Adamski wrote:I think the era of ultra low interest rates is likely over. Lasted from 2009 to now. Base rates used to be higher than inflation, sometimes by a wide margin 1980s - 2008. Shopping around you could make money on building society savings vs inflation. Now of course you're losing money in real terms by very wide margin. My guess is once inflation falls back to target, base rates will be brought down, but not to the level they were previously, should be better for savers and worse for borrowers.
Kings/State used to need to borrow money, when money was gold/silver, worth its weight. Being finite, inflation broadly averaged 0%, such that interest paid on loans (lending them your silver/gold) to the King/State were a real rate of return. Many preferred to lend for that benefit instead of holding money (silver or gold coins).
That all ended in 1931 when too many were converting Pounds into gold for that to be sustained.
Since then we've had fiat money, backed by nothing other than promises. Where the state prints/spends new money that devalues all other notes in circulation, might be considered a form of micro-taxation, but is more commonly just known as 'inflation'.
The state no longer needs to borrow money, it can simply print/spend. Even banks nowadays can just create money to lend borrowers, they no longer need depositors money. Banks used to store your money securely for you, nowadays a deposit is a transfer of your money to the bank, that is free to pretty much do with what it likes (within regulations). Some banks even play a heads they win, tails the taxpayer bails them out game-play.
Interest paid net of inflation and taxation no longer is the real gain benefit it was of old. The state can direct inflation, interest rates, tax rates .. etc. you're lending to someone where the table is stacked heavily in their favour.
The final decoupling from gold occurred in the late 1960's, when the US made such a break as a means to help pay down the cost of the Vietnam war. Originally the US established common agreement that other countries would use the US dollar instead of gold for international trade, and that the US would peg the dollar to gold. That promise was progressively broken, as occurs with all fiat currencies, coming to a end in the late 1960's/early 1970's. That induced concerns and inflation/interest rates spiked - a lot. Since then we've seen a broad trend of ever decreasing interest rates, down to more recent negative real levels. Your pensions/pension funds have to, by law, "invest" in government bonds (lend to the state), are in effect taxed by the state. Nowadays they're pretty much the only ones who do buy Gilts.
You use currency (Pounds) as a alternative to bartering. But nowadays that's just paper or low cost metal coins (even copper penny coins ceased to be copper in 1991 when copper prices spiked, from 1971 (decimalisation/new coins) to 1990 they were 97% copper, but nowadays are just copper plated steel). But that's not a store of value. For a store of value you want a 'money' that is backed by something tangible, such as stocks and gold and only convert that into currency close to the time you want to exchange for something (goods/products/services) and similarly convert any surplus currency you have into something tangible (stocks/gold) soon after having received such. Typically a brokerage account that is used to store such 'money' has a T+3 day notice period for withdrawals.
Reasonably investors prior to 1932 might have simply lent to the state, perhaps held a 10 year Gilt/Treasury ladder. From 1932 a investor might have opted for 50/50 stock/gold, perhaps opting for US$ and US stocks for the stock holdings assuming they had £ invested in a UK home. Three currencies, just 33% with counter party risk (house and gold in-hand), three assets (land/stocks/commodity (gold)). Diversified. Since 1896 (with just bonds pre 1932, stock/gold 50/50 thereafter) for all 30 year periods that sustained a 4% SWR, in the worst case. More often ended 30 years with residual value remaining, typically at least half the inflation adjusted start date amount, sometimes all of the inflation adjusted start date amount, periodically more.
I wouldn't be surprised if negative real yields were here to stay, long term. Neither the state nor banks need your money, they're more inclined to charge for you to store money with them. High inflation is just the same as high taxation, under fiat both tend to spike at times, typically when policy makers foul up. The exception is the few mutual building societies around, who do match borrowers/lenders - old style. Most of those however have converted over to being 'banks'. You used to be able to uplift values by inflation when calculating capital gains taxation, even that has been removed and now you're taxed on what at least in part is inflation (double taxation). Government demands for spending other peoples money is insatiable. The UK is in a mess for permitting migration floodgates to be opened, whilst under-spending on infrastructure to accommodate the larger population. A risk is that is nearing a critical cliff-edge point and should confidence/acceptance of fiat currency falter/fail you neither want to be holding cash (Pounds) nor having lent to banks/state. In the run up to such however the state will do as much as it can to prevent you avoiding the pain. If/when you are restricted to only taking so much cash out of the country, or holding gold is prohibited, such will be pre-warning indicators of the rapidly approaching fiat cliff-edge, when you will be far better served by holding foreign currencies and/or stocks and/or gold. When in the case for gold you want to be holding physical gold, not paper-gold such as gold ETF's (even ones that claim to be backed by physical gold). There's over one hundred times more paper gold than there is physical gold, so over 99% will be disappointed if they're not holding physical gold.