Income-seekers beat frozen bank rates

By Ian Cowie Your Money 


Last updated: February 7th, 2012

Base rates are still frozen - despite rapid inflation

Nearly three years after base rates were frozen at a historic low of 0.5pc,despite inflation running about 10 times that level, savers and investors are waking up to this slow-motion bank robbery – and pouring money into share and bond-based funds to preserve its real value or purchasing power.

Equity income and corporate bond funds dominated the best-selling individual savings accounts (Isas) last month, according to Skandia Investments; one of the biggest Isa platform providers. Nor is Skandia talking its own book. Rival managers M&G and Invesco Perpetual took seven of the top 10 slots.

With the best easy access deposit accounts paying 2.5pc before tax, what’s not to like about shares yielding 3.3pc net of basic rate tax – to take the FTSE 100 index of Britain’s biggest blue chips as a benchmark – or corporate bonds yielding even more?

It ain’t rocket science. Other sources, including Capita – Britain’s biggest share registrars – have been reporting rising investment by individuals for months now. Shares not only offer a higher initial yield to income-seekers but also the prospect of capital gains in future, if the current recovery in stock markets continues.

True, there is no guarantee that you will get your money back from investments in shares or corporate bonds; the latter being IOUs issued by big companies. In both cases, stock market setbacks may mean you get back less than you invest. But unit and investment trusts provide a convenient and effective way to diminish the risk inherent in stock market investment by diversification.

While the Government adheres to its unspoken policy of running negative real interest rates to inflate away its debts, the only certainty bank and building society deposits offer to long term savers is the certainty of becoming poorer slowly. Yorkshire Building Society reckonsthe average savings account lost nearly £2,500 of its real value over the last decade.

Perhaps the big surprise is that it took so long for people to wake up to what is going on. Most bank and building society deposits’ apparent security is a sham over anything other than the short-term while they fail to match the rate at which inflation is eroding what these savings can buy.

http://blogs.telegraph.co.uk/finance/ianmcowie/100014666/income-seekers-beat-frozen-bank-rates/

Warren Buffett - Best Hedge Against Inflation

Redefining Risk. Realistic definition of Risk.

Redefining Risk

Risk was the chance that you might not meet your long-term investment goals. 

And the greatest enemy of reaching those goals:  inflation. 

Nothing is safe from inflation. 

It's major victims are savings accounts, T-bills, bonds, and other types of fixed-income investments.

Investors usually use Treasury bills as their benchmark for risk. These are considered risk-free because their nominal value can't go down. However, T-bills and bonds are in fact highly risky because of their susceptibility to inflation.




Realistic definition of Risk

A realistic definition of risk recognizes the potential loss of capital through inflation and taxes, and includes:

1. The probability your investment will preserve your capital over your investment time horizon.

2. The probability your investments will outperform alternative investments during the period.

Short-term stock price volatility is not risk. Avoid investment advice based on volatility.

So if volatility is not risk, what is your major risk?

The major risk is not the short-term stock price volatility that many thousands of academic articles have been written about. 

Rather it is the possibility of not reaching your long-term investment goal through the growth of your funds in real terms. 

To measure monthly or quarterly volatility and call it risk - for investors who have time horizons 5, 10, 15 or even 30 years away - is a completely inappropriate definition. (David Dreman)


Take Home Lesson

Using Dreman's definition of risk, stocks are actually the safest investment out there over the long term. 

Investors who put some or most of their money into bonds and other investments on the assumption they are lowering their risk are, in fact, deluding themselves.

"Indeed, it goes against the principle we were taught from childhood - that the safest way to save was putting our money in the bank." 

What America Can Learn from the Greece Financial Crisis

Written by Lewis E. Lehrman
Thursday, June 30, 2011

Observations on the Greece financial crisis and what America can learn:

1. Greece is only one example of an irresponsible, reckless, insolvent government, which is spending itself into bankruptcy. There are dozens of such countries, both developed and emerging.
2. Central bank and commercial bank credit financing of the government budget deficits in every country leads to inflation. This mechanism leading to inflation is subtle but pervasive and inevitable.
3. The solution to the problem is to prevent governments from requiring their central banks and commercial banks from creating new money and credit to finance government spending.
4. In the case of America, the budget deficit and the balance of payment deficit affect the entire world because the world is on the paper dollar standard. The dollar is the official reserve currency of the world. These US deficits are financed by the Fed, the commercial banks, and foreign central banks with new money and credit which cause the depreciation of the dollar. The vast new Fed created credit of QE1 and QE2 floods the world banking system with excess dollars, causing world wide inflation.
5. Greece is the concrete lesson for American public finance. Central bank and commercial bank financing of the government budget must be restricted or, even better, prohibited.
6. The best institutional restriction on undisciplined Federal Reserve discretion to finance the budget and balance of payments deficit is to establish convertibility of the dollar by statute to a fixed weight of gold and to end the official reserve currency role of the dollar.
7. When the dollar is convertible at a fixed parity to gold, then if the Fed and the banks create too much money and credit, causing inflation, the American people can protect themselves by turning in their undesired dollars for gold at the fixed parity. Since the Federal Reserve and the banks would be required by law to redeem the dollars in gold, the banks must then reduce the expansion of credit, tending to reduce inflation.

The gold standard, in a word, is democratic money. The sovereign American people should regulate the quantity of money and credit, not the Federal Reserve, a government agency. Gold is also the money of the Constitution as stipulated in Article I, Sections 8 and 10. Thus, the monetary system must be regulated by a democratic people, and not by economists manipulating the currency at the Federal Reserve Board and the Treasury.

http://www.thegoldstandardnow.org/the-lehrman-gold-standard-articles/533-greece-financial-crisis-solution

No savings account beats inflation

No savings account beats inflation
Savers will struggle to erode the effects of rising inflation as the savings number of products dries up.

No savings account beats inflation Photo: .Keith Leighton / Alamy

By Kara Gammell

11:33AM GMT 13 Dec 2011

Today's inflation figures show that the Consumer Prices Index (CPI) fell during November from 5pc to 4.8pc.

In order to beat inflation, a basic-rate taxpayer paying 20pc would need to find a savings account paying 6pc per year, while a higher rate taxpayer at 40pc needs to find an account paying at least 8pc.

However, there is not a single savings account on the market that taxpayers can choose to negate the effects of tax and inflation whether it is CPI at 4.8pc or the Retail Prices Index (RPI) at 5.2pc.

The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20pc, would have the spending power of just £9,210 today.

Sylvia Waycot, spokesperson for Moneyfacts.co.uk, said: "Savers continue to lose out to inflation even though the rate fell today. With returns so low and inflation unsteady, people don't know which way to turn."

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A growing number of people are falling into an eroding spending-power trap which has already wiped nearly £800 off the spending power of £10,000 in just five years, said Ms Waycot.

"Over the last year the number of savings accounts that beat inflation for basic rate taxpayers has dropped successively from 57 to absolutely none, which must leave savers wondering why they save at all," she said.

http://www.telegraph.co.uk/finance/personalfinance/savings/8953110/No-savings-account-beats-inflation.html

UK: No savings account beats inflation

UK:  No savings account beats inflation
Savers will struggle to erode the effects of rising inflation as there as the savings number of products dries up.

No savings account beats inflation Photo: .Keith Leighton / Alamy

By Kara Gammell

11:33AM GMT 13 Dec 2011

Today's inflation figures show that the Consumer Prices Index (CPI) fell during November from 5pc to 4.8pc.

In order to beat inflation, a basic-rate taxpayer paying 20pc would need to find a savings account paying 6pc per year, while a higher rate taxpayer at 40pc needs to find an account paying at least 8pc.

However, there is not a single savings account on the market that taxpayers can choose to negate the effects of tax and inflation whether it is CPI at 4.8pc or the Retail Prices Index (RPI) at 5.2pc.

The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20pc, would have the spending power of just £9,210 today.

Sylvia Waycot, spokesperson for Moneyfacts.co.uk, said: "Savers continue to lose out to inflation even though the rate fell today. With returns so low and inflation unsteady, people don't know which way to turn."

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A growing number of people are falling into an eroding spending-power trap which has already wiped nearly £800 off the spending power of £10,000 in just five years, said Ms Waycot.

"Over the last year the number of savings accounts that beat inflation for basic rate taxpayers has dropped successively from 57 to absolutely none, which must leave savers wondering why they save at all," she said.




http://www.telegraph.co.uk/finance/personalfinance/savings/8953110/No-savings-account-beats-inflation.html

Inflation robs savers, pushing gold and share prices higher

Inflation robs savers, pushing gold and share prices higher
By Ian Cowie
Your Money Last updated: November 16th, 2010

Another month, another missed inflation target for the Bank of England. Readers of a certain age who can remember double digit inflation in the 1970s may be tempted to think that today’s problem is pretty small beer. But the stealthy erosion of the real value of money – its purchasing power – is an insidious enemy of millions of savers.

Some of the most vulnerable are older people. It would take just 16 years – or less time than most people can expect to spend in retirement – for inflation to cut the real value of money in half if it continues to rise at 4.5 per cent; the annual rate of increase in the Retail Prices Index (RPI) during the year to October. Bear in mind that RPI was actually shrinking by 1.4 per cent last year and you can see how sound money is deteriorating.

You can see why the Government proposes to measure inflation by the Consumer Prices Index (CPI), which consistently produces lower figures – including its current annual rate of 3.2 per cent. CPI will produce much lower costs for the Government and employers when they calculate how much pensions should rise in future.

Unfortunately, as far as many pensioners’ daily experience of the rising cost of living is concerned, the CPI might as well be the Chinese Prices Index, as I have pointed out in this space before. It bears little or no resemblance to the bills they must pay because, among other factors, CPI does not include housing or heating costs.

Falling prices for electronic goods such as iPads and iPods may be good news for the young but largely irrelevant to older people who may spend more of their income on food and keeping warm. For example, gas and electricity absorb twice as much of many pensioners’ income than these fuel bills do for younger people, who earn more and spend less time at home, according to calculations by Alliance Trust.

However, for the first time in 30 years, from next April pay rises will be taken into account when the basic state pension is uprated in line with inflation. At present, indexation of pensions is calculated in line with the annual rate of increase in the retail prices index (RPI) in September or 2.5pc; whichever is greater.

In his Emergency Budget, the Chancellor introduced a ‘triple lock’ to index 11m people’s pensions plus State benefits and tax credits received by millions of others. These will rise in line with the bigger of earnings or price inflation or 2.5pc per annum.

Most people welcomed the change because earnings have tended to rise faster than prices in the past – although whether that remains true in ‘austerity Britain’ remains to be seen. Pay cuts are more likely for many than pay rises in the years ahead.

But a less obvious and potentially bigger problem to bear in mind is that next April will be the last time RPI is used to measure price inflation for the indexation of State and company pensions, benefits and tax credits. After that, the CPI will be used. It’s just a pity that in the real world most pensioners will have to buy food and fuel at British prices rather than the knock-down rates available in Kowloon or Shanghai.

Here and now, inflation is the spur that is turning many savers into investors. Supposedly risk-free bank and building society deposits are a waste of time and money when inflation is eroding its purchasing power at six or eight times the gross rate of interest being paid. By contrast, many shares and share-based funds look attractive – despite the absence of any capital guarantee – when the FTSE 100 index is yielding more than 3 per cent net of basic rate tax. No wonder share prices are rising, despite fears about the collapse of the euro and a double dip recession.

For those who require no immediate income but whose priority is the preservation of capital, whatever happens to paper money or fiat currencies, gold continues to shine. When RPI hit 5.3 per cent in May this year, Adrian Ash of the gold dealers Bullion Vault told me: “With the widest gap between RPI and Bank of England base rate since 1977 it is little wonder the gold price in Sterling jumped to a fresh all time high. When cash-in-the-bank pays less than zero, there is no such thing as a risk-free investment.”

Six months later, the slow-motion great bank robbery continues and gold has soared through $1,400 an ounce. Rising numbers of savers and investors are taking the plunge into precious metals and shares – despite fears that current prices look toppy – because, by contrast, inflaton means deposits are merely a slow and certain way to lose money.

http://blogs.telegraph.co.uk/finance/ianmcowie/100008651/inflation-robs-savers-pushing-gold-and-share-prices-higher/

Pensions in UK devastated by low interest rates

Pensions devastated by low interest rates, warns Saga
Record low interest rates and rising inflation are damaging pensions and will push more pensioners into poverty, a leading expert has warned.

Pensions 'decimated' by low interest rates Photo: Getty Images

By Myra Butterworth, Personal Finance Correspondent

5:40PM GMT 15 Nov 2010

Speaking at the Bank of England today, Ros Altmann, director-general of the Saga Group, warned that historically low interest rates could lead to another financial crash that would leave pension pots “decimated”.

She explained poor returns were prompting savers to take greater risks with their pensions as they approached retirement.

Savers have seen their rate of returns hit rock bottom as the Bank of England has maintained interest rates at just 0.5 per cent since March 2009.

Dr Altmann said: “Very low interest rates are having a damaging effect on pensions and pensioners.”

She warned of the dangers of rising inflation if interest rates stay too low for too long.

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“Pension investors and people buying annuities are being hit by low long-term rates and pensioners suffer from low short-term rates as well, as their savings income having fallen and they cannot make that up.

“In addition, they have been hit by high inflation, so they can no longer protect the value of their capital.

“We already see signs of rising inflation and this has damaged pensioners significantly already. Their savings income has not kept up with inflation, most annuities are being purchased without any inflation protection and a continued increase in inflation will plunge more pensioners into poverty in future.”

An ageing population, with less money to spend, could depress consumption and economic growth, she added.

She called on the Government to take action, suggesting it issues special pensioner bonds that help provide additional income to pensioners caught by the loss of their savings income.

She said the Government could also consider inflation-protection products for pensioners, such as reviving the National Savings products that were recently withdrawn.

Two of the most popular state-backed investment products were withdrawn from the market earlier this year amid the Government’s austerity drive.

National Savings & Investments pulled its inflation beating and fixed interest savings certificates and cut rates on other products.

The group feared demand from consumers could place too high a burden on the taxpayer, at a time when the public finances are under unprecedented strain.

Andrew Hagger, a savings expert at personal finance website at Moneynet, said: “There seems to be no light of the tunnel, with many people having already used up a large proportion of their savings. They are going to get to a stage where there is no where else to turn.”

Robert Bullivant, chief executive of pensions broker Annuity Direct, said: “The only saving grace is the performance of the stockmarket and so anyone who has stayed in equities will see a larger fund than they did a year ago. But if they have switched to cash, they have not seen much growth. People now need to switch to cash to lock in the stockmarket gains. If you lose those gains and suffer with low interest rates, it’s a double whammy for pensioners.”

http://www.telegraph.co.uk/finance/personalfinance/8135118/Pensions-decimated-by-low-interest-rates-warns-Saga.html

The corrosive effect of inflation explained.

"Inflation has turned £100 into less than £20"
One stockbroker explains the corrosive effect of inflation.

The dangers of inflation Photo: Larry Lilac / Alamy

By Paul Killik, senior partner at stockbroker Killik & Co

6:00AM GMT 19 Nov 2011

How would you feel if you bought a security for £100 back in 1971, and it was worth less than £20 today? Unfortunately, if you are over 60 years old, as I am, you will probably have done exactly this, as this is how much the purchasing power of sterling has fallen over this period.

To put it the other way around, had I gone into a supermarket 40 years ago and bought a trolley of goods for £20 and then returned to the supermarket today to buy the same trolley of goods, it would cost me £240.

Inflation is the most insidious investment risk, but its destructive power is frequently ignored by investors and financial regulators alike. There is a tendency to believe that if you save a pound, then, providing you get your pound back, plus a return while you were not using the money, all is well.

Wrong! Money is simply a form of exchange and its true value is determined by what it can purchase, not by its face value.

For the value of your money on deposit to hold its purchasing power, you would have to generate an interest income, after tax, equal to the rate of inflation. Even to a standard-rate taxpayer, that demands a return of 6.25pc with inflation at 5pc. What is more, you can't spend it – you have to save it.

Even over the past five years, from October 2006, the purchasing power of £1 has fallen to 84p.

Where is inflation going from here? The truth is that while short-term inflation can be predicted with some accuracy, and in the short term it is likely to decline as certain known increases of a year ago fall out, no one knows where it is going in the longer term.

There hangs the rub. Many commentators, and I would count myself among them, believe that the level of quantitative easing being undertaken by the Bank of England will result, in the longer term, in further serious – if not hyper – inflation.

In such an environment, monetary assets will decline in purchasing power, while, on the basis of historical precedent, physical assets such as property and shares will maintain their value in real terms.

The conventional wisdom, as one gets older, is to reduce exposure to equities and increase the money on deposit or in fixed income. The risk in this is that we have no idea how long we will live for, but with increasing life expectancy one is potentially exposing oneself to inflation risk for an indeterminate period of time.

Historically, this made sense – as shares generated less than fixed-income securities, so it was logical to go for the higher income and greater certainty. However, today, with the London equity market yielding 4pc after tax, equivalent to 5pc before tax, it is difficult to get an improvement from long-dated fixed-income securities and impossible from gilts or money on deposit.

I would therefore advise a higher equity content for portfolios today and, while I recognise that it is difficult to do so, I would also urge an investor to try to ignore the volatility in capital values, both good and bad, and focus on the dividends.

History tells us that over the years dividends have more or less maintained their purchasing power relative to inflation throughout most of the chaos that the world has thrown at us, and they have done so by steady growth and none of the volatility shown by the equity capital values.

http://www.telegraph.co.uk/finance/personalfinance/investing/8900038/Inflation-has-turned-100-into-less-than-20.html

Singapore eases monetary policy, warns of inflation

Posted on 14 October 2011 - 09:27am

Last updated on 14 October 2011 - 02:29pm

SINGAPORE (Oct 14, 2011): Singapore's central bank loosened monetary policy slightly on Friday in the face of global economic weakness but not as much as markets had expected, stressing inflation was expected to remain elevated in the near term.

The decision to allow the Singapore dollar to appreciate at a more modest pace sent the local currency up as much as 0.7% in early trade, and highlighted a policy dilemma for Asian central banks as they face both slowing growth and persistent price pressures.

"MAS will continue with the policy of a modest and gradual appreciation of the Singapore dollar NEER (nominal effective exchange rate) policy band in the period ahead," the Monetary Authority of Singapore (MAS) said in its half-yearly policy statement.

"However, given the expected moderation in core inflation, the slope of the policy band will be reduced, with no change to the width of the band and the level at which it is centred," MAS added.

The Singapore dollar traded around 1.2745 against the US dollar, up from 1.2770 just before the announcement and 1.285 earlier in the Asian day.

"MAS slightly surprised with a less bearish stance. The market expected more easing," said Goh Puay Yeong, Asia FX strategist at Credit Suisse in Singapore.

Singapore manages monetary policy by letting the local dollar rise or fall against a secret basket of currencies of its main trading partners to boost growth or control imported inflation. Its currency is the world's 12th most actively traded.

Growth trends in the highly open economy and its monetary settings are a bellwether not just for demand from developed markets but may also give hints on policy in China, whose managed float of the yuan is believed to be modelled on the Singapore dollar.

Chua Hak Bin, an economist at Bank of America Merrill Lynch, said the MAS statement suggested headline inflation will remain high at 5 percent or above in coming months.

"That is probably the reason why the MAS is probably a bit more constrained in easing to a neutral bias," he said.

MAS said in its policy statement that "headline inflation will be elevated for the rest of this year before easing, especially in the second half of 2012".

Singapore also reported on Friday that its economy grew 1.3% in the third quarter on a seasonally adjusted and annualised rate, beating forecasts for an expansion of 0.8%.

This meant the city-state narrowly avoided a recession as its economy had contracted a revised 6.3% in the second quarter.

However, third quarter growth was due primarily to a surge in biomedical production that more than offset the continued decline in electronics. On a sequential basis, Singapore's services industries contracted 0.7%.

Output from the biomedical sector can be highly volatile.

Singapore's decision to loosen policy follows numerous economists' downgrades of global growth forecasts for this year and 2012, and Indonesia's surprise decision earlier this week to cut interest rates by a quarter of a percentage point.

All 13 economists polled by Reuters before the policy statement had predicted Singapore would loosen policy in some way as global demand cools, although only one expected MAS to switch to a neutral currency bias.

Singapore slightly tightened policy in April by sanctioning an immediate rise in the value of its dollar, saying headline inflation will likely stay elevated. – Reuters