Compounded interest is the most powerful of forces of our universe. Albert Einstein knew it and savers around this globe experienced as much. The world has changed though, even if the World Savings Day suggests something else, Peter Hody writes for finews.first.
finews.first is a forum for renowned authors specialized on economic and financial topics. The texts are published in both German and English. The contributions appear in cooperation with Pictet, the Geneva-based private bank. The publishers of finews.ch are responsible for the selection.
It is World Savings Day and the editors of finews.first are at a loss. About as much as the central bankers of this world who have rendered this once important day to a farce. Or as many banks, which offer their customers a great deal, but not really attractive savings solutions. And lastly as much at a loss as savers who are left alone with their concerns and feelings of insecurity.
In 1925 and subsequent decades, the World Savings Day was of significant international importance. The organization behind the day, the World Savings and Retail Banking Institute, wanted to spread globally the importance of saving money. The talk even was of getting the Pope as a prominent backer of the idea.
«You are being punished for saving money»
After World War II, saving money became a responsibility for society as a whole as Europe was literally bombed out. The reconstruction of the continent and the establishment of a wealthy middle class became the predominant tasks.
Savings and popular banks, who sponsor the World Savings Day, are using the institution to improve customer loyalty. They are giving their best to attract young savers.
The compounded interest effect always has been the best argument for banks to encourage their clients to save money: put aside x francs a month and you will be a millionaire within thirty years.
What Albert Einstein once deemed the most potent of powers today has turned into a danger: you are being punished for saving money.
«Of course, you can always withdraw your money and put it under the proverbial mattress»
The International Monetary Fund (IMF) estimated that about half a billion savers have been affected by negative interest rates. The Swiss National Bank, the central banks of Denmark, Japan, Sweden, Norway and Hungary as well the European Central Bank all introduced negative rates.
Banks, insurers and security traders are forced to pay a penalty for their sight deposits above a certain level.
Some savers have already been asked to pay up: Alternative Bank Schweiz (ABS) is the only Swiss bank to charge interest on their retail customers' assets. But the longer the rates stay below zero, the more likely it is that other banks will pass on the costs of depositing money onto their clients. Costs that amount to more than a billion francs in Switzerland alone.
Of course, you can always withdraw your money and put it under the proverbial mattress. But savers don't do that kind of thing. On the contrary: savers in countries with negative rates actually increased their effort to put aside money, according to the OECD.
The manifest concern about the future is evidently bigger, and not even irrational seen from the perspective of a central banker: savers accept the extra costs of the presumed security that a bank has to offer. Conversely, this means that the negative rates haven't yet reached their threshold of pain.
«Panic saving usurps negative interest rates»
The German expression of “Angstsparen”, sometimes translated as panic saving, is usurping the aims of negative interest rates. Saved money doesn't enter the economic cycle of money and prevents any hoped-for inflationary effects.
Panic savers are creating a problem for the banks, in equal measure as negative rates. But monetary policy has so upset investors that they steadfastly refuse to invest their money in the market.
Their reaction is reasonable in times of negative rates: savers equate security with the guarantee of a loss.
It isn't of course the sort of client the banks would want in the current situation. Clients looking for security won't earn them any money.
«Beating the drum for World Savings Day under these conditions seems slightly presumptuous»
But savers are at the end of the food chain in times of negative rates. Pension funds and insurers already have started passing on the risks from monetary policy on to their customers.
The Swiss government this week agreed to lower the interest paid on assets in occupational benefit plans to 1 percent in 2017.
Beating the drum for World Savings Day under these conditions seems slightly presumptuous. Retail banks in Germany, Austria, Italy and Spain however are organizing whole weeks dedicated to the benefits of saving money – partly for reasons of tradition of course.
No Swiss bank is doing that. The World Savings Day isn't an issue for Swiss banking. Only Credit Suisse is giving a hint that it has taken note, emitting a «Weltspartag Fix Kupon Express Zertifikat».
But only in November and in Frankfurt. The reference used for the certificate ironically has nothing to do with saving and interest: it is the Euro Stoxx 50 stock index.
Peter Hody is deputy editor-in-chief of finews.ch. He has held several managerial positions at «Cash» and «Stocks», Swiss financial news outlets. Earlier, he was a reporter at Associated Press and RTL/ProSieben. Hody studied history and acquired an MBA in Media Management at the Hamburg Media School.
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