Household bank account balances struggle to hold their own against inflation

Banking / analysis

Savers moved their deposits aggressively during the pandemic. Now the pandemic has passed and they remember how to do it, does that risk other more destabilising shifts out of the banking system?

27th Mar 23, 11:26am by David Chaston

Source: 123rf.com Copyright: solerf

Household bank account balances rose sharply during the pandemic, and the components shifted sharply too.

Households prioritised 'safety' over 'returns' during this period, choosing to keep their cash assets readily available. One implication was that larger deposit balances became more vulnerable to a sudden shift, or in any one bank's base, a 'run'.

We were lucky the pressure infecting the US and European banks presently didn't become material here then. But it was not as though a small number of households didn't react; they did, by holding much higher volumes of paper money (especially $50 bills).

But things have been settling recently. And the best way to observe that is to watch the proportion of household bank balances held in term deposits.

Pre-pandemic more than 57% of these balances were held in term deposits. During the pandemic that dropped to just 38%. The shift involved moving more than $23 billion, and in the New Zealand context, this is a lot. (Kiwibank's total deposits, household plus business, total $25 bln.) The whole banking system would have noticed if that level of funding moved out of the sector. But it didn't; it just shifted across to at-call accounts.

Now the pandemic has passed, savers are piling back into term deposits. In fact, the latest Reserve Bank data shows they are now at a record high level; $106.5 bln.

However, there were other big influences over this period. The borders were closed, and the Government and the central bank were free with liquidity support to counter the inherent stresses when the world closed up.

But closed borders and flooded liquidity has generated inflation, and at a level we haven't seen in 40 years and beyond the memories of most people.

So it is fair to ask whether these much higher household bank balances are 'real'. We can test for that by adjusting the totals to an adult per capita basis, and strip out the Consumers' Price Index (CPI) inflation component.

And then the picture isn't so positive.

What this shows, confirms really, is that inflation is a thief of savings. It is obvious at an individual household level, but this review shows it is true across all households as well.

We should worry about savings incentives when these bank accounts wither from inflation. There are other solid investing options to term deposits of course. But the temptation to take unreasonable risks rises as inflation roils returns and suppresses asset values. That is why it is crucial for the inflation genie to be put back in the bottle.

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39 Comments

by bw | 27th Mar 23, 11:35am 1679870143

A good article, and the best sentence?

"That is why it is crucial for the inflation genie to be put back in the bottle."

And the lunacy of the last 15 years or so means that there is only one way to do that - the opposite of what let it out in the first place. If we countenanced Negative Nominal Interest rates, then a similar, but opposite response on the other side is coming.

by ACB | 27th Mar 23, 1:19pm 1679876346

Positive real interest rates are a prerequisite to bringing inflation under control. Taylor rule suggests the OCR needs to be over 8.5% to do that.

https://www.gdplive.net/Dashboard  

by Squishy | 27th Mar 23, 2:46pm 1679881593

The quality of these two comments is outstanding. If Reserve Banks are stalling it's not because there isn't sufficient evidence that rates need to be raised further to control inflation.

Regarding the consequence, we cannot and should not manage our monetary policy to accommodate our worst managed bank(s).

by fortunr | 27th Mar 23, 4:25pm 1679887524

Yes, it is true that if we want to have inflation under control we should have an OCR above the current 7% inflation level.

However this would be potentially catastrophic to the housing Ponzi, which is already in a very fragile state, with potentially significant collateral damage in other sectors of the economy and the financial system in general.

This is why I think that an acceptable compromise between conflicting requirements would be an OCR at around 6%, kept at that level until inflation goes down to 2% and stays at that level for a reasonable period.

by kiwimm | 28th Mar 23, 10:19am 1679951975

A click on the small graph icon on the Taylor Rule line brings up a chart which shows two interesting things:

1 - we are chasing the interest rates up but lagging by about 12m e.g. we are at 4.75% now which is where we should have been in April 2022 (we are acting too late)

2 - the optimal rate right now to keep inflation at 5% would be 7.34%. To get to 2% is 8.84%. At the current setting of 4.75% we would be lucky to keep inflation at 7% (we are not doing enough)

by Rob Reid | 28th Mar 23, 10:36am 1679952978

Price changes (price of money, price of anything) are just demand/supply signals - in normal circumstances they wouldn't need to me managed.

If we could wrest control of the currency from the State (ie abolish monetary policy) we could address the cause of the inconvenient imbalances.

But as someone commented the other day, given the mess that has been created they need to somehow untangle it first. I can only see that playing out as the political apportionment of a reduced standard of living. And it's election year.

by chebbo | 27th Mar 23, 12:28pm 1679873310

Except using the CPI in this context doesn't make sense, so any conclusions drawn here are meaningless.

It's entirely possible that those funds locked up in term deposits are earmarked for something not measured by the CPI, or not intended to be spent at all. In fact it would make far more sense if that was the case; groceries and petrol tend to come out of at-call accounts.

by Antz | 27th Mar 23, 12:41pm 1679874084

During the pandemic ... 'Households prioritised 'safety' over 'returns' during this period, choosing to keep their cash assets readily available'.

Yes, but ...

For money in the bank there were no effective returns, so I think it was as much, maybe more, about 'ready availability' as it was 'safety'. My thinking at the time was why put money into term deposits, locking it away from availability when the returns were negligible cf. to leaving it in transaction accounts?

by Jonny.Foe | 27th Mar 23, 1:12pm 1679875962

Exactly. When mortgage rates started going up there was a huge surge of over-payments on mortgages, and then when term deposits started to increase there was a major shift from transaction / savings accounts into term deposits.

by 21Trillion | 27th Mar 23, 1:01pm 1679875283

The banks won't have it so easy in the coming decade.Younger generations are waking up with readily made information online regarding inflation, monetary policy and how our financial system fails those who do not take risk.

Especially with housing ponzi on the rise (if it does continue to rise), you're dreaming to think saving and term deposits will get you to your deposit for a house unless you make significantly good money post tax and/or do not have to pay rent while saving.

Stocks and especially crypto will slowly draw the capital that has for so long been left in banks and TDs. With no entry barrier and long term proven track records alongside the understanding of how money works with reserve banks and govts, people will make the switch, it's just a matter of time before more younger generations are educated on this, but it's moving at a fast pace.

A good example is a friend of mine, his parents (late 50s) just inherited a decent chunk of money and have chosen to move a third (to start) into Bitcoin. With ANZ serious saver offering 3.75%, while reported inflation is 6+% (reported*), why on earth keep it in the bank. They are only moving a chunk into Bitcoin because their son (my mate) has been informing them of how money works, current banking crisis in the USA and how Bitcoin works.

It's all just education. The only way banks can stay relevant and continue long term to hold the kind of consumer capital that they have in the past will be to compete with good savings and TD rates or adopt stock/crypto investments and make them consumer friendly.

by J.C. | 27th Mar 23, 1:10pm 1679875809

Stocks and especially crypto will slowly draw the capital that has for so long been left in banks and TDs.

This is clearly obvious in the U.S. and the crackdown of the authorities (Fed and the SEC in particular) on the movement between fiat and digital assets (the word 'crypto' really needs to be killed). However it has been poorly thought out and executed and will serve to anger the little guy even more.

It should also ne noted that Wall St's "cunning plan" to corner capital through digital assets is in full swing. The Nasdaq announcement is an example of this. Not a peep out of Pocahontas Warren and the usual cast of characters.

Nasdaq Inc. (NDAQ) is getting close to launching its crypto custody business in the second quarter of the year

https://www.msn.com/en-us/money/markets/nasdaq-readies-to-launch-crypto…

by 21Trillion | 27th Mar 23, 1:27pm 1679876867

The irony of that situation re Wall St and banks wanting to grab/control crypto capital is that crypto started with Bitcoin and the idea was to not have it in centralized custodial hands, rather self custody, private of the state and from physical theft/seizure. The masses will use something like a bank to store it until that lesson is learnt, that it was not created for that purpose.

FTX is a perfect example of why most people in crypto do not trust having their assets in other hands. If Wall St or a bank ever lose crypto assets stored in their custody, they can't just print it again to back it up. Ticking time bomb if they confidently think they can offer that service without imploding all trust in the system.

I think we have some turbulent years ahead for this. A full crackdown in the USA will not be a healthy move for the states either, with other countries widely inviting crypto users into their arms.

I honestly beleive the US has left it too late to try control the crypto space. They will never be able to fully control it, but had they taken it more seriously earlier, and introduced healthy regulation, they could've had big influence and benefited from the industry, they've left it too late.

They can actively control the on/off ramps within their own country but that is all they can control. If they chose to go against businesses working in crypto in the states, those businesses will move. It's very interesting, the SEC seems to be on a witch hunt, currently they're on CoinBase and CoinBase is going to fight it legally to the bitter end by the look.

by rastus1 | 27th Mar 23, 4:01pm 1679886079

I don't think the US, China etc will have any trouble controlling crypto - if they really wanted to. Quantum computing will sort that.

by J.C. | 27th Mar 23, 4:21pm 1679887283

Quantum computing will sort that.

Yep. And North Korea will theoretically control the Pentagon with quantum computing. Zero sum.

by rastus1 | 27th Mar 23, 4:01pm 1679886102

by Pragmatist | 27th Mar 23, 1:28pm 1679876903

With no entry barrier and long term proven track records alongside the understanding of how money works with reserve banks and govts, people will make the switch, it's just a matter of time before more younger generations are educated on this, but it's moving at a fast pace.

14 years is longterm?

by 21Trillion | 27th Mar 23, 1:34pm 1679877259

Software that hasn't faulted in 14 years and has only grown in strength and resilience, yes. In that 14 years it has also been the best perfoming asset class. Long term is different for everyone I guess. When you're in your 20's, something that has been around without fault for 14 years is decent.

By long term track records, I wasn't just speaking on crypto/stocks but also the money system. Consistent devaluation of the dollar and financial crisis occuring more and more often. I think I've witnessed "once in a lifetime" financial/banking crisis 3x in 15 years.

by J.C. | 27th Mar 23, 2:54pm 1679882062

All the financial crises have stemmed from traditional finance with institutional involvement. I know it sounds conspiratorial, but the idea that the FTX debacle was planned is not as outrageous it appears if you look at all the connections.

by 21Trillion | 27th Mar 23, 1:58pm 1679878688

yep, there is some connections there that make you wonder. I guess the good thing is, at the end of the day, self custody still hasn't changed and is only being proven as the best way to hold digital assets

by J.C. | 27th Mar 23, 1:55pm 1679878510

by MediumPangolin | 27th Mar 23, 2:16pm 1679879783

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How about we all do our bit to get these posters removed, so we can get back to civil discussion.

by J.C. | 27th Mar 23, 2:56pm 1679882175

If you are a regular reader on interest.co.nz, and concerned with the tenor of the comments as of late, can I please encourage you to raise your concerns directly with the Managing Editor of the site.

Is this related to the possible bursting of the bubble you think?

by chebbo | 27th Mar 23, 3:19pm 1679883594

I'm frankly more concerned with the number of attention-seeking commenters who use bold text, spacing, emojis and repeated characters to try and get their point across.

by Von Metternich | 27th Mar 23, 4:20pm 1679887254

I think you are some sort of bad actor. Let's look at your past posts, a large porportion of them are demanding others are censored.

by MediumPangolin | 1st Dec 22, 11:47am

@Greg Ninness, @David Chaston - isn't this exactly the kind of thing you were talking about the other day when you mentioned improving the tone of this comment section? Can we please see you put your money where your mouth is & kick these low-effort commenters to the curb?

by MediumPangolin | 18th Nov 21, 2:08pm

If Brock Landers has the sense or decency to delete his comment, then for the record he refers here to Rawiri Waititi as 'Scribble Face'.

Are you happy to provide a platform for casual racism, or are you not capable of moderating your comments section - which is it Mr Chaston? Neither is a particularly good look for you or this website.

by MediumPangolin | 3rd Sep 20, 11:52am

Excuse me, but I have to object to your using my perfectly valid criticism to further your needless ad hominem attack on this poster. He's already conceded that he was being a little hyperbolic, and retracted his statement, replacing it with a more credible assertion. In terms of time being wasted, while he appears perfectly willing to engage in adult debate, you seem to be fixated on mudslinging. May I suggest the comment section of stuff, or perhaps the herald, if you're interested in that kind of nonsense. This website aims a little higher.

You devote many of your few comments on here to tone policing people. This is one of the last uncensored news websites in New Zealand and it is why it is so popular. Go back to Reddit if you want a hugbox.

by Thats All Folks | 27th Mar 23, 8:10pm 1679901054

Nobody asked bud, take a hike.

by powerdownkiwi | 28th Mar 23, 9:18am 1679948308

I, for one, have no problem with a range of views being debated - it is a sign of a healthy society.

When folk start to urge repression, is when we need to start to worry.

Then we need to ask the simple question (as do journalists).

The question is: Why?

The base-line answer is that there are too many humans consuming a finite planet, too fast. That's why the upwelling of 'genders' all of which share one factor; they aren't about species reproduction.

And, like all cohorts, they will do anything to avoid facing unwelcome truths (like: they are a result of overshoot). Thus all cohorts (mainstream economic thinkers being just one such) attempt to shut 'others' down. It is 'shutting down', which is the original societal sin.

by KH | 27th Mar 23, 2:53pm 1679881997

It's interest rates. Three years ago I had $150K in an ordinary account. Earning no interest. Could not be faffed chasing interest at the then minimal rate.

Now, at five percent plus in the six month range, it's worth the bother and I am bothering.

by 21Trillion | 27th Mar 23, 2:58pm 1679882336

is it? You're still losing against inflation

by DTRH | 27th Mar 23, 3:23pm 1679883820

The people who were pull into buying a rental property with savings or worse using paper value of own living property as equity will now be looking at both houses losing 20% of value so far and when refinancing paying a whole lot more for something that will not gain value for years.5% for chilling is not bad even if inflation is at 7%

by wingman | 2nd Apr 23, 8:26am 1680380784

Exactly.....almost every other asset has taken a beating, except term deposit rates.

by KH | 28th Mar 23, 10:17am 1679951851

Yes indeed. Am losing against inflation. But inflation rate minus five percent is better than inflation rate minus zero point five percent.

by Simon | 27th Mar 23, 3:13pm 1679883222

Eventually, REAL assets, that are tangible and cannot be digitally printed on-mass and that provide tangible value will always end up jumping higher in value as fiat currency gets de-based (high inflation).

Some might be celebrating falling real estate prices at present but like a coiled spring getting pressed more and more it only makes for more crazy boom periods as soon as sentiment changes again and ever greater amounts of worthless fiat currency again chase the very limited amount of real estate (while new builds halt and only come on when cost increases to make them justify developing again - 5 years away)

by DTRH | 27th Mar 23, 3:34pm 1679884451

Like you said 5 years until the spring booms from being under pressure so making 5% on the million dollars in the bank would give you 50k a year to spend and who knows the spring could be broken.

by Simon | 27th Mar 23, 4:23pm 1679887396

No. You use the flat down period to buy undervalue and reno - waiting until the sentiment changes means you're too late and will be paying 100, 200k more than if buy during this down period. 50k in the bank, before tax - 33k - I can fit out ford transits making them into campers to sell for a 33k untaxed profit in a week or 2 if that sort of coin excited me

by Gold Kiwi | 27th Mar 23, 8:49pm 1679903364

How would that be untaxed profit? Converting vans into campers sounds like taxable income to me.

by John2 | 27th Mar 23, 9:58pm 1679907497

Took 5 yrs in GFC.

Its supply vs demand, we were short of 20K houses then. This time there is an oversupply in some regions.

And I dont think we will beallowing 100k migrants ant time soon.

Supply and demand until it balances out until the next cycle which could be a few years away

by powerdownkiwi | 28th Mar 23, 9:23am 1679948638

Do some homework on the Limits to Growth.

This is a one-off reversal globally, and due to physics.

We've HAD that discussion here; so sad to see folk coming in with JFK-era thinking still.

https://www.youtube.com/watch?v=oJJ2GnSRX14

take the time; it's worth every minute. Might perhaps change your whole perception, will certainly change some of it...

by KH | 28th Mar 23, 10:23am 1679952184

Simon. ".......like a coiled spring getting pressed more and more it only makes for more crazy boom periods......"

Sounds like you got an emotional adrenalin hit out of the recent boom -. now seeking more.

But remember the market is not as reliable for your emotions as is cocaine

by Contrarian | 28th Mar 23, 1:01pm 1679961712

In this age of internet and instant information (right or wrong), mass sentiments moved by SM, Wall street and Central Banks scratching each others' backs, the average Joe with some money cannot afford to take any long term (5 years and more) view of anything financial. Past events and current developments (coming from the left and right, back and front fields) are increasing the uncertainty multi-fold about financial planning, investment, realignment etc. A fair bit of luck is involved in any selection of where to put the surplus today. Anything can sour, any day. Generalisations are not useful. Statistics tells the past story, can't really be a guide for the future, not now anyway. With the caveat, Lies, Damn Lies and Statistica (Was it Mark Twain ?)