Historically, savers have been able to earn a decent return on their savings from investing in government bonds and holding their funds in a bank. This changed after the 2008 financial crisis. For the past decade there has been a quiet war on savers. The past decade has been characterised by:
- Almost no return on bank deposits in developed markets.
- Almost no post-inflation return on bonds in the US and China.
- Negative bond yields in most of Europe and Japan.
- More money printing than in all of human history.
This can be seen in the charts below.
Where did all of that money go? The vast majority went to financial system players, mainly commercial banks, who used it to repair their balance sheets. A minority made its way into the real economy.
The two main implications of the war are set out below.
1. Many savers lost ground to inflation, meaning that they could purchase less at the end of the decade than at the beginning, despite savings.
2. Some savers were pushed into riskier assets, as they sought higher yields.
OK, that is the good news.
Then came the Coronavirus issue.
The policy response has been a dramatic increase in money printing and purchases of low-quality debt. Two results of this action are quite likely: asset prices will rise and real yields will remain low.
Another result is almost certain: inflation will increase, probably substantially.
The market view of coming inflation can be seen in the difference between short and long term money rates. This differential has risen sharply since central banks began to print even more money and will likely increase. You can see this in the graph below.
This means that the war on savers will get worse.
Likely much worse. It is unlikely that savers will be able to live off of interest on their savings for the foreseeable future.
Yet, at the same time, interest rates charged to borrowers have risen sharply over the past two months. Astute savers might ask themselves: why are these higher interest rates not being passed on to me?
The answer is because money is cheap. There is a lot of it around today, after the substantial money printing by central banks.
So, savers are hurt by the fact that the money supply has increased substantially (so they earn little on their savings) and that inflation will likely increase substantially (so the purchasing power of their savings will decrease over time).
What is the solution?
One thing that savers can do is to speak up about the fact that central bank action vastly favours borrowers (especially the financial industry) at the expense of savers. More realistically, savers should seek exposure to rising asset prices (for example, real estate and high-quality stocks). But, these options have risk: real estate is illiquid and stocks are volatile.
To return to the good old days when savers could actually live off of interest, savers need to go around the banks and get direct exposure to low-risk borrowers who pay a good rate of interest. This is easier for large savers, like pension funds.
There is also another possibility: technology. Like in many other industries, technology has the potential to circumvent high-margin, low-value centralised players like banks and share the savings with users. If regulators are willing to treat savers fairly, technology is likely to be an advantage for them in the war to make their money work harder for them.
As savers ourselves, fed up with low rates in the bank, we decided to create a financial technology company based in the safety and security of Switzerland. The result is CrescoFin SA, a regulated firm that combines decentralized finance + blockchain technology + insurance. We’ve tested it with our own money. It is designed to be everything that the traditional financial system is not: transparent, honest and low risk. It is our effort to help other savers make their own money work harder for them.
 If you didn’t have much money in the bank. If you had a lot of money in the bank in certain countries, like Switzerland, you paid up to 75bps for the pleasure of the bank holding your money. Plus fees. Plus hidden fees.
 Banks are not simple intermediaries; they are active investors in the economy. If you really want to know about banks, you can read this: https://www.amazon.com/financial-establishment-doesnt-behind-curtain-ebook/dp/B07MVJYNGD
 Savers ultimately are individuals, who work hard for their money. The category also includes pension funds, insurance companies, assets managers, etc.