31 July, 2013

Is it time to withdraw our Bank Savings Deposits?

Given that banks can create money out of nothing through their unique ability to create credit and that our savings deposits are treated as unsecured loans to banks that they can do with as they please without our prior consent or redress in the event of either investment or bank failure, it seems to me that this rather one sided and increasingly risky relationship needs to be shaken up and reformed back in favour of the depositor.
Given also that funds on deposit are earning derisory rates of return that have no relationship to the risk attached to investments made by banks using these deposits or indeed the continuing viability of the bank itself, wouldn’t it be more sensible to withdraw our bank deposits altogether for our own safekeeping or investment elsewhere?
If we did this altogether, it would undoubtedly cause a bank run which would be catastrophic for the industry with painful social consequences but in the end this may be the only way we can get out of the financial mess we are in and start all over again with a clean slate by letting our banks go bankrupt just as Iceland did.
The alternative would be if this could be achieved in stages over the short term which would perhaps wake government up to the very real concerns of savers and persuade government to break up the banks into more competitive smaller retail and separate investment banks subject to market forces and thus not too big to fail.  This would require a much deeper and more thorough reform of the banking system than is currently being proposed by our government to prevent banks milking the system and forming cartels which make them too big to fail leaving tax payers exposed to picking up the bill, thereby circumventing free market forces which, under normal circumstances, would lead to the banks going bankrupt.
I have been pondering this and what the alternatives are for some time now.  I expect that many of you have been too.
Clearly the financial security or solvency of many of our banks is still very much in question as recent events in Cyprus and around the Euro Zone have also revealed.
Given the degree of bank loan / investment inter-dependence that currently exists within the international banking system and that the anticipated collapse of the euro will equally affect UK banks that have loaned vast sums into the euro-zone, there is a very real risk of the whole international banking system collapsing like a pack of cards.
The only bargaining chip that savers have if their governments fail to look after their long term interests is to withdraw their funds on deposit.  Keeping in mind that most savers are either approaching retirement or have retired and that longer living pensioners that have savings represent a growing proportion of the population, that bargaining chip can only carry more weight as our population ages.
Moreover, how can our working population become incentivised to save funds for retirement, especially while in debt or, the burgeoning “baby boomer” segment of the population approaching or already in retirement, finance their retirement if they continue to receive derisory deposit rates?
The conventional answer from financial advisors is to maintain variable investment mix plans including equities or bonds managed by fund managers that they channel funds to.  However, after taking into account financial service commissions, charges, consulting and management fees over the life of an investment prior to retirement it often comes as a shock to discover too late that the net returns over the investment period are all too often insufficient to finance comfortable retirement, especially after also taking into account the effects of inflation on the costs of living during retirement.
This is why most Defined Contribution Pension plans are inadequate because of their unpredictable outcomes dependent on the state of the economy and financial markets over the investment period and at the time an annuity income has to be triggered.  Currently, annuity income rates are the lowest they have ever been and the long term economic outlook is decidedly grim.  Moreover, job security to pay into these plans is being rapidly eroded by the current economic malaise and government austerity programmes leading to the prospect of significantly greater part-time and under-employment in both the private and public sectors.
Defined Benefit Pension plans, particularly inflation indexed pension plans, are a much better option for employees but many firms, institutions and even governments can no longer afford these and they are being capped or closed down at an alarming rate because of the very real threat of plan holders being made bankrupt by unsustainable pension obligations for longer living pensioners.  This is indicative of a general lack of confidence by our financial institutions in their prospects for long term economic growth and explains their focus on short term gains.
Confidence in the financial sector is at an all-time low and only a very few people really understand the investment markets in any meaningful way anymore because of growing extremely complex computerised electronic trading which masks what is really going on with vast and increasingly high frequency transactions that very few individuals and practically no institutions can intelligently follow in real-time.  Consequently, the financial regulators that are supposed to be protecting us from financial collapse are always playing catch-up and didn’t even see the 2007/2008 financial crisis coming.
Moreover, Quantitative Easing by the Bank of England forces annuity rates and interest rates to remain low while devaluing the pound sterling (by essentially printing money) which reduces our ability to afford the imports that our economy is entirely dependent upon in both the consumer and manufacturing markets (commodities and machine components), thus reducing our global export competitiveness and exacerbating our balance of trade and balance of payments predicaments.
The financial sector appears to me to be out of control so why would you want to invest with them when the only winners in all this appears to be the fund managers, financial services agents and investment bankers that increasingly control the markets with computerised trading using your money?  The winning odds are stacked in their favour, not yours.
These circumstances are exacerbated as the investment markets become over-valued (like they seem to me to be right now) when there appears to be nowhere else to invest – until the investment bubble bursts and another stock market crash is triggered.
The situation can only get worse as populations age and the workforce shrinks which is predicted before the second half of this century in UK and much earlier in some other countries like Japan and Germany.
In the last decade, the previous UK government turned a blind eye to excessive net immigration that put pressure on the UK workforce to keep wages low while maintaining high demand for consumer goods and services including in particular housing that led to a credit funded economic boom and the biggest bust ever.
There is just so much credit available that eventually must be repaid before debtors reach a point where they can no longer service their loans.  That point has come and gone and it is now payback time.
There are also limits to just how many immigrants a country can accept and support economically without undermining national cultures, settled population work opportunities and standards of living in general, with dire social consequences as a result.  It stands to reason that the more consumers (people) there are the less there is to go around in a world or nation with finite resources, until a point is reached where resources become so diluted that our civilisation is tipped, irreversibly,  into rapid and catastrophic decline.  We are fast approaching or may even have passed this tipping point.
Higher net immigration is unsustainable in this already overcrowded small island nation that can no longer feed itself and is not the answer to our predicament especially when energy and food poverty start to erode national wellbeing as they are beginning to now.  Energy security remains the highest priority in UK, particularly as the nation will starve without reliable and affordable access to oil and gas.
So what can the average saver or investor (i.e. most of us) do and where can they safely place their savings or investment funds in these circumstances?
The answer is that in our current circumstances there is no conventional safe haven for savings or investments worth considering, other than under your mattress.  Our regulatory and finance sectors have screwed up royally, lost all credibility and exposed our future and that of our grandchildren to the prospect of financial ruin.  We can no longer depend on the so called elites within our government and financial institutions that are responsible for leading us into this catastrophic financial and economic state of affairs and must begin to grasp what we can do to help ourselves.
We need to take control of our destinies and become more self-sufficient by building community resilience to a growing prospect of rampant energy and food poverty by adopting Social Enterprise models to begin with until we can redefine a workable free enterprise model that embraces an ecologically sustainable Steady State Economy that can successfully replace the current dysfunctional bank owned capitalist economy.
The values of fiat currencies within nations adopting fractional reserve banking systems are being devalued causing currency wars in order to deflate vast unsustainable sovereign debts or external debt created within these systems over the past couple of decades.
The growing UK sovereign debt amounts to more than 406% of GDP or a horrifying c.£100,000+ per capita while the National Debt represents 90% of GDP or c.£21,000+ per capita.  How did this happen without our knowledge or consent?  Who are the culprits for all this debt and who was in charge while this horrendous debt spiral was going on and allowed it happen?
Consequently, we could be heading for a very long financial de-leveraging and deflationary period where the only assets worth investing in will be those that provide some useful direct benefit including acquiring skills, tools and land that enable sustainable living and bartering in a world economy that could easily collapse overnight.  You will need to acquire the knowledge, skills and assets for this over the short term while continuing to do what you are paid to do now – just in case everything collapses and it is everyman for himself in the worst case scenario or we become more local community orientated and dependent with a much greater chance of survival over time.
As we can no longer rely on our financial institutions for either short or long term savings or investment growth it makes more sense to me that we should eliminate debts and withdraw our savings for local investment in community social enterprise opportunities in local services, energy or food production where we can have more direct control, influence and benefit.
In an increasingly digital world, the growth of alternative financial services to those provided by conventional large banks, include Crowdfunding, Zopa’s peer to peer lending and Bitcoin which raise the prospects of making banks irrelevant in the medium to long term as the next generation of consumers and entrepreneurs become familiar with a greater choice of integrated on-line network services that facilitate the freedom to bypass traditional bank middlemen so that people can source and deal directly with whomsoever they trust to conduct transactions with.