Tuesday, 20 September 2011

Enough stuff! What to do with this spare money?

At some point in time, I hope that you look around you at all the stuff in your life and you think to yourself "seriously, I've got enough stuff! I don't need anything more". Maybe you don't even have enough room in your house for more stuff! Not only do you no longer need anything, but you physically can't take any more.

What a great situation!

Perhaps you should blow it all on a holiday instead of buying more stuff! Holidays don't take up a lot of space, and I'm sure you could use a rest after all this hard work you've been doing if you've got spare money that you're wondering what to do with it. But wait. Hmmm, if you spend all your money on a holiday or something like that, it's gone. That's not storing your purchasing power for when you'll need it some day in the future. That's using it up already. Better think again I guess...

So then you're thinking "OK, but I still have money that I want to save somehow or another for later use, but you're telling me that keeping it in the bank isn't without risk of loss". Well, yes and no.

As we previously discussed, because of the nature of today's money system, you are never at serious risk of losing all your savings in the bank. You may not get them all out of the bank instantly if you want to get it out during a panic, but you will eventually get all of your cash back from the bank. The Central Bank will ensure that the banks eventually have whatever amount of money is required to pay back all their depositors. Politics and the possibility for Quantitative Easing will see to it for you.

The problem is that, as we also previously discussed, the cash you get back after it has been Quantitatively Eased into existence for you will likely no longer buy what it used to. You have the same "nominal" number of Pounds, Euros, Dollars, etc — but you won't find you can buy as many things as you could before. In "real" terms (in terms of the world of real things you might wish to buy) there is a strong risk that your purchasing power will have been reduced by the time you wish to buy your stuff in the future.

So, we can see that, nominally, you are not at risk by keeping your money in the bank. But in real terms, you are at risk of lost purchasing power. The whole point of the exercise in saving was that you would put off buying stuff until later, the goal of your saving is to store purchasing power into the future, when you will wish to spend it. So, it doesn't seem very likely that you'll find a reduction in your purchasing power to be an acceptable risk, given what you know about the future of money in a world of widespread loan failures and Quantitative Easing to repair the damage.

Your question then is likely "how can I store my purchasing power, without buying masses more stuff, most of it useless to me or I would already know I want it now, and I can't possibly keep much more in my house because it's already rammed full?" You're pretty good at asking good questions aren't you? It's nice working with you.

Given that 'money' is something of ever-expanding quantity and ever-diminishing value, you are looking to avoid keeping all your savings in money. You are looking for something else that you can buy with part of your money that (1) won't go rotten, (2) there is always a willing buyer for, and (3) doesn't go down in value, depreciate, the older it gets — like, say, a car or a fridge or any other "consumer item" like that.You want something that you can rely on to retain its real purchasing power, in the face of a world where money is gradually becoming worth less and less over time. To offset the loss of purchasing power in your money savings.

Many people thought that buying houses was the best plan, and that's what pushed up house prices to unaffordable levels. Well, we can all see with hindsight that houses weren't, after all, the perfect item to purchase if you are looking to protect your purchasing power. For one thing, you can't always guarantee there will be somebody willing to buy your house from you at what you consider to be a fair price. I bet you've noticed at least one house in your area that has had a For Sale sign outside for months on end, right? For another thing, houses deteriorate and need money spent on maintaining them all the time. For another you are probably going to have to fork over a fortune in Council Tax while you own it, or if not you then your tenant will — a tenant that won't look after the house like an owner would by the way, so again you can expect some maintenance bills. Then you're going to get a nice tax bill for almost half of whatever amount of nominal money you "make" when you sell the house (unless you bought it to live in it yourself). Next we have to consider that houses are big and expensive things, and you can't just break off a chunk to sell when you need to buy something; you're going to have to sell the whole house. It may also not have escaped your attention, that lots of people don't like it when the houses they wanted to buy are too expensive for them. They need houses! By this point in time, most people have come to appreciate that houses are not the perfect investment after all. So I won't waste any more of your time here dissing houses-as-investments.

So you are looking for something from the real world, that doesn't go rotten over a long period of time, that isn't something large that you can't sell off little by little as and when you need to. This is how, in a global tradition built naturally across thousands of years of human experience, precious metals have come to fill the role of first choice stores of value. Specifically, gold. But also, to a somewhat lesser extent, silver.

If you have gold, you can chip off a little bit as and when you need to, and you will always find there is a world-wide market where there is always someone looking to buy whatever you have got. These metals never rot. One piece is interchangeable for any other of the same weight (it is 'fungible'). You can take any gold you have into a high street jewellers, or Cash Converters, or a pawnbrokers, and walk out with cash minutes later. That is why gold is the prime thing you can buy and hold with confidence, and you have been able to do so for thousands of years.

Gold is quite unlike, say, a diamond — you can't chip off a bit of diamond to sell, at least not without ruining it and making the whole lot worthless. And you can't take a diamond into any high street jewellers and walk out with cash either, because there is not a large and reliable market for diamonds. They cost you a fortune, and will last forever. But you'll discover they're not worth so much when you want to sell them and nobody's buying.

Another great thing about gold, is that it is relatively expensive by weight — so it takes up very little space in your house! In fact, the more expensive it becomes, the better it is for everybody. People who already have it, great they love it when it becomes worth more. People who are looking to store value in the future but have an already-full house, great they don't have to make a lot of space for their extra gold. People who don't have any already and aren't looking to buy any, well great whatever as far as they're concerned — it makes no difference to them either way.

I don't care who you are. I can say with confidence: gold is just the thing for you if you are looking to entrust some part of your long term savings to something other than your bank.

Monday, 19 September 2011

What does Quantitative Easing actually mean?

You've by now most likely heard the term "Quantitative Easing" about, oooooh I dunno... maybe a million times? On the tele and in the papers, it's everywhere these days!

The first few times you heard it maybe you thought to yourself "OK, but what the hell does it actually mean?", and then after a while, since nobody in a position of authority that you feel like you ought to take them seriously seems to want to tell you what it really means ... you probably just started thinking "what-ev-er!" and switching off. I don't blame you, and you likely don't need me to tell you you're very much not alone!

To cut to the chase, it really is as simple as the name might suggest. It means they are creating new 'money'. They are "easing" the "quantity" of money in the financial system. Making money easier to get hold of, so that the economy isn't thrust into a depression like the 1930's, or perhaps more accurately in today's world, a prolonged recession like the last twenty years plus (and still counting) in Japan.

Back in the day, when money meant bank notes and coins in people's wallets, shoeboxes under the bed, and those massive whiskey bottles full of coins that your grandad used to have beside the sofa in the lounge, it would have been literally translated as "printing money". The Central Bankers would have been up all night and through the weekend just trying to print as much money as they thought they could get away with. But today most money isn't cash, it's electronic information within the banking system. Electronic digits on a computer hard disk somewhere. They no longer have to employ people into the dark hours and through the weekend, and especially on bank holidays, feeding paper and ink into the printing presses. No, printing actual, physical bank notes is so last century! Nowadays they simply type the number of new Pounds (or Dollars, Euros, etc) that they want to create, into the Central Bank's computer, and presto! There is more money to go around. It's done before you've even got the kettle boiled for your tea break. In the immortal words of Tommy Cooper: Just like that!

Wonderful isn't it, this modern world of ours? So civilised. At the stroke of a keyboard, the Bank of England (and other Central Banks around the world) can create more of that lovely stuff you need to buy things every day and spend most of your time working to earn, or more importantly to pay back the loan of the money you previously borrowed to, say, buy your house perhaps. Or your car. Or that nice holiday you had last year. Or that natty pair of jeans and designer shoes that you put on the credit card and will, y'know, get around to paying off sometime soon. Yeah, soon... OK, maybe never then eh?

You have to work for money, but the people who create the money you must work for, type numbers into their computer. It's a tough job, but someone's got to do it, right? The really hard part is stopping themselves from going mad at it and creating so much of this money that people start to realise ... Hey! This money is no good! What am I doing with all this money in my bank account and my personal pension? Why haven't I got a lot of stuff, real-world and tangible things, instead of this mirage? Why am I working so hard to pay back these loans and mortgages and whatnot that I've accumulated over the years, when someone else can just make it up out of nowhere!? I reckon you'd have a pretty good point.

Rich people don't have money in the bank. They have debts, and they have stuff. They understand that money is no good. So they borrow it expecting that it will be easier to pay back later. Stuff will have become more expensive, just because there is a lot more money chasing after it by then, so if necessary they'll just sell their stuff to payback the debts. Simples. But they'll have the stuff at today's prices in the meantime... and they'll probably wind up keeping it.

This was how houses became so unaffordable! Many people took on money debts to bet on house prices rising forever and making the debts easier and easier to repay, which did kinda look almost like it might the case... until it clearly wasn't any more and people started not just losing money, but finding they couldn't even pay off the mortgage loans after selling the houses. Oh dear! But that's a whole different story and, thankfully, I'm not about to take you there in this post, because I like to keep focused. Call me old fashioned.

Anyway, moving swiftly on. You're probably about now thinking something like "OK, so QE = printing money, I get it and you can stop labouring the point now... but why are we only recently hearing this term bandied about?". That's a great question! I'm glad you asked. But you'll need to read yet another article to find out the other half of the Quantitative Easing story. Sorry about that! Why not stop and relax with a song before you click that link and continue with this voyage of discovery?

A thing for me

In the real world around you, there are only so many things available. In the pretend world of money, there are an unlimited number of claims to those real things.

If we could somehow scrape together a comprehensive list of all the things in the world that anyone could possibly buy, add up the total value of them all, we'd establish that a very large amount of money would be required for all those things to be bought.

But not as big a number as the total of all the claims (money) already in the world. (And there's still plenty more money coming from where that all came from!)

How can all these claims for stuff spread out across the account holdings of people around the world (not even considering the additional claims that are coming into the system all the time) provide all of those claim-holders with the stuff they will wish to purchase at some point in the future (why else would they hold the claims, rather than spend them on something right now?), given there are already so many more claims than goods available?

What if you suddenly came to realise that your current savings are not really worth what they say they are? Because, clearly, we can't all buy what we think we can today. There is too much money and not enough stuff.

You understand this at some level as of today, if you didn't consciously know before. But what if everyone else realises too? Will you beat them to spend your money on stuff, before all the stuff runs out and your money no longer buys you anything? Not at today's kind of prices anyway.

No more claims for me, a thing for me please!