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When saving is bad

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“Never spend money before you have it.” Wise words from fiscal conservative and former US President Thomas Jefferson. It isn’t a new concept. Proverbs on financial wisdom probably started to pop up the day after someone borrowed money and wasn’t able to repay it. However, in the new paradigm of low and even negative interest rates, it is not a rule to live by.

 

Allianz SE
Munich, Oct 06, 2016

Allianz-Michael Heise, chief economist at Allianz SE: “In times of negative interest rates, savers have to adjust their savings behavior”

Michael Heise, chief economist at Allianz SE: “In times of negative interest rates, savers have to adjust their savings behavior”

In this post-financial-crisis world of seemingly quixotic monetary policies, the idea is that low interest rates will encourage companies to invest and consumers to spend now rather later, no matter what they need. It is not a logic Germans have been able to embrace, so findings of the latest Allianz Global Wealth Report.
 
“Only a few households seem to be succumbing to the temptation of ultra-low loan rates and embarking on a credit-fueled spending spree,” says Michael Heise, chief economist at Allianz SE. “The majority of households are acting in an economically very sensible manner – defying the intentions of central bankers who are trying to pump up demand via aggressive rate cuts.”
 
The same interest rate cuts that make borrowing relatively painless are lethal when it comes to bank savings. Germans are fiscal conservatives at heart. Risk adverse, they prefer to put their assets in insurance policies and, above all, bank deposits rather than the stock market. Over the last four years, Germans parked roughly 40 percent of their financial assets at the bank. But at low and even negative real interest rates, the returns have been about as good as hiding their money under the mattress.
 
According to model estimations, this investment behavior actually cost German savers 200 billion euros. If they had reduced their share of bank deposits by just 10 percent and reinvested the money in equal parts into listed shares and mutual funds, the annual rate of return would have been almost one percentage point higher.
 
“In times of extreme monetary policy with negative interest rates, savers have to adjust their savings behavior,” says Heise. “Old certainties no longer apply. Supposedly safe assets such as German government bonds are no longer ‘safe’; they actually jeopardize wealth building. Supposedly risky investments, on the other hand, promise long-term returns. It is high time for Germans to rethink their savings strategy.”

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Dr. Lorenz Weimann
Allianz SE
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