And I was “irresponsible” and “misinformed” how?

In attacking my recent story What’s the Use of Saving Money? as “irresponsible” and “misinformed,” I’m not entirely sure Peter Aceto, the CEO of ING Direct Canada, read beyond the headline. If he did, he’d know it wasn’t a piece that “discourages Canadians from using savings accounts.”  Quite the opposite. While bemoaning and exploring the demise of the saving culture in this country, our story argued that around the world people are being discouraged from putting away their pennies by ultra-low interest rates and government programs that promote spending (Cash for clunkers, home reno rebates etc).

I won’t go over the content of the original story. I’m confident readers understood it simply aimed to give a voice to the frugal few and their frustration that low rates subsidize borrowers while hurting savers.

The main thrust of Mr. Aceto’s indignant letter is that Canadians who don’t want to buy a house or invest in the stock market have a choice—they can open an ING Direct savings account. It’s true that until ING came along, there were few options for Canadians to earn decent guaranteed rate on their deposits. ING popularized at least the idea of saving with that Dutch bloke and his accented “Save your money” catchphrase. ING pays 1.5 per cent with its standard high-interest savings account. Ally Financial, which in a past life was the financing arm of General Motors until a bailout came and washed away all its problems, offers 2 percent to its clients. (You can earn more with both if you put the money into longer-term GICs.—five-year GICs pay 2.5 per cent at ING and 2.75 per cent at Ally.)

That’s great, but in the year since ING raised its savings rate from 1.3 per cent to 1.5 per cent, there have been seven months where year-over-year increases in the Bank of Canada’s core consumer price index exceeded that rate. The core rate also excludes eight of the most volatile components (fruit, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest cost; natural gas; fuel oil and other fuels; gasoline; inter-city transportation; and tobacco products and smokers’ supplies). Excluding those items helps the Bank better determine the long term trend of inflation, but they’re still products Canadians buy and must pay more for. Much more in some cases. According to Statistics Canada, in August food prices were up 4.4 per cent.

Contrary to what Mr. Aceto claims, I didn’t say Canadians should be investing rather than saving. I made no suggestions whatsoever for what Canadians should do with their money, because there is no easy answer. The housing market looks like it’s in a bubble, the stock market is terrifyingly volatile, and savings accounts are not keeping pace with inflation. That’s just the sad reality for savers today. And it’s why many more savers are likely to throw up their hands and ask “What’s the point?” For the record, and for Mr. Aceto, I believe that’s a bad thing.

Here are some more thoughts on the topic from south of the border. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, is retiring tomorrow and takes a parting shot at ultra-low interest rates:

“What you do when you artificially hold rates down is ask the savers to subsidize the debtors. In an emergency and a crisis that is justifiable, perhaps,” he said.

But to do it repeatedly and indefinitely risks distortions in the market and creating unintended consequences and eventually inflation, he warns.

“It would be better if we were not as accommodative so the market could function and send out proper signals,” Hoenig said. “I think interest rates would be low. I just don’t know how low.”

Before I finish I want to also take an opportunity to thank Garth Turner, the former MP and financial commentator for his help rustling up folks for us to talk to for our original story. After I asked Garth if he knew anyone who felt like a chump for being prudent in the face of all the incentives to borrow and spend, he put out the call on his popular www.greaterfool.ca site and sent me dozens of emails from people who responded to his message. The request clearly hit a nerve.




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And I was “irresponsible” and “misinformed” how?

  1.  Why on Earth would I dump my money into savings account if I can either prepay my mortgage (that has a much higher interest rate), or, at the very least, put my money into CPP or one of the other numerous tax extempt accounts that would at least give me tax return?

    • Well, because you can’t actually afford a house (you are too old to work until you’ve paid off a twenty year mortgage, and your downpayment isn’t enough to get a home in your area with a lesser length mortgage that you can actually still afford the payments on.

      Put your money into CPP?  How do you do that?  If you meant RRSPs, you don’t because while they provide a tax savings now, you don’t make enough for that savings to be more than 15%–which is what you’ll have to pay when you really need the money and take it out.  Some money, sure goes there, and of course the TFSA is maxed, but you feel that having it sit in an RRSP bank account–where you can get at it if the housing market turns in your  favour–is almost a complete waste of time.

  2. You weren’t being irresponsible. You were just wrong.

  3. I feel like you wrote that article for me, and I thank you for it Jason.

  4. Jason,

    I share the frustraation expressed in your article that borrowers and spenders are getting a good deal. I think Hoenig has it right. This will come back to haunt us a few years down the raod.

  5. Canadian Direct Financial offers 3% interest on their TFSA savings accounts…

  6. At some point, as the context favours borrowing and spending rather than saving, might not the definition of “prudent” change?  With fiat currency, why is it more prudent to save gov’t-issued coupons (“dollars”) rather than borrow more and more of them in order to amass real goods and experiences?  The coupons and the digital representations thereof in a computer are of uncertain ongoing value; the real goods and experiences are much more reliably valuable, because they are real.

    • But when you borrow you are not borrowing actual dollars, not even not-actual fiat dollars!  You are qualifying, in most instances, for the receipt of promises to pay in actual dollars.  In most loan transactions, no actual dollars are exchanged.  It is merely a set of promises to pay from one institution transferred to another institution and registered as an incoming set of promises to pay.  Banks, by and large, do not deal in actual dollars.  They deal in promises to pay.  This is the problem.  Banks enable the exchange of promise for real physical goods.  This is not an equal exchange.  

      Unencumbered government issued exchange tokens, ie money, are not the problem.  A government issued currency is not a fiat currency.  Bank money is the fiat currency.  Gold’s historical value as a currency was/is that it can not be counterfeited.  That is it.  It doesn’t have any other value.  Perhaps that is part of it’s wide utility, the fact that it can’t be counterfeited, really can’t be put to much other use, and it is relatively difficult to obtain.  

      • Thanks for the reply, ColdStanding. I confess I’m not up to your level on this stuff, and am wrestling through what you wrote trying to grasp it as it relates to what I said.  (Not intended as a criticism; meant sincerely.)  

        As I understand it the inequality you close your first paragraph by pointing out is only relevant to the banks.  That is, both the borrower and the provider of real physical goods are satisfied with the exchange.  The borrower who borrows to buy the real goods ends up with the goods.  The provider of the goods receives fiat currency (digital or coupons/notes) from the bank, which s/he may as soon as desired exchange for other real goods/experiences.  The only inequality/risk is taken on by the bank, isn’t it?  The risk is that the borrower might default and not fulfil the promise to repay.  But this repayment, to the bank, isn’t exactly re-filling coffers that have been drained.  What the repayment refills is one of either a) the ‘seed’ or pre-fulcrum sum of digits/notes which the bank must legally hold in order to create something like 30+ times the amount of ‘lendable’ digits/notes, or b) some of that 30+ times lendable digits/notes themselves.  In fact, in modern banking as I (crudely) grasp it, there are enough laps/iterations allowed in the process that even the bankers themselves really couldn’t pin down what coffer you are draining/refilling.  And as the reward for taking on this risk the bank gets to collect more than your promise, which they then can immediately multiply by 30+ times and lend out again.

        Again, my grasp may be crude or even completely wrong.

        As far as I can tell the banks have no risk at all if only a few of the 30+ times borrowers default; in fact they require a certain number to default or they scourge themselves internally because they are being too conservative in their lending.  I see the systemic risk of this system in the sense that if more than a certain threshold default the banks themselves no longer carry sufficient capital to justify to their governments that they are lending so much.  Thus a credit crunch and the whole mad borrowing frenzy which drives the economy of the world suddenly binds up.

        However, my point was wondering about (not asserting!) when prudence shifts from borrowing and paying back to borrowing and not-paying-back, for the individual borrower.  I am not talking about deliberately defaulting– that is breaking a promise and I don’t care if that is pseudo-clever or not.  It’s rotten.  I’m saying that if you simply service your loans in good faith, keeping your promise, drawing out the paid-back sums as more credit as long as the banks allow, with no thought of ever paying it off, isn’t that possibly prudent?  Especially as the whole spinning top of a wild economic dervish looks more and  more unstable every week?

        • By the way, this is Jeff Wiebe. The Facebook sign in utility was having an error.

  7. Your article was misleading. You made savers feel like suckers. The truth is … if the banks are making more lending, why not become an investor and a shareholder? You refer to the stock market as terrifying. Bad misinformation. While it’s volatile, many of us are not “terrified” but are taking advantage of better prices. Are savers in the US not better off than people walking away from their mortgages? People who lost half their money? You skewed your article to attract attention. Bad habit of the media. What has been funny is watching the media flip flop on the market as it changes daily. The mdia talks about crashes and the end daily. Is that responsible? Congratulations for being part of a force, a horribly misguided one, that’s confusing savers and investors … In the end, it was the media in the US that was writing about making money almost daily as the rest of us saw a bubble forming. Now you’re making savers and investors feel like idiots. Who are these people you say feel like idiots. Are they largely figments of your imagination or the PR you base your stories on? I think so … You were probably one of the irresoponsible journalists who said we were at the end in 08 09. Some of us made 40 per cent in short order by being contrarians and going completely against your doom and gloom. But thanks for the despair ….

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