The Good, the Bad and the Ugly: Save and go to hell

The key government response to the crisis - by all governments, everywhere - has been to throw money at whatever was perceived to be the problem. This solution was pursued via the two main tools of economic policy, namely monetary policy and fiscal policy.

Monetary policy centers on interest rates, with the central bank of each country reducing rates to make money cheaper. Reducing rates is done by pumping money into the money markets and buying short-term bonds and bills, until their rates come down to the level the central bank wants. Fiscal policy means using taxation and the government budget; when you want an expansionary fiscal policy, to boost the economy, you either cut taxes or give tax breaks, or you spend extra money - or both.

But it only takes the briefest consideration to see that making money cheaper and/or making the government's deficit bigger is actually a continuation of the policy direction that caused the problems in the first place. If everyone is hooked on borrowed money to finance their spending, whether it's individuals, firms or the government, and that has created the current mess, then giving people more money and making loans cheaper is not the solution - it's the problem.

That seems very simple logic, but there is a counter-argument, which centers on the fact that the mass psychology that drove the boom has already turned on its head, so that now people and firms actually don't want to borrow. In any event, even if they do, banks and other lenders - who previously couldn't seem to lend too much - no longer want to lend. Where 18 months ago, an unemployed, illiterate drug addict could get a 100% mortgage for a large house, today a stable family with two incomes can't get even a 75% mortgage for a small home. In this environment, everything possible must be done to persuade the banks to resume normal lending, or else the economy will seize up and die like a living creature deprived of oxygen.

This is the argument you can see raging across blogs in every country, and an objective observer would surely agree that there is merit on both sides of it. But there is also more to it than that. After all, there is more to an economy - even nowadays - than borrowing and spending. There is also saving.

It isn't fashionable and, in America, it hasn't been done at the national level for years. Yet many individuals still save. Especially older people, approaching or in retirement. However, in the same way as the price of money (the rate of interest) works as an incentive or disincentive to borrow, depending on how high it is, so it also works as an incentive or disincentive to save - just in the other direction. The lower interest rates are, the less likely people are to save, because it simply becomes not worthwhile.

Japan has had very low interest rates for many years and the famously frugal Japanese have poured their savings into foreign currencies, buying bonds and shares around the world. American interest rates are now back to 1%, making them negative in real terms and making life really tough for people who live on investment income: their stocks have been murdered, their real estate is sinking into the ground and now their bank deposits and CDs pay next-to-nothing (in the happy case that the bank hasn't gone bust yet...)

The bottom line is that the monetary policy being pursued by central banks around the world has already (in Japan, US) or very soon will (in UK, Europe and Australia) create big problems for an entire swathe of the population, namely middle-class people aged 50 and above. That's a lot of voters to annoy.

It also means that in addition to class tensions between lower-, middle and upper-income bracket households, we are going to see age tensions between young people desperate to find or keep jobs (hence demanding as much stimulus as possible) and old people desperate to generate income from their (much-reduced) capital.