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.