As regular readers will know, we are looking to build an investment portfolio and are therefore becoming interested in the science and practice of storing money – that is, investing. So let me dream for a little, imagine that we have already amassed a stash and want to put it away safely and securely. While there are all sorts of esoteric investment opportunities around, I want to consider the more traditional and trusted approaches and ask the question: ‘Just where should we store our hard-earned loot and in what currency? ‘.
It is the most unfortunate time to do this with such low-interest rates. Funding for Lending, where the Bank of England injects money into the real economy, hasn’t really worked as current mortgage and debt consolidation lending figures show. Now there is talk of negative interest rates to force banks to lend to the (more risky) business and consumers. That may be fine for the companies but think about what that will do for savings rates.
The problem is particularly acute for people who have saved all their lives and now want to store their money somewhere safe. That will be a problem that we would like to have of course, but it is a severe problem for people who were, until recent events, expecting to get 5% or so on their savings. The difference between an expected income of 5% and 1% is – factor of 5!
Would you enjoy your income reduced by such an amount? It really isn’t funny. If you have worked hard and managed to save half a million pounds (or realised it from the sale of a business or house) which would have yielded a comfortable cushion of £25,000 a year or more pre-crash, and you discover that the same money now yields only £5,000, this is serious poverty. It is also very depressing at a time when people are hoping to relax in their retirement, particularly as having that cash would preclude a lot of benefits to which people may be entitled on the consequent income.
But with the globalisation of finance, the world is our oyster. Do not be frightened of using offshore banking – it is in the UK’s DNA! Assume for the moment that we had our famous stash and we want to put it away for up to 5 years that is safe and that offers a real return. One way to do this would be to invest in fixed-rate bonds offshore. Of course, it is important to realise that having bought the bond, we can’t withdraw any of it before the term has ended, which may be a year or 5 years. The longer we commit the money, the higher interest rate we can achieve so we won’t put our rainy-day money there- these funds are certainly not liquid!
Then, as we will almost certainly be investing overseas, we will need to be able to move money from one currency to another which really means using an international bank that understands the issues. Or we can have proper accounts in multiple currencies, same solution.
The UK economy remains sluggish, and we are threatened with yet another official recession – which would make this recession the longest in memory. More quantitative easing is likely to happen, and the sterling will inevitably depreciate a little – or a lot. Japan has adopted the same policy in order to kick-start the Japanese economy after more than 20 sluggish years. I am not convinced that the worst is over in the Eurozone – all may be quiet at the moment, but there are major problems ahead. Like Nero, the ECB fiddles while the Euro burns, or at least is smouldering – see what happened in Italy last week. And the Federal Reserve has clearly stated that it won’t worry about inflation until unemployment in the US reduces (which seems an amazingly sensible policy). So it’s a race to the bottom and being able to move money from one currency to another by international currency transfer becomes very important.
Don’t we live in interesting times?
I agree these are definitely interesting times, to say the least. I had read the other day about the proposed negative rates. Talk about potential moral hazard! It really does cause someone to try and find creative, yet safe, ways to make money off of their money.
Negative interest rates are designed to stop banks depositing with the central bank (which is by definition risk-free in a sovereign currency) and so they will have to look around for somewhere else to lend it as leaving it in their own account does not earn any money at all.
But it doesn’t mean that businesses or individuals will be able to borrow at negative interest rates! No, the banks will be happy to charge as much as they possibly can and that will certainly be at a positive interest rate!
The big question is whether, or by how much, negative interest rates would depress savings rates which are already low enough. The problem in the UK is that despite there being money around and despite the governments feeble attempts, banks are still not lending for investment. The Funding for Lending Scheme has had only limited success in lowering mortgage rates but has not enabled business in particular to access money. Some businesses are very cash-rich but are similarly not prepared to take a risk with the all-important SME sector.
This is what you get when you crucify the economy by cuts everywhere. It isn’t the same as keeping house.
If your employment is safe, I would want my money working for me. What is your risk tolerance? Since I expect to live at least 30 years in retirement, I am concerned with growing my nest egg. I invest in the stock market as a reasonable to solution.
Sensible investment is the best option but many people are still wary of the stock market, whether you buy stock directly or via funds. Hence some people want to keep their money as money.
Interesting = yes, interest rate wise = definitely not.
Yup – we are way outside conventional economics here. In the long run this crisis will provide a lot of hard data which will keep economists exercised for generations to come. But the low interest rates do present a big problem particularly for retired people.
I think the reductions in income are a joke to be honest. Especially as prices are coming down, although many a shop likes to claim they are. The price of a pint where I live now is almost an hours wage. Ouch.
Are you arguing that deflation and recession is a good thing? Prices may come down (they are not in the UK anyway as our inflation is still 2.7% or so and more for basics) and incomes may reduce too but many people and businesses have fixed overheads – rent, heating, wages etc – and this crucifies business in particular.
The ultimate way out of the mess is growth and/or controlled inflation because then wage increases can be differentiated in favour of the work needed and fixed costs are reduced in real terms.
But no politician will admit this, particularly in Germany of course where Weimar memories still run deep. Hence the problems particularly in the Eurozone.
I move currencies around all the time, but am trying not to touch my pounds at the moment, hoping for better times. I did a good move around the London olympics though :). If you have properties/travel overseas a lot it makes sense, but with the high volatility if it is just to invest you’d rather be in for the long term.
The pound is bound to decrease a bit or even more if the Bank of England carries on printing money in some way. The big question is whether other currencies will follow suit, in which case the decrease may not be so big. The issue has come to be whether the market has any confidence in the UK government and sad to say I think it is losing faith. In my opinion the original faith was misplaced anyway – the excuse that the Eurozone’s problems were unexpected does not really hold water as such major disturbances as the collapse of Lehmans or the near-collapse of RBS were bound to have enormous knock-on effects and the structure of the Euro is an accident waiting to happen as had been predicted at some stage by a number of commentators. I recall Oscar La Fontaine scaring me in 1998 talking about fiscal union being the logical consequence of the Euro. He was right of course but it hasn’t happened for political reasons and probably never will.
We needed stimulus and growth since 2008 but in the last 3 years have had exactly the opposite on some macho austerity ticket. There is no real reason to lose the AAA rating – it makes no sense in a sovereign currency – but that is a reflection of the way the pound is seen. The market generally over-reacts so a new scare in the Eurozone (where there are elections all the time) may well give you the opportunity to move into Euros with profit at some stage. Or if you choose to leave your money in sterling at least it will be OK for your visits to the UK!
Fun to observe but people are getting hurt.