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Unfair? We may have to hope so

  • Stephanie Flanders
  • 9 Feb 09, 03:30 PM GMT

If you think are unfair, then hold on to your hats. It's a sad fact about life after the crunch that the best-case scenario now for the global economy may be the unfairest.

The most obvious example is that of savers versus borrowers. Already savers are getting some very unjust deserts. But for the world to recover, that may have to continue.

Piggy bank, estate agent boardsIf you saved for the future during the boom years the chances are you are now being hammered. Indeed, the just dubbed savers "the new underclass". Your pension may well be worth less than what you've contributed, and the interest rate on your savings account is now barely visible to the eye.

Even before last week's by the Bank of England, half the variable rate savings accounts were paying interest of less than 0.5% - while many borrowers are seeing a big cut in their monthly costs.

Of course, prudent home buyers who didn't take on enormous mortgages can enjoy the fact that they are not now sitting on negative equity. And the shrewd renters who saw this all coming know that their reward is on its way in the form of lower house prices.

More generally, net savers might hope to gain from the deflationary future now being painted for the major advanced economies. It's not just houses that are getting cheaper. In a world of generalised price falls, every pound of savings will go that much further. And every pound of debt is cause for that much more regret.

That's when savers do get their just rewards, and borrowers are sent to deflationary hell because the real value of their debt keeps on going up.

But, lest you forget, this deflationary scenario is precisely the one that the major central banks are all hoping to prevent. The authorities are (understandably) scared of a repeat of the 1930s - or Japan in the 1990s - when falling prices led to a prolonged period of stagnant demand.

So in the best scenario savers will not get much reward in this life, while borrowers will enjoy extremely low interest rates and even some erosion of the value of their debt by inflation. (If they're really lucky, they could even get hyperinflation, which would wipe out savings and debt alike, but that's a subject for a future post).

And there's likely to be plenty more injustice to go around.

We don't yet know quite how the fiscal costs of cleaning up this mess will be distributed - but it's a fair bet that young people will end up paying higher taxes to clean up after a boom they didn't enjoy.

When it comes to the financial system, it is possible that the banks who were prudent in the boom years will come out ahead. But those same prudent banks could question whether the institutions who took colossal (and foolish) risks are going to come out sufficiently behind.

It's been the same problem since the credit crunch began. If governments are going to restore confidence in the financial sector and so revive lending to the broader economy, they're going to end up 'rewarding' a lot of bad behaviour and effectively punishing those who abstained from it.

Seen in that broader context, the mega-bonuses for bankers might look like a drop in the ocean.

Yes, it's all very unfair. But it may be our best hope.

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