Eddie Hobbs: Your savings are collateral damage in the new rules of the game

A decade of negative interest rates will have a profound impact on your money power

'Policymakers know that pushing up rates prematurely will tip over the global economy into depression, that’s why they cannot do it.' Picture: Pexels

There was never going to be a V-shaped recovery. It was a myth for cosy cocooners. We are entering a decade, maybe longer, of negative real interest rates with a profound impact on money power. It is climate change for cash deposits.

Yesterday’s budget is a tactic, part of the response phase of the global pandemic. Next up, in 2021 comes the Flood and Fractures phase as the collateral impact becomes clear, before the real recovery phase can begin in a reshaped world thereafter. Not everything can be saved and the idea that there is unlimited borrowing capacity to do so is as fanciful as rewriting Game of Thrones with Nanny McPhee in power at Kings Landing.

The latest surge in excess global debt cannot be serviced, except by crushing interest rates for up to a decade or longer. Central Banks know this, that letting loose inflation is the only way out, while Governments jack up borrowing to world war levels hoping to reignite growth faster than the debt piles up. The ECB intends to ride shotgun, letting time and inflation erode the real value of outstanding debt while they play their part by crushing rates into negative territory.

Savings are collateral damage in the new rules of the game. Irish Banks are charging up to -0.65% to hold cash. So far, it has sharply curtailed Credit Unions capacity to take in cash and is hurting corporate deposits, trusts and charities, but it is coming your way next year once it seeps down from seven-figure consumer deposits. You can ignore bank propaganda to the contrary.

Eddie Hobbs: "Savings are collateral damage in the new rules of the game. Irish Banks are charging up to -0.65% to hold cash."

The maths is sobering. Negative rates at this level with inflation running very low like 2% on average could stealthily thin €100k to €87.6k in money power in just five years even though the ATM will report it nominally higher. Over ten years it will have shed nearly a quarter of its real value. There isn’t a financial vaccine. Policymakers know that pushing up rates prematurely will tip over the global economy into depression, that’s why they cannot do it.

There isn’t a replacement for rock-solid guarantees, access to capital and interest rates higher than inflation. It doesn’t exist in nature and claims that it does are misleading. As a rule of thumb, to break even against inflation in this decade, half of your savings will probably need to grow by 4% to 5% yearly to compensate for the losses in the other half. This rules out low-risk products.

Safe havens like Government Bonds are negative so you have to pay European governments to mind your cash. Money market choices like short duration bonds are guaranteed to leak money. 

The only way to get higher yields is by taking on higher risk of capital losses but beware the siren call from the unregulated and murky world of shadow banking. 

You’ll know this has arrived at your door when an accountant or financial firm, acting as the agent for creditors and high from undisclosed fees and commissions, offer gravity-defying interest rates.

But be on your toes because the next phase, flood and fractures are going to test global financial stability all over again as defaults hit. It will start with Leveraged Loans, credit lent to firms already highly leveraged, a global marketplace estimated to hold $5 trillion in debt, a quarter of which has been securitised into Collateralised Loan Obligations (CLOs) and spread beyond banks to insurers, pensions and funds. These are likely to be the detonator. Sitting beyond are Commercial Mortgage Backed Securities (CMBS), these are property-backed loans in the vast sectors crumpled by lockdowns and restrictions and which may be outside the pale for Government bailouts or Central Bank supports. Think of airlines, hotels, restaurants, office blocks, cruise liners, casinos, parks, anywhere that the public will not go and whose revenues have vanished.

Pushing rates negative for small savers at Irish banks will force equivalent treatment for An Post bonds. This is set to become a highly charged political issue over the times ahead and will arrive at a time of when bank system fragility moves centre stage, especially European banks which are not as well recapitalised as US banks.

Zero or negative interest rates will coincide with banks shipping huge losses from loan defaults and is likely to dominate the next year or two. 

Corporate defaults are already a growing menace as Covid extends its grip and court protections run their course, but these will inevitably be followed by consumer debt defaults as Government borrowing and forbearance programmes reach their limits.

Political idealists and populists in print, on radio and TV, will have you digest the alternative story of heroic rescue by some spirit in the sky that has recast the laws of money. It makes for great romance but unhappily it is nonsense. This isn’t the Lion, the Witch and the Wardrobe, it is Game of Thrones, except with a social contract.

Eddie Hobbs is a Financial Advisor and Writer