Prices are more or less back to their long-term average (bottom left). The final comfort is that people who buy goods (rather than services) with their money are actually paying lower prices now than they would have done a year ago.If you step back from the personal concerns of savers, there are a string of more general economic concerns about too cheap money.The first is that if money is too cheap, people waste it. One of the problems of Japan is that the quality of investment by the public sector is terrible. The quantity is terrible too: the budget deficit is more than 7 per cent of GDP but were the money invested wisely, they would matter less. The huge debts have been run up with really no prospect of their being repaid.
At some stage there will have to be a reconstruction of Japanese debts, which will be miserable for savers.You can see problems of quality of investment here in the UK in both public and private sectors. In the private sector, the dot-com bubble was the result of money being too cheap - mostly equity money but some debt too. In the public sector, much of the present investment in the railways is almost certainly being wasted. And in that grey area between the two sectors, there is yet more waste.
Had we had reasonably accurate traffic forecasts for travel between the UK and France, instead of wildly optimistic ones, the Channel Tunnel would never have been built.Cheap money also takes pressure off companies to produce profits Again this is most notable in Japan, much more so than here. In Britain, companies have had to pay reasonable dividends because they have been competing for capital. Japanese companies have not had to do so because there are so few alternative outlets for savings that pay any reasonable return.Finally, low returns on capital must reduce the incentive to save and increase the incentive to borrow. Just yesterday a Taylor Nelson survey showed that more than half of all Britons failed to save any money at all during the first three months of this financial year Even those who did save something, did not set much aside Only 13 per cent had saved more that £500 Meanwhile debts have continued to climb The average amount of unsecured debt (i.e. debt not for home or other long-term purchases) is now £3,383, against £1,000 five years ago.In the short term this has been helpful to the economy In the long-term it is a disaster.
The longer we carry on with very low rates the less likely it will be that people make adequate provision for their future.I suspect that both the mood of the financial markets and the politics will change. In Japan, the recent rise in long-term rates has been associated with a slight revival of industrial confidence. In the US, too, the jump in long-term rates does not seem to have done any damage to Wall Street.As for the politics, I suspect that savers will gradually become more organised and that their concerns will receive more attention. The pension lobby is becoming much more active than it was even six years ago, when it was possible for Gordon Brown to increase taxes on pension funds with hardly any opposition This could be a sign for savers too.. Short-term interest rates throughout most of the developed world are now so low that it is hard to conceive of them going much lower. In some countries, notably the United States and Japan, lower rates are in any case virtually impossible, as they are already close to zero.
