Did you know there’s an actual ‘World Savings Day’?
I had no idea there was such a thing until this week when I read a speech by the National Bank of the Republic of North Macedonia commemorating the day.
I mean, the official date is 31 October, so the day has long come and gone without much fanfare.
But in doing a little digging I thought it was interesting that the day has been around for 100 years…and that it came about as a campaign from commercial banks to get people onboard with the idea of keeping their savings in the bank, instead of under the mattress.
But what really caught my eye was this year’s campaign motto: ‘when you save a bit, big things follow’.
I’m guessing the idea behind the motto refers to compounding interest. That is, your savings pay you interest on your interest.
Compounding interest is a powerful idea…but probably not that exciting when interest rates are at 0.1% and the inflation rate is hovering around 0.7%.
It certainly doesn’t seem our current economy places as much importance as it did in the past on savings. Central banks are pushing on lower interest rates to get people to spend and our economy is set up for continued spending and higher debt.
The question is, how much of all this stimulus will actually do with interest rates already at record lows and debt at highs.
The system is on the verge of a massive change…
We are setting ourselves up for more low growth, more risk and higher debt. We are following in the steps of Japan, a path that’s not great for savers…or banks.
On this, it was interesting to see an article on the Wall Street Journal titled ‘The World Should Watch Japan’s Attempts to Save Its Struggling Banks’.
As The Wall Street Journal wrote:
‘Japan is trying to encourage mergers among its ailing regional banks by introducing a sweetener for those that cut costs. Other advanced economies should pay attention: Rock-bottom interest rates mean Japan’s present is likely to be their future.
‘The Bank of Japan is offering commercial lenders an extra 0.1 percentage point in interest on their deposits with the central bank if they reduce their overhead ratio by certain benchmarks, or merge or integrate their businesses.
‘After 30 years of falling and even negative interest rates, many of Japan’s regional lenders have share prices of 0.2 to 0.3 times their book value—levels that would have been considered catastrophically low even a few years ago.
‘A marginal shift in interest rates on accounts held with the central bank might not sound like much, but Moody’s Investors Service rightly notes that given regional banks had an average return on assets of just 0.14% in the last fiscal year, an extra 0.1 percentage point return on large cash balances is nothing to sniff at.’
This system of low interest rates for long is already hitting banks. They are struggling, but not only on low interest rates but on competition from fintech and digital currencies.
But they may also be facing competition from central banks and central bank digital currencies (CBDC).
And as I’ve said before, central banks are reaching the end of the line here with interest rates at record lows and quantitative easing already in play.
A retail digital currency would allow for negative rates
A way to up the game is through digital currencies. A retail CBDC would allow for central banks to bypass commercial banks to have people hold money directly with them, and to gain some control on how money is lent.
And a retail digital currency would allow for negative rates…something that right now is hard to impose because people have an alternative: cash.
In fact, it’s something the Bank of England touched on this week in a speech by Andrew Haldane, where he said:
‘On the monetary policy side, one of the most pressing issues for monetary policymakers today is the zero (or close to zero) lower bound (ZLB) on interest rates. At root, the ZLB arises from a technological constraint on the ability to pay or receive interest on physical cash, whether positive or negative. In principle, a widely-used digital currency could mitigate, if not eliminate, that technological constraint by enabling interest rates to be levied on retail monetary assets. How far it is able to do so will depend on the supply of physical cash to the public, as well as any impact of the new regime on the financial system.’
Negative interest rates mean people get charged to keep their money in the bank…so much for the idea of compounding interest to build wealth.
But this could be at the expense of commercial banks…
The system is on the verge of a massive change and I think CDBCs will be at the centre of it.
For The Rum Rebellion