To inflate or not to inflate (1): Is money plus credit in the Dutch economy currently contracting?

With inflation, it is always a question how you look at it and which method of measuring you use. Especially Mish (globaleconomicanalysis.blogspot.com) has written some very good articles on this topic and I’m happy to refer to him, as he is one of the best bloggers in business.

Just like Mish, I am convinced that we are currently in a deflatory situation in the world, as a consequence of a worldwide contraction of available credit. And although the Fed has printed huge amounts of paper money during the last three years (QE1 + 2), the tightening of credit was such a strong deflatory force that the Fed’s printing press hardly had effect.

The same has happened in The Netherlands; since the end of 2008, the amount of available credit has tightened, due to the banks’ stricter lending rules for companies as well as normal citizens. This is one of the causes for the fact that the housing market is still locked tight and consumption is lagging.

Even the circumstance that the interest on savings accounts was historically (and ridiculously) low, didn’t spur people to consume their savings money, afraid as they were that worse times were ahead. In my previous article “Macro-economic Outlook for The Netherlands 2012”, it becomes clear that the Dutch people were probably right in this expectation.

And now there is an extra deflationary force working: increasing interest rates on savings. Although most Dutch citizens did already save lots of money during the last years, the banks still need more money currently.

The new and much stronger capital demands of Basel III are gaining momentum and force the banks (finally) to increase the interest rates on savings accounts: away from the pathetic 2.2% in average that was paid previously on savings accounts. The Dutch Business News Radio station BNR (www.bnr.nl) reports on this topic. Here are the pertinent snips:

Banks increase interest on savings (link in Dutch)

To attract more savings money, the banks massively increase their interest rates on savings, according to the Dutch comparison site for interest on savings, www.spaarrente.nl. The cause are the stricter capital demands for banks.

“From 2013, the rules and measures of the Basel III agreement are deployed in The Netherlands. This international bank agreement states that the banks must maintain large financial buffers for economic headwinds. To create these buffers, banks need to attract savings money. The banks desperately need their savers’ money. In exchange, they are willing to pay higher interest”, according to Amanda Bulthuis of Spaarrente.nl.

Bulthuis expects that the interest on savings will further rise this year. “We view that more and more banks are raising their interest rates. This increases the competition for the savers’ money”. According to her, this will force banks to even further increase their interest rates.”Even banks that didn’t raise their interest rates yet, can’t stay behind”.

And to give you an impression: the following data is coming from the mentioned site spaarrente.nl. Unfortunately, these are the only banks on the site, where the previous rates are actually mentioned, but there were also three other banks that increased their interest rates. And, I expect that many more banks will increase their interest rates by 0.5% or more.

Bank or insurance company	New interest rate on savings	Previous interest rate
Delta Lloyd	2.9%	2.3%
Ohra	2.9%	2.3%

There are lots of interest rates on this site for all kinds of savings products, so it might be worth your while to take a look at www.spaarrente.nl:  if you are a Dutch citizen, live close to The Netherlands or just suffer from very low interest on your savings account.

I am very happy that the banks are finally increasing the pathetic interest rates on savings accounts. You must not forget that with a projected inflation of 2% for 2012 (measured by the Dutch Central Bureau of Statistics (http://www.cbs.nl/), using a basket of goods and services), the real interest is only 0.9%. And that is still pathetic.

You will notice that I stated that The Netherlands is still in a deflatory situation and on the other hand use the official projected inflation rate of the Dutch government.

You are right, but being in an deflatory situation doesn’t mean that the goods that you purchase (hence: the goods in the CBS basket) won’t become more expensive. This confusion makes the inflation vs deflation discussion often very hard.

One thing is for sure: the rising interest rates on savings accounts will enhance deflation in The Netherlands, as even more money is withdrawn from sources, available for consumption and investments.

This is a double whammy:

·    Due to Basel III, banks will even more hesitate with lending money to corporate investors and to private citizens for financing and consumption purposes in order not to risk their capitalization levels.

·    Due to Basel III, banks will borrow more money from private savers.

Expect the economic growth for 2012 to be near to or even under zero, due to these deflationary forces working their way up in the Dutch economy.

And please, don't see this mandatorily as a bad omen: The path of debt destruction is the only path that can lead to future sustainable growth. And it seems that The Netherlands is now also walking this path.