It seems that us "Hayseeds " without a string of letters after our names are completely bamboozled by what is happening in the financial world. A few decades ago the enemy threatening to decimate our superannuation savings was - inflation. Everything kept getting more expensive - and that was bad ! Now we are told that because things are getting ever cheaper - the new enemy is - Deflation !
Most world economies are putting into practice plans to try and get inflation to rise to at least two percent a year. We are being goaded to go out and spend money - and now the watchword is that "Debt is good " ! Whatever happened to that motto of "Saving something for a rainy day ? "
Another weird thing is happening to the money we do have stacked away for old age. The interest it accrues in a term deposit or a savings account is shrinking to near zero - in fact in some parts of the world it is now in reverse. The banks are actually making a charge for the privilege of allowing you to park your money in their vaults.
In Europe, the European Central Bank ( ECB ) has set interest at -0.1% and then lowered it again to -0.2% a few months later - and Denmark, Sweden and Switzerland have applied negative rates to deposits by their customers. The interesting thing is that most countries require the banks to maintain reserves in their Reserve bank to ensure liquidity. Even that now attracts a negative interest. It seems that we are returning to the old age remedy of stuffing any spare money under the mattress for protection.
The whole idea of banking used to be so simple. Wise people saved money and put it in the bank where it drew interest for them. The bank used this money to grant loans to people who were starting a business - and this new business provided the jobs that put meals on the table for families. It seems that today there are not enough people wanting to start businesses or willing to apply for loans - and the banks have money they can no longer lend.
Another aspect of world finance puts the heads of ordinary people into a spin. We had a disastrous financial crash back in 2008 and most governments went on a spending spree to try and "buy our way out of trouble ". They bailed out the banks and other big financial institutions and this money came mostly from the issue of government bonds - which are guarantees that the capital will be repaid with interest at a nominated future time.
Now it seems that this debt tied up in government bonds is something of a "time bomb " and clever people have devised a strategy to diffuse it. It's called "Quantative Easing " - and it simply means printing new money to buy back those government bonds. Put simply, we create what is really "phoney money " by printing banknotes that will buy back debt that becomes the property of treasury - and will never be repaid or have interest added because it is solely now owned by a government instrumentality. If only that solution was available to us mere mortals !
Unfortunately, this entire reversal of financial normalcy will have a dire effect if ever the chickens come home to roost - or if we have another recession of the 2008 magnitude. In a deflationary era pay rates cease rising and may even drop as work hours retreat from permanent to casual - and fixed charges such as home mortgage payments become harder to meet. At the same time, institutions such as credit unions and building societies which exist on the margin of attracting deposits and making loans face ruin.
It seems that the fate of world finances rests heavily on the decisions made by a handful of people whose faces appear regularly on television as they grapple with the levers of finance. These are reputed to be people of extraordinary wisdom. They represent a range of countries and their pronouncements are listened to avidly by everybody from Kings and Presidents to the far corners of the industrial world. It is said that they possess crystal balls that foretell the future with incredible accuracy.
It is an unnerving thought to wonder how they got it so wrong in the run up to 2008 !
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