Interest-rate whingers should spare a thought for savers

By MALCOLM McPHEE*

"The human species, according to the best theory I can form of it, is composed of two distinct races, the men who borrow and the men who lend."
- Charles Lamb (1823) in Essays of Elia: The Two Races of Men.

Like the rich and the poor, the whingers are always with us. Whenever the price of money changes, these lobby groups fill headlines with complaint: it is too much when the interest rate is going up and too little when it is going down.

They talk about all sorts of interest rate effects on the economy - many and real - but they seem strongly biased towards borrowers.

Every borrower needs a saver. Loans are made from savings that some call deferred spending.

Borrowing can be described as the spending of money you haven't got.

Let's not condemn borrowing: at some stage in life, most of us are either a borrower or a saver/lender, and even both at once.

If the price of money is not sufficient, the borrower might take too little care over how well the money is invested or spent. We have some spectacular reminders of that.

Of course, if the price the borrower is prepared to pay is too high and if the lender is too greedy, the lender will take too little care in watching the borrower's risk and not get repaid. Examples of that abound.

It's not the simple price of money or interest rate that matters most: it's the real interest rate.

Increasingly, as inflation has been kept relatively subdued, it is becoming forgotten that the interest rate must be above the inflation rate to give the lender or saver a return that has value, otherwise inflation steals the benefit; and if inflation is high enough it also reduces the buying value of the money saved.

There's worse. The Government taxes the interest earned by the saver/lender without any regard for the inflation rate, even taxing value the saver doesn't get. So there is a double steal - by inflation and taxation.

Inflation is a thief, transferring value from the saver to the borrower. The value of goods and services the borrower can buy with money borrowed is more than what the lender will be able to buy when he is eventually repaid because inflation will have eroded its buying power.

It is a measure of the success in curbing inflation - and most importantly expectation of inflation - that interest rate whingers have dared to become more vocal, even condoning a "little" bit of inflation. How much is little? Let's be wary of simply blaming money costs on bankers, our savings keepers. Unlike the Japanese, whose savers have been switching from money to gold, we're not suffering from imprudent banking.

Arguably, as prolonged inflation reduced the rewards of saving, thus lessening New Zealanders' appetite for it, and increased the benefits of borrowing, Kiwis have been encouraged in their love affair with property speculation in farmland as well as housing. Why then, you might ask, are some borrowers, unlike savers, given tax benefits on interest costs?

Certainly the level of household debt rose strongly in the decade leading up to the turn of the century. And that other gauge of saving, the current account balance in the nation's business with the rest of the world, persists in deficit, so adding steadily to our stock of foreign debt as we continue to borrow and spend other people's savings.

In 1993, our foreign debt was $68.3 billion, or 90.8 per cent of gross domestic product, the gauge of annual national output.

At the end of last December it was $122.17 billion, or about 106 per cent of GDP. That is despite the Government getting its tally down from $23.5 billion, or 31.3 per cent of GDP, to $16.1 billion, or about 14 per cent. The so-called corporate sector tally was up from 59.5 per cent of GDP to around 92 per cent, or $106 billion.

Certainly the Reserve Bank sets a marker for interest rates and, some say, thank goodness, or else the exchange rate might collapse to re-ignite inflation. But the supply of savings as well as the borrowers' demand for them also helps to determine interest rates. If we saved more the price of money (the interest rate) could be lower.

A big risk in borrowing foreigners' savings is that if we don't invest them wisely we'll drive up prices here.

The people hurt most by inflation are the poorest, along with savers denied the value of their prudence to the benefit of spendthrifts.

That's a somewhat simplified equation, for all of us are spenders oiling our economic wheels, but don't forget that inflation and its tribulations have not been vanquished permanently. Argentina's troubles show that.

* Malcolm McPhee is a former business editor of the Herald.

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