By Tim Price – London Investment Alert (Great Britain) –
The Victorian era author and editor of The Economist, Walter Bagehot, once wrote that “John Bull can stand many things but he cannot stand two per cent”, indicating British savers’ traditional disapproval of low interest rates. One wonders what Bagehot would have made of today’s interest rate environment.
Within my own bank account I earn deposit income of 0%. For the right to earn this imaginary return I am fully exposed to the counterparty risk of the bank (over and above the limits of the Financial Services Compensation Scheme, that is, provided it can work its magic as and when required). Let there be no misunderstanding on this point. The moment you park your money on deposit with your bank, legally it ceases to be your money. From that point on, it becomes the legal property of the bank. You become an unsecured creditor to the bank, who can ultimately do with your money what it likes.
For this deal to work, it clearly required, in a bygone age, the requirement that your bank actually compensated you in some way for taking on that counterparty risk, by means of paying you interest on the loan you had effectively given it. In an environment of quantitative easing and the War on Cash, that link between risk and return has been severed. As a depositor, you now have return-free risk.