.

A system that saves.


Vern Gowdie

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Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.

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