Savers vs Speculators

Savers lose £43bn in ‘slow motion bank robbery’ with worse to come

Ian Cowie joined The Daily Telegraph in 1986 and became personal finance editor in 1989. He became head of personal finance, Telegraph Media Group, in 2008. He is @iancowie on Twitter

the Telegraph, 

9 November, 2011

Savers have been stealthily robbed of £43bn of the real value of their savings since the Bank of England froze interest rates at 0.5pc nearly 32 months ago but there could be worse to come.

That's the total shrinkage of bank and building society depositors' purchasing power caused by inflation, according to the pressure group Save Our Savers , following last month’s calculations by Yorkshire Building Society that the average saver has lost £2,500 in real terms since the credit crisis began. Pensioners have suffered even more because higher than average proportions of their fixed incomes are spent on food and fuel.

They are the largely silent victims of the Bank of England's policy of running negative real interest rates. Now, as if that slow motion bank robbery does not seem bad enough, independent experts say history suggests the crisis in the eurozone could cause inflation to rise much more rapidly in future as governments take desperate steps to avoid a global slump.

Mike Warburton of accountants Grant Thornton told me: “This may be a good time for your readers to recall what happened in 1914, especially since it is Armistice day on Friday. After Archduke Ferdinand was assassinated in Sarajevo the financial markets froze and, as an emergency measure to inject liquidity, the main central banks agreed to take part in a form of quantitative easing.

“It worked, in that the markets recovered to some form of normality and operated throughout the war, but it came at a price. Until then inflation had been very low and stable. The impact of quantitative easing came out in due course as inflation.

“My fear is that the same thing will happen to us. It seems that all the warning signs and political manoeuvrings were ignored by the financial markets and policymakers until the problem hit them in the face. I can’t help thinking the euro crisis is drifting in the same way.”

Needless to say, worse things happened at sea and elsewhere at that time – for example, at Jutland and on the Somme – but the insidious effect of inflation on savers was devastating. 

According to the Office for National Statistics (ONS) the real value or purchasing power of the pound actually increased during 1914 because of the deflationary impact of the slump on economic confidence but quantitative easing pushed inflation into double figures – 12.5pc – in 1915; followed by 18.1pc in 1916 and 25.2pc in 1917. The annual rate of inflation did not fall below 20pc until 1919.

By that time, the purchasing power of money had been cut in half. This demonstrates how quickly inflation can get out of control – and the dangers of central banks and politicians being tempted to think that a little inflation cannot do any harm. Mr Warburton added: “That’s what I call a warning from history.”

Finally, looking ahead to Remembrance Sunday this weekend and bearing in mind that some things are more important than money, the events of nearly a century ago may hold a lesson for today’s anti-capitalist demonstrators camped outside St Paul’s Cathedral.

John Newlands of Brewin Dolphin and author of the definitive history of investment trusts ‘Put Not Your Trust in Money’ points out that the London Stock Exchange website entry for 1914 records: “The Great War means the Exchange market is closed from the end of July, until the new year. The Stock Exchange Battalion of Royal Fusiliers is formed – 1,600 volunteered, 400 never returned.”

Let's hope today's protestors don't disrupt this weekend's Remembrance Sunday, whatever they may think of the City and its workers.