By real savers, I mean those who keep their savings in private, free market investments such as stocks, bonds, commodities, or even save by buying stuff they plan to consume later.

Fake savers are people or organisations that keep their savings as cash.

In normal times, when central banks are sufficiently accommodative, there are almost no fake savers out there. This is because even savings kept as cash are mostly kept in banks and these banks usually lend most of them out on their clients’ behalf.

But sometimes, when central banks are not sufficiently accommodative, maybe interest rates are not sufficiently low and can’t be lower because they have hit the nominal 0% floor and inflation is not sufficiently high, banks stop lending their stock of money and the economy ends up with an accumulation as excess reserves. The amount of money held by people, banks and businesses then becomes disconnected from the amount of things out there that are or will be available to be bought. The money multiplier drops. Cash becomes little more than idle valueless paper to the economy.

Savings should be somehow tied to stuff or production of stuff if we want them to be redeemable. After all, you can’t beat the laws of conservation of matter and energy. In order for people to buy things, these things have to exist, they have to have been produced. There are many ways to tie savings to real consumables.

Buying stuff that will be needed later or similarly, investing in commodities is one of the most concrete example of saving, but not often do these have the highest returns because of storage costs, insurance, obsolescence etc.

Buying stocks means financing and buying shares of companies that produce or will produce stuff. They also have an obvious link to production albeit with somewhat more uncertainty in the capacity of producing the right stuff at the right time.

A bond is a loan, a promise from someone or some organisation to produce in the future and sell this production and pay back the loan. How closely this is actually tied to production depends on the quality of the loan, on whether the borrower can be trusted to produce value and repay the loan. It starts being a bit of a stretch when it comes to government loans where the repayment happen through taxes, you have to trust that the government can sustain the conditions where production is high enough that taxes cover borrowing costs and government services. Government bonds as an aggregate store of value, can become uncertain if large groups of people are going to want to spend their saving and stop lending to government at the same time in the future. The government might have to increase taxes to pay for lots of people to redeem their bonds. A society lending too much to its government can be seen as lending to itself. However, if the money is relatively well spent by the government, it can increase production capacity and the loans can pay themselves, especially if the government is forward looking in its spending and invests things that create long term value.

Then there is money. Currencies were created to make transactions and contract negotiations easy and more predictable and prevent us from having to resort to things like barter. To meet this goal, money has to act as an artificial store of value. Somewhat like a zero interest, no term length bond, it is a tradable promise from others to provide some of their wealth in exchange. The trouble is, money can be accumulated on the aggregate, economy wide, without anyone explicitly promising to produce stuff to trade for it.

Money has no intrinsic value in itself and when central banks ration it so that it artificially stays too valuable, it can make it desirable enough that it displaces investment in private market stores of value.

When people and banks are incentivized to invest in government fiat instead of the real economy, it becomes a subsidy to the act of removing savings from real investments and parking them in economic inactivity. This jams the private markets while allowing for a buildup of illusory savings. Instead of additional accumulation of wealth being productive and getting positive or slightly negative returns, it gets near -100% returns for the economy over the period that it is parked.

It is the difference between taking your money and saying to the next generation here, take it and use it to buy some tools, build some buildings, work and give me some of the product of this work in exchange and instead saying, I will hold to these pieces of paper as a claim on your future wealth but won't help finance the tools and infrastructure needed to generate this wealth, and if, even without proper tools, you manage to bootstrap and create new wealth by yourself, I will use my overvalued paper to get some of it at a discount. Too many savings become just implicit claims or promises from people who have not explicitly made any promise and where no one has made the necessary investment to be in a position to fulfill these promises.

All this idle money accumulating without production to back it up means it will be difficult in the future to spend it without pushing prices up. Idle money that starts chasing sparse goods is a risk of spikes in inflation.

However, inflation doesn’t necessarily happen. Even if large sums of money accelerating can make prices difficult to control, central banks have powerful tools to control them. The only problem is that they may imply painful corrective high interest rates or a generally restrictive monetary stance which comes with downward price corrections of the real kinds of savings and upwards pressure on taxes.

Central banks have two choices when a stock of idle excess money starts moving. They can let prices correct upwards, devaluing cash savings (which were not backed by production anyways) or they can, and this is usually their stated actual goal, maintain the illusion and instead use a tight monetary stance to devalue the savings of those who invested in the real economy. That is, even though the value was generated by those investing in private stores of value, those saving in cash which created little value, get to keep their artificially inflated claims over other people’s wealth.

In order to make money keep 98% of its real value every year, often making it, on a risk adjusted basis, an overvalued store of value compared to private market alternatives, central banks will sometimes have to effectively transfer the wealth of those who saved in the real economy to those who saved in idle cash.

Central banks should not have to make that choice. Such a situation can be prevented if they stimulate enough and for example, don’t hesitate to temporarily raise their inflation targets when unemployment starts rising, preventing cash from accumulating idly (while putting people back to work). Inflation overshooting a little, early in a recession, prevents more inflation later by creating more value through investment and people’s work and preventing the cash to real value ratio from getting out of line. If the stimulus is applied hard and early, you need much less of it overall.

And really all that is needed is for central banks to state credible intentions to let prices correct upwards as soon as they can for them to correct almost immediately because knowing money will get devalued sooner or later, people and banks will store their savings in real investments instead.

There is no reason for people to prefer an artificially inflated intrinsically valueless store of value. Even if they get a slightly better option for some of their savings, all their other options for accumulating wealth will get severely damaged.

It seems that sometimes people see negative returns as unnatural aberrations. This might be because of the fact that the 20th century was one of unprecedented technological and demographic growth which made low risk positive returns easy to find.

The law of thermodynamics tells us that most things decay over time unless you input work and energy into them. Widely available low risk positive real return investments may be a thing of the past. We should not let overvalued money price out the type of investment that may be emerging as a crucial part of the savings market.

We often hear economic debates where the idea of people not saving enough is pitted against people saving too much. This is a false dichotomy. It is possible to spend and save at the same time. If I buy something that I will need later and don’t consume it now, I am buying and saving at the same time. If I invest in a company so they can build a new factory to raise production later, I am buying a factory, employing engineers and builders and amassing capital at the same time. If people do it because of higher than normal inflation and they may be on average only getting something like a real minus 5% returns instead of a fictitious minus 2%, but they are really raising average wealth creation from almost 0% to near 95% of the value of excess dollars that would have stayed idle otherwise.

One of monetary policy’s main function can ultimately be seen as making people’s savings flow all the way to the real economy. The point of increasing demand through inflation is not to hurt savers, it is to help them save in things that are real and that won’t result in their wealth being devalued later.

The free-market advocates out there who often seem afraid of inflation should understand that propping up intrinsically valueless cash so that it artificially keeps its value better than private stores of value is the government interfering, market distorting option. Letting money consistently devalue enough to be closer to its intrinsic value of nothing, and allowing private stores of value such as stocks, bonds, commodities etc. to take its place is the free-market way.

Money doesn’t have intrinsic value and it shouldn’t be made to seem like it is too valuable by governments or central banks. It should be made valuable and stable enough to allow for low friction, low cost transactions and contracts and not more.