If you had returned from the moon and listened to last week’s news from the UK, you might think that there were two big stories. There was the crisis in Cyprus and the attempt to head it off with a shock tax on bank deposits; and there was the Budget in the UK with its sad admissions of failure (on the budget deficit and on growth) and its slightly bonkers-sounding solutions (looser monetary policy and more buying and selling of houses).
But in fact these weren’t different stories, just different aspects of the defining story of the decade – the huge debts that have been built up by sovereign states and the various ways they intend to scam their voters into paying them off.
The situation in Cyprus is an obvious one of crisis, but in many ways our own – while covered up by our often used ability to depreciate our currency and indulge in quantitative easing at will – is not much better. Look at any chart of global indebtedness (
The Economist has an upsetting one) and you will see that overall debt in the UK is the highest of all the large nations bar Japan (which should bring little comfort). Our debt-to-GDP ratio, once you have included household debt, is well over 500% of GDP, while our financial sector debt alone comes in at extraordinary levels relative to the rest of the world (nearly 200% of GDP).
Yes, you might say, but at least we aren’t talking about nicking money out of the bank accounts of our savers to deal with our problems. No asset confiscation here. In one sense you would be absolutely right: we aren’t talking about it; we are just getting on with doing it. The effect on the UK savers of the very low interest rate policy of the past few years has been just horrible.
In this week’s magazine, John Stepek calculated that had your money been sitting on deposit in the UK for the past four years you would now be worse off than if you had kept it in Cyprus and suffered the (now unlikely) deposit tax.
A toxic combination of ultra-low interest rates and high inflation (relative to current interest rates as opposed to relative to the 1970s) have made it all but impossible for UK savers to make a real (inflation-adjusted) return on their savings.
According to the forecasting group the Item Club, someone who deposited £10,000 in 2009 would now be sitting on a real terms loss of £1,297; the pressure group Save our Savers puts the total cost at just over £200bn (not far off 20% of the value of all the savings in the UK). But however you run your numbers, the cost to the hard working and saving ‘strivers’ all politicians profess undying passion for is pretty stunning.
I’ve written about financial repression before, and this is a pretty classic version of it, one in which you keep interest rates below inflation with a view to allowing the government to borrow cheaply, cutting real wages (to make us more competitive), bailing out private debtors, subsidising bank profits and of course keeping house prices high. It is also one you should expect to have to live with for many years to come – because it works.
Savers’ money is gradually being transferred to debtors (the Ernst & Young Item Club notes that the average mortgage holder is saving £387 a year in payments thanks to repression), government debt will come down over time as inflation eats away at it and fiscal drag (more people being dragged into higher tax bands) ups the tax take. It also forces investors out of cash and into assets that the government prefers us to hold (government bonds, equities and, of course, houses) and in doing so forces us to take more risk than we normally would.
Now you know how much you are losing in real terms every year on your cash, do you really want to hold so much of it? Me neither. That’s why so many of us are moving out of cash and into other assets almost regardless of price.
In his latest note for the Personal Assets Trust, executive director Robin Angus points to the yield on junk bonds which are “supposed to offer high yields because they are, well, junk.” Instead they not only yield less than in 2007 but are offering some of the lowest returns ever. What sort of world are we living in, asks Angus, “when Bolivia can borrow for ten years at a mere 4.75%?”
There is definitely now a bubble in the bond market (caused by the desperate search for yield) and a good case can be made that it is shifting to the equity market too. The quality stocks that I have spent the past few years encouraging us all into as some form of defence are, as Angus puts it, getting “too dear to offer an adequate margin of safety”. They were ‘Garp’ stocks (growth at reasonable price). They are now ‘Gawp’ (growth at the wrong price).
Good business models and relatively good yields might offer an illusion of certainty in the markets. But at the wrong price, there is none. You may be wondering what to do. Tricky one. Part of the answer might be to hold more cash than you are comfortable with. The other part is to recognise that this aspect of financial repression works too: all valuations can be driven to extremes by yield-panicked investors in extreme circumstances.
Take me. I know that house prices in the UK are still not far off historical highs. But after this week’s Budget I actually found myself wondering if I should look for a buy-to-let investment on the basis that there is some yield and that the government has clearly decided house prices are never to fall. That’s how well it works.
• This article was first published in the Financial Times