Savings

(photo from the flikr commons)

I was listening to this story on NPR last night about these retirees circulating a petition to the Bank of England urging them not to lower interest rates anymore. These prudent savers are currently living on the meager interest that they earn on their savings accounts and have seen their income slashed as interest rates have been lowered to stimulate the economy. They don’t see why they should be punished for being smart and hording away their pennies.

At the time I was sitting there thinking “Yeah! You tell them. That’s so not fair. There must be some fundamental flaw in our economic system that causes prudent savers to be punished in times like this.” And I resolved to think through what that flaw might be later.

Then this morning as I was doing just that, I realized… Hey… wait a minute! The only reason the bank can pay you interest on your savings account is because they take your money, lend it to someone else, and earn money on the interest. If they can’t do that because no one is borrowing, then they can’t pay you interest. That’s not a flaw. That’s just the way it works.

Like it or not, when you put money in a savings account, you become a lender. If no one’s borrowing, you’re just as screwed as everyone else. It’s the risk you took when that became your retirement strategy.