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Will there be taxing times for everybody or just savers?

Will there be taxing times for everybody or just savers? Mindful Money

Many times as I have surveyed the credit crunch era, it has been apparent to me that economic policy in the countries affected is set to benefit borrowers and debtors. For example, we saw an initial response of lower official interest rates across the developed world apart from places like Japan which had operated such a policy for some time. Then we saw intervention in longer-term interest-rates via polices such as quantitative easing (QE) and the European Central Bank’s (ECB) Securities Markets Programs. In other words, government bonds were purchased by central banks in an attempt to lower their yield. Also, we have seen interventions in mortgage markets with the general driver here being - yes you have guessed it - to lower mortgage rates. This happened at different times in different places though. For example, purchases of mortgage backed securities were an early and ongoing part of US QE and the ECB decided to purchase covered bonds back in May 2009 (this ECB program is mostly ignored in the media, showing again that the best place to hide something is in plain sight). You could therefore argue that the Bank of England, with its Funding for Lending scheme, was a latecomer to this particular party - let alone the coalition government with its Help To Buy schemes.

That is quite a list and I would love to think that the world economy is now “saved”, and the UK economy’s current mini-boom will extend to the end of time. But, you see, such phases were present in the Great Depression of the 1920/1930s and the clue is in its name.

The economic theory

This is relatively simple, in that you reduce interest rates to encourage people to spend more by several routes. For example, it costs less to finance their existing debts, so perhaps they will be encouraged to borrow more. Accordingly, they will be likely to spend more and the economy will be boosted. Also, if bond yields can be reduced, governments will be likely to spend more than otherwise too.

Problems, problems, problems

There are a litany of problems with this, especially when you are in a credit crunch where the issue is longer-term. A big driver of this is that, if you think about it, the “cure” above relies on behavior changing in the short-term. Putting it another way: unlike the famous quotation from the Gettysburg Address, you can fool all of the people all of the time! So a major catch is that, if it does not work reasonably quickly, it is unlikely to work at all. There is plenty of food for thought here in a credit crunch which has seen the fifth anniversary of the collapse of Lehman Brothers. As Muse put it, 'time is running out' for this strategy - or you believe that it already has.

Another issue is the fact that this “cure” seems to find itself being unveiled a bit too frequently, as by definition it also needs a period of “normal” interest rates to reset the economy. The extreme situation of this is Japan, where it has found it virtually impossible to get out of what became a zero interest rate combined with falling prices trap. You may note that this has led to the Bank of Japan and the Japanese government to press the pedal even harder to the metal with what is called Abenomics. In the near universal lauding of this from official bodies, we get I think a clue to our own future - or, as they put it in the best science fiction, a 'likely path' for our future.

In a nice coincidence of timing I have spotted this on Twitter  (h/t @nr_zero ):

"ECB’s Bonnici: Prepared To Go Negative With Deposit Rate, Has Some Complications"

I guess one advantage for a central banker from a small country (Malta) which is part of the ECB is that people take note of what you say! However, you may note that we are supposed to be in an economic recovery, yet he is discussing negative interest rates. A central theme of today’s blog is that these are still possible and, indeed, if we observe policymakers and their published views, perhaps even probable. Let me post a nuance here – there are plenty of roads where market rates do something else entirely which would create a bit more than confusion, Mr. Bonnici!

It is always the banks

You may have noted that, ahem, by some unexplained coincidence, every single measure described above also benefits the various banking sectors. We are living in an era where the too-big-to-fail philosophy has gone way beyond actual bank bailouts, as we see overall economic policy twisted, and to my mind perverted, to their benefit. No one is ever likely to admit for decades that the claimed policy of helping borrowers was in fact one which was designed to help the banks.

Along the same road, we note that such moves have benefited governments overall who have in general seen lower bond yields (even after the rises of 2013 so far), which have eased the fiscal issues that many of them face. This is quite different to the problems faced by taxpayers who find themselves financing ever larger debt burdens created by the same governments. You do not have to take my word for it as the US National Bureau for Economic Research has weighed in:

"The principal message of our paper is that without exogenous restrictions on transfers, the level of government debt doesn't matter."

Otto von Bismarck and Jim Hacker:
"Never believe anything until it is officially denied."

It is a balance sheet problem

Here is the fundamental issue, which is that we are treating the credit crunch as if it were an income and spending issue when in fact it is a underlying balance sheet issue. There was an extraordinary debt binge around the world which went from boom to bust, but what has happened is an attempt to make the cost of financing the debt cheaper with no effort to deal with the size of it. Or, if you prefer, we are dealing with the visible part of the iceberg and ignoring the below water component.

Now here comes the crunch, which is that the debt has matching savings on the other side of it. This means that there is a savings problem too and maybe an investment one as well. As such, that there are various Swords of Damocles potentially awaiting savings and perhaps investment hovering in our future.

The International Monetary Fund steps into the fray

There is a clue in the title of the document, which is Taxing Times! Anyway, at first it is probably expecting a chorus of cheers:
"In principle, taxes on wealth also offer significant revenue potential at relatively low efficiency costs."

After all, we see plenty of examples of the 1% then the 0.1% and then the 0.01% doing so well in a time of crisis. Whatever some in those categories do, they always end up in the winners circle. However, I am troubled by the International Monetary Fund (IMF) entering this arena, as its policies in general support such people. So, savers may have genuine concerns about how “wealth” will be defined.

If we continue with the train of thought of the IMF, we see this:

"The sharp deterioration of the public finances in many countries has revived interest in a 'capital levy'— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability."

Okay, and what might that mean?
"The tax rates needed to bring down public debt to pre-crisis levels, moreover, are sizable; reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth."

Job done? Err, not quite…

Odd that the IMF has chosen the euro area - after all is it not supposed to be “on track”? Apparently not!

Houston we have a problem!

If we cut to another underlying theme of these times, we see that central banks have as an apparent objective a goal of raising asset prices, such as equity values and house prices. If we look at the tax plans, it makes me wonder if this is a type of lamb being led to the slaughter. Look how well you have done - oh by the way we are going to tax you on these apparent gains. Should there then be a fall...?

What about savers?

They may be wondering if this will be another feature of what is called financial repression. They have had a credit crunch of two halves. As we entered it, money market interest rates surged and we had a phase where they benefited and debtors lost - and indeed this was the climax, so to speak, of past mistakes. Then, they had an equivalent of a savings nuclear winter, where even cutting official interest rates to near zero was not enough as other policies designed to drive savings rates lower emerged.

The economic effect was supposed to encourage savers to spend, whereas I have long been a believer that in such a crisis the balance sheet effect makes them retrench, reducing any possible boost and in fact sending it negative.


For today’s purpose, if you will excuse me, I will be making a sweeping generalization and treating pensions as savings - but in the UK there was an intended brake on the economy here, as the reductions in bond yields affected defined benefit pension schemes, and led to companies having to put more money into these schemes. So, money was sucked out of the economy one more time.


It is kind of the IMF to remind everybody of the theme established by my article of the 1st of this month, Are continual tax rises the future for Japan and indeed us all?

My answer, if we cut to the chase, is yes - except perhaps for the 0.1%. After all, the various world so-called elites have mostly skipped the Sword of Damocles so far and, rather unfortunately for the IMF, it has often reinforced this. In another theme of this blog, we are back to regulatory capture - and let me widen this issue as it often feels like everything in authority has been captured. Next, we will be planning football competitions in deserts in the heat of summer whilst spread betters make markets in heart attacks and heat exposure collapses... No fiction is as ridiculous.

The solution is surprisingly simple and it is that debtors/borrowers and savers/investors need to follow the prescription of John Lennon:

"Come together, right now..."

And to follow the principle below:
"All we are saying is give peace a chance."

Instead we have policymakers singing along to a glam rock effort.
"Does anyone know the way? Did we hear someone say?
We just haven’t got a clue what to do,
Does anyone know the way? There’s got to be a way?"

And repeat as often as you like…

This blog was written by Shaun Richards and originally published in MindfulMoney under the title: Will it be Taxing Times for everybody or just savers?

Tags: assets , credit crunch , ECB , economic recovery , European Central Bank , Great Depression , IMF , International Monetary Fund , Lehman Brothers , national debt , Pensions
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