Here's How to Fix It
Tell Sid he can Save Britain
If we understand Britain’s underlying economic problem, we can fix it. The earlier pieces show how Britain’s profits model has become predatory rather than usefully supportive. Approximately three quarters of Britain’s profits relies on household and government dissaving, rather than net investment and net exports. The downgrading of investment to a walk-on part in profits generation, rather than its main motor, has cumulatively malign consequences which are now visible:
lack of investment results in lagging productivity, since capital per worker grows only slowly;
lack of productivity growth in turn caps growth in real incomes;
the lack of real income growth is incompatible with sustained consumption growth, unless household savings are tapped;
pursued long enough, this profits model therefore leads to beggary both for households and the government, whilst the capital stock ages.
Laid out like this, it’s easy to identify the underlying problem that needs to be addressed: Britain’s households need to save more and consume less; Britain’s businesses need to invest more and stop relying simply on raising prices to maintain profits. This is clearer than ever now that we no longer have falling interest rates to hide the damage being done.
In other words, like so many problems in economics, it’s about saving and investment. We need policies to encourage a step-change in attitudes towards saving.
Britain loves shopping, doesn’t it? Shop till you drop; retail therapy; and from the FT, no less, ‘‘How to Spend It”. Certainly, ceaseless creativity and inexhaustible expense is deployed to persuade us that the road to happiness is thronged with shopping trollies. Why does it take such mighty efforts to keep us buying stuff? Maybe we don’t really love shopping so much.
That choice to spend rather than save is not inevitable, or natural, or a normal part of all cultures. I’m absolutely convinced that Hong Kongers, for example, get a far greater dopamine rush from topping up their deposit accounts at lunchtime than they do by going shopping
The problem isn’t something intrinsic to Britain’s culture. What’s doing the damage it is the unequal balance of incentives and costs which promote consumption and denigrate and frustrate saving.
Happily, it’s not hard to work out how to change this. Consider what happens when you want to buy a major consumer item: if you’re buying a sofa, DFS will give you not just the amazing, must-end-soon sale price, but will organize the financing for you. If it’s a new car you want, bring a minimum deposit, and the dealer will look aggrieved if you don’t take the financing that goes with it.
If you want to buy a government bond?
Well, first of all, who would sell you a government bond?
Would your local bank, assuming you still have a local bank, even know how to sell you a bond?
If the government wanted to sell you its bond, why doesn’t it offer you financing?
If the government wanted to trigger a change in savings behaviour tomorrow, it would get the Bank of England to provide 90% financing for anyone who wanted to buy a government bond, with a financing rate which was no higher than, and preferably lower than, the coupon the bond carried. If DFS was selling government bonds, that’s what it would do.
First Policy
Make that a policy: 90% financing at sub-coupon rates for anyone who wants to buy a government bond. Buy now, pay later. The difference is that what you are buying is . . . savings. What your buy now, pay later is doing is buying an improvement in your financial strength.
I offer this policy to any political party, any think tank, any newspaper, any minister, free of charge. No attribution necessary. Do this, and the incentive balance between savings and consumption begins to move the way we need it to move. Lizz Truss, do this in your first 100 days, as the ‘Tell Sid’ moment we need.
Now, let’s think about a much more difficult problem: the mismatch between the consumer offer made by an endlessly creative and diverse retail sector, and the consumer offer made by Britain’s antiquated commercial banks. As far as the saver is concerned, I suspect Britain’s commercial banks offer less service, less choice, than banks in the Victorian age. Which is to say, they offer deposits which pay almost nothing, and . . . er, that’s your lot.
For the rest of the financial system? Also precious little choice, precious little opportunity for the would-be saver.
The choice for Britain’s savers is certainly worse than it was at the turn of the century. And it is frankly unrecognizable from the range of saving/investment choices available to from Hongkong Bank in Hong Kong in the 1990s. Possibly this might explain why Hong Kongers save more? If it was good enough for Hongkong Bank in Hong Kong, why is it impossible for HSBC offer in Britain now?
Why has it happened? One reason is that financial regulators have over-reached destructively. In the name of minimising consumer risk, have made it no longer a sensible risk/reward proposition for banks to offer anything but the barest scraps of financial service.
But whilst they close down savings choices in the name of protecting the consumer . . . . at the same time every time you watch sport, you’ll find some actor posing as an East End diamond geezer amping up your phone-gambling habit.
The whole point of the gambling industry is that, on balance, the punter always loses. That’s not actually true of savings and investment products. Britain encourages gambling at the same time as its regulators stifle savers’ choice. That’s policy.
Second Policy
We’ve got to remove the pillow that regulation has clamped over the savings industry’s face. Start by renaming and repurposing the Financial Conduct Authority. Rename it the Financial Development Committee (FDC) and task it with removing restrictions on consumer saving products. Its job should no longer be to ‘regulate financial services firms and financial markets’, but rather to ‘encourage and foster diversity and choice in financial services available to the public’.
Yes, there will always be the risk of commercial failure, but it is the Fraud Squad’s job to sift theft from genuine failure. If necessary, get that East End geezer back on the telly: ‘Save365: invest responsibly, it’s better than gambling’.
It’s not hard to see where the FDC can start: Mifid2 has done, and is doing, great damage to private and public markets, so should be first up against the new FDC’s wall.
Are Britain’s banks up to the challenge? Maybe not. Margaret Thatcher removed formal currency controls back in 1979, but informally they’re back now. A large part of Coldwater Economics’ revenues are in US dollars, but the difficulty of doing even elementary banking in dollars in Britain is bewildering and pointless. Who benefits from such a sclerotic banking system, who pays for it?
If Britain’s commercial banks are unable or unwilling to offer a proper range of savings products (foreign exchange, bonds, shares, ETFs, REITs, gold, cryptos), shove them out of the way, and let others make the offer (the Post Office maybe? Maybe DFS could do the job? Maybe SportsDirect fancies a run at SaversDirect? Why not?)
Third Policy
Many cryptos exist to fill a vacuum where a functioning financial system and public markets used to be. They are inefficient and costly (think Ethereum), so if you really want rid of them . . . allow a proper diversity of savings opportunities.
These are policies designed to tilt the spend/save decision back towards saving. They are a start in overhauling a commercial and financial culture which no longer serves us well. But they are only a start. Others initiatives can and should be imagined and pursued. What is important is to be clear that incentives have changed to reflect the urgent priorities of our time. And once you change the terms of the spend/save decision, longstanding problems of investment, productivity, wages and financial security will begin to heal.
There will be objections, which I welcome, but I have to keep this piece within reasonable length. If you have questions or objections, I’m very happy to deal I’ll deal with them either below the line or by email if you wish. In the meantime, please feel free to pass these ideas around. If you spot a passing Chancellor, badger him/her about them.
PS. If you are interested in my take on economics, take all look at the Coldwater Economics website, or my sister Coldwater Economics substack page.
So in #1 you've "invented" QE. I particularly like the idea that the BofE may fund gilt purchases with an interest rate in excess of the bond coupon! That would really incentise investing!
In #2 you've "invented" stockbrokers. See for example ii.co.uk. Others are available....
In #3 you've said nothing.
Well done!
Very interesting point on labour flexibility, almost an argument for going for continental type inflexibility to get the higher productivity they enjoy albeit with the higher unemployment that goes with it. Although the US has flexibility and high productivity but crucially seem to be able to invest heavily and successfully. Some great ideas on how to encourage longer term employment contracts. While they’re about it maybe they can fix the ridiculous NI contribution employers have to make and the subsidisation/encouraging of companies not paying people enough given income support from the govt. Re our manufacturing capabilities Nissan did actually come to mind when I was writing but I couldn’t think of anyone else, not that means much given I’m no expert on U.K. companies.