Tuesday, June 21, 2016

The End of Money as we know it

Mervyn King: The End of Alchemy

Subtitle: The End of Savings as we know it

Last week, in a further attempt to simplify Marcus' life I have began reconciling, or well actually closing Bank Accounts.  It's like this:

- In the old days you had a Current or checking account
- Then perhaps a Savings or Money Market account

- But today, thanks to Money Printing, Zero and and in some cases NIRP Central Bank Interest rates, deposit account interest is close to zero.

How close?

- Bank account of 1000 CHF  (about 1000 USD)
- Interest per year 0.1 CHF  (10 cents!!)

Multiply this up:  for a Deposit of 10,000,000  [10 million CHF aka 10 million dollars] , interest would be 1000 CHF, in other words not enough to live on, for 1 year.

So if the banks would lend me money on the same basis that they are crediting me,    I could

- borrow 10M CHF
- use 100K CHF per year to live on
- pay my 1000CHF interest to them to keep it legal and nice and tidy
- leaves me 99K per year of usable income
- This would last me 100 years.  Surely enough.

Indeed,   Are you F*****ing kidding me?

- Yes, the banks won't lend me millions of CHF
- However Central Banks worldwide  (well Japan, European Central Bank,  Bank of England, Federal Reserve) are creating money, ie. inflating the money supply like confetti.

I was relieved to hear that India under the control of Raghuram Rajan has not caved to such short term prosper, long term, catastrophic mechanism.  See here

In view of the ultimately not only counterproductive but unworkable idea of printing money and saddling future generations with debt, one could implement this idea personally.  Well, in fact, you're just mirroring the Government's monetary strategy right ...

Death with Debt Strategy
Moral and Ethical considerations aside  (i.e. the follow is knowingly leaving the world in a shittier place than when you entered)

- You knowingly take on huge debt
- At very low to almost zero Interest
- You service the debt and don't pay it off
- You get old, and die with the debt
- The debtors take the hit

Youth with Debt Strategy
Moral and Ethical considerations aside (i.e. your policy is flawed,  unplanned, illogical, arguably burdening others, but you have to survive)

- You take on large by your metrics debt as a student  (tuition and accommodation costs)
- You are unable to save for a Mortgage at today's House Prices
- You give up on the housing market
- You believe in the new generation of social services like Uber, or airbnb.  You don't invest in your own car for example.
- You don't take out a pension or save for retirement, because your savings are so small, there is just no point
- You believe that eventually somebody will sort it out

Is there an answer then?

My sagely advice would be

- Take the 30 minutes of your life to watch the  above YouTube video please

- Personally I will buy and read/ listen to Melvyn's book
- There are no simple answers
- QE (Money printing),  Government Bank bond purchases and other monetary and fiscal tampering mechanisms have clearly failed.
- Such Mechanism work only in the short term, and only if everybody else is not doing it too, in which case even the short term effects are nullified.
- Luckily for Marcus and Agata our 2 most invested countries  (UK and Switzerland) are not in the Euro, the Euro currency is not sustainable even in the medium term.
- If you have only Euro investments, including Pension Funds, consider diversifying them.  You have time, say an 18 month horizon.  Invest elsewhere.