Here at ChinaFund.com and on pretty much any let’s call it financial outlet, quite a bit of energy has been continuously dedicated to market participants (from the average consumer to large corporations) who have been caught off-guard by 2020’s developments or, the same way, by the Great Recession or any other past calamity.
We’ve written about the reasoning behind bailouts, why some companies are considered systemically relevant, why even approaches in the realm of the Universal Basic Income are being implemented to kickstart consumption among the general public and the list could go on and on. To put it differently, enough content to fill mountains of pages has been dedicated to how the authorities are putting out various fires.
But what about… well, the collateral damage dimension?
What about the stereotypical responsible saver, an unsophisticated market participant but one who has usually been rewarded for his willingness to defer current consumption so as to save for a rainy day. From every imaginable moral perspective, being a saver makes perfect sense. Why not build a nest egg so as to protect your family? Why engage in reckless and unsustainable credit-fueled consumption by spending money you do not have on things you do not need? Why not be “responsible” instead?
Whether we are referring to measures that have been taken to combat the Dot-Com Bubble, Great Recession or 2020 crisis, the elephant in the room in terms of collateral damage-related common denominators is relatively easy to spot: the fact that time and time again, traditional savers have been harshly punished.
Through the continuous reduction of interest rates, to give the most obvious example, a reduction of such a magnitude that the days of saving money for retirement and living to a significant degree from the interest you earn during your golden years are long, long gone. Instead, it seems as if governments and especially central banks are considering traditional savers the proverbial bad guys and therefore continuously working on more and more unorthodox punishments.
Simply because, as counter-intuitive to the point of peculiar is may seem, the traditional saver is actually the number one enemy of the current worldwide economic model. An economic model which needs perpetual growth to sustain itself and at this stage in the game, that perpetual growth can only be credit-fueled.
To put it differently, we are in a clear “paradox of thrift” situation. As the name alludes to, the bottom line is this: as far as our current system is concerned (yes, even in China), behavior types which revolve around being financially responsible in the traditional sense (deferring consumption, setting money aside for a rainy day and so on) can be a great choice for an individual but if too many people were to engage in this type of behavior, the result would be disastrous for society as we know it.
Critics of consumerism believe the end of the current worldwide economic model would be a good thing, whereas the other side and especially decision-makers who do not want the world to proverbially crash and burn on their watch tends to be on the other end of the spectrum, believing that we need to do “whatever it takes” (to borrow the phrase which became iconic after being used in the right context by the former European Central Bank president Mario Draghi) to preserve the status quo. From the perspective of today’s decision-makers, traditional savers aren’t a category of market participants that deserve or need to be saved, they are a threat to the system as we know it and as such, can and should be considered collateral damage.
The elephant in the room in terms of implications is this: the days of “passively” living off interest are long gone, with savers being effectively forced to embrace a more active approach so as to not only preserve but also enhance their wealth. In an ideal situation, governments and central banks would love nothing more than for savers to embark on a consumerist journey, thereby aggressively contributing to much-desired economic growth. If that is not possible, then they should at the very least buy assets such as shares rather than hoard money under the proverbial mattress or keep it in a bank, expecting to generate something worthwhile.
An important question arises, however: aren’t too many monsters being created in the process?
To put it differently, a valid case could be made that the actions of governments and central banks are creating massive distortions, distortions we can consider unprecedented in terms of how ubiquitous they are. Make no mistake: from China to Japan, from the European Union to the United States, savers are being literally trampled on pretty much everywhere.
Primarily the fact that bubble after bubble is being created so as to counter the effects of the previously popped one. From tech stocks which crashed and generated the bursting of the Dot-Com Bubble to measures aimed at jump-starting the economy but which also inflated an even larger bubble, the real estate one that brought us the Great Recession. Fast-forward to the present, with us living in an environment where we cannot help but notice that we are surrounded by bubbles. Furthermore, we also know that no matter what happens, the authorities will do everything they can to preserve the status quo.
Most likely until the market ultimately decides that enough is enough, with a deflationary crash being followed by “more of the same” in terms of solutions (lower interest rates and greater injections of capital) but eventually also by the market putting an end to it all through a massive inflation-generating loss of confidence in status quo currency systems altogether. While nobody can predict the future and/or guarantee that this will happen after the 2020 economic crisis, what we can and do clearly state is this: with each cycle, the probability that something “breaks” in terms of confidence in currencies goes up and as always, we are doing our best to have all bases covered.