Saturday 4 December 2010

Governments should provide secure inflation-proof savings vehicles

Logically, speculators and investors should be residing in two different groups, but the two kinds of sheep keep wandering out of their respective pens. And there are wolves outside the pens.

John Lounsbury, reviewing ‘What Investors Really Want,’ by Meir Statman.

This is the difficulty we face now. If you are a savvy speculator and willing to accept a high degree of risk, you may (with luck) do well in today's volatile markets.

But if you are an ordinary investor (like most people), you are looking for something that will at least preserve the value of your savings and reward you with modest real growth for not spending them.

Unfortunately for investors, our governments' attempts to shore up an essentially bankrupt banking system and profligate welfare system involve lower-than-inflation interest rates, and at least one product that is guaranteed to overmatch inflation has been withdrawn - see what happened to NS&I Index-Linked Savings Certificates in July.

Sadly, one suspects that even if such products continue to be available, inflation will be defined in a way that does not fully reflect increases in the cost of living for ordinary people. In fact, definition tweaking is already happening, as in the case of "hedonic adjustment" in the American CPI Index. This means, for example, that a new computer that costs the same as your old one but has double the memory, has effectively halved in price - even if the extra computing speed has absolutely no practical benefit for you (we don't all live in the fantasy world of role-playing games).

I'm quite happy to let the speculators play high-stakes poker with each other, as long as the rest of us can humbly and patiently build security through thrift. It should be a lasting shame to governments that they are denying us ways to do this.

"The hungry sheep look up, and are not fed."

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