Central banks have killed children’s savings accounts. Can Bitcoin Resuscitate Them?

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Sad times for savers.

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When I was a teenager, I remember staring in wonder at the savings rates advertised in my local bank window.

If only I had a million pounds I could live off the interest for life, I often told myself. And I was not wrong. With the Bank of England base rate never dropping below 5% in the 1990s, any millionaire could park their savings on Main Street and withdraw three times the UK’s average annual salary. in money dropped completely free.

Better yet, real inflation-adjusted interest rates have climbed to around 4% for most of the decade. Thus, savers did not simply go wrong with high balances of a depreciating currency; they actually increased their wealth in real terms.

Whether it’s so easy for millionaires to sit down and rake in free money is up for debate for another day.

But, for ordinary people, keeping real interest rates in positive territory is an integral part of the unwritten social contract between governments and their citizens. As long as we are given the opportunity to preserve and grow our savings, we are unlikely to rage against today’s economic model. Better to leave the government in the driver’s seat and walk the winding path to prosperity, however disappointing how far we eventually have to travel.

Nowhere is this felt more than in the area of ​​children’s savings accounts. We all want our kids to have a nest egg, and until the 2007 global financial crisis, savings accounts were generally considered the best tool for the job.

By putting funds into a child’s name and not allowing them to touch it, you ensured that your child would be better off in the long run, not only because neither you nor they could waste the money, but also because the Interest rates on these long-term products are invariably among the best in the market.

It is impossible to overstate the virtuous circle that these savings accounts offer to society.

Taking on financial responsibility at a young age has a profound impact on future quality of life and mental and physical well-being. Just as reckless borrowing on credit cards can ruin lives, prudent savings can transform them for the better by opening the doors to higher education; career freedom; better work-life balance; private health care and much more. And it all starts in childhood, when you learn or don’t learn the consequences of choosing to please yourself versus choosing to be frugal.

All of this makes the global trend towards ultra-accommodative monetary policy, whereby central banks speed up money printers while cutting interest rates, really hurts the stomach.

Proponents say this two-pronged approach saved the global economy by getting consumers and businesses to invest and spend.

Spend it or lose it

In reality, the measures are not goads but lashes. Real interest rates reached -2.4% for the British and -5.15% for the Americans (calculated by deducting the latest CPI inflation figures for the two countries from their respective base interest rates. ). In this manipulated environment, the opportunity cost of holding cash is so high that individuals and institutions have no choice but to throw their money into risky assets, from bad business loans to mortgages. absurdly cheap in over-inflated stock markets.

It’s nothing more than a bet that stability will return and covid-19 will fly away before lasting damage is done by lavishness. If the bet is successful, the central bankers will take all the credit. If it explodes, and if a wave of insolvencies engulf the world, devastating economies, they will reject all responsibility.

Instead, it will be individual citizens who wanted to put their money in a savings account, but were forced not to, who ultimately find themselves in possession of the bag.

No one sums up the myopia of these policies better than Christine Lagarde, the convicted criminal who is currently president of the European Central Bank. It was his attempt to defend negative real interest rates in April:

I really appreciate the fact that people who save are not happy with the consequences of negative rates, but we have to look at the situation from a global point of view. We cannot look at a particular depositor or a particular category. We need to look at the whole economy.

In other words, in the world according to Lagarde and most central bankers, savers are an isolated group of citizens of a particular category who have chosen to behave in a certain way and who should face the consequences of their behaviour. (Consequences imposed by diktat and without right of appeal.) These people do not, according to her, embody the virtue of financial prudence, a positive trait that has been encouraged, in one form or another, since the dawn of the silver. They do not act responsibly and should have their wealth forfeited if they persist in their obstructive behavior.

In such a demented worldview, perhaps it’s no surprise that little Timmy and his piggy bank are seen as part of the problem. Thus, UK children cannot earn more than 1% on balances greater than 3,000 in an easy-to-access savings account, and no more than 2.5% in a Junior ISA which is blocked until l age 18.

American children are beaten even more by higher inflation rates and lower savings rates: 0.55% is the market leader for balances over $ 1,000. (Alliant Credit Union describes this product in which deposits currently lose 4.85% of their purchasing power each year as the perfect opportunity to teach kids about money. Touch!)

The simple truth is that the Bank of England and the Federal Reserve want it to be physically impossible for parents to do the right thing and put money aside for their children. Every penny set aside in a savings account is a penny that is not used to keep the global economy running happily despite its growing difficulties.

That won’t stop a possible market downturn, of course. When a sick person numbs their pain with alcohol and refuses to see a doctor, their illness does not magically go away. It gets worse. They are deteriorating. The road to recovery becomes more difficult.

And if that doesn’t worry you, maybe this table:

Agree for some: The richest 1% of Americans added $ 10 trillion to their net worth over the … [+] pandemic (green line), against only 700 billion dollars earned by the poorest 50% (pink line).

The New York Times / The Federal Reserve Board of Governors

This is what happens when central banks arrogantly assume that pumping money into the economy through financial institutions will create a ripple effect for ordinary citizens. Big surprise: no. Since March 2020, when the Federal Reserve put its stimulus on steroids because of covid-19, the richest 1% of Americans have added $ 10 billion to their net worth (green line). Over the same period, the poorest 50% earned only $ 700 billion (pink line). Unfathomable sums have been invested in risky assets inaccessible to most citizens, deepening inequalities and fueling dangerous bubbles in all sectors of the economy. Simple leftovers end up in the pockets of those in need.

The final insult? Earlier this month, six of America’s biggest banks reported combined profits of $ 42 billion for the second quarter of 2021. That’s a profit of $ 462 million every day. These are the same banks that say they can’t afford to pay you or your children real positive interest.

An alternative path?

At the start of this article, I said that citizens are unlikely to go wild against today’s business model as long as they are given the opportunity to preserve and grow their savings.

Obviously, Western governments are not giving us this capability.

In the title of this article, I hinted that bitcoin, the decentralized cryptocurrency launched in 2009 in response to central bank excesses during the global financial crisis, might offer a solution. It will surprise some readers that I waited until the end of my article to mention bitcoin again. But that’s because understanding the problem is much more important than subscribing to a single solution.

Bitcoin, in my biased opinion, is the best chance society has of creating a stable and incorruptible currency for the citizens of the world: it is entirely free from central bank manipulation; it is deflationary because of its fixed supply, and therefore does not lose purchasing power or need interest rates; and it’s accessible to anyone with a cell phone, whether they’re a millionaire in West London or a farmer in Equatorial Guinea.

Once you understand how and why central banks impoverish your children, it doesn’t take long to start looking for ways to preserve your wealth. As Lagarde herself puts it: If there is an escape, that escape will be used.

I’ll leave it to you to determine if bitcoin is the most attractive escape hatch.

Financial Disclosure: The author has owned bitcoin since 2013.

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