New site launch: Orphans of Liberty

A new site is starting today, run by a (mostly) right of centre blogging collective. Give it a go: Orphans of Liberty.

Will the government really help us against inflation?

Inflation-proof, government-backed savings will soon be back on sale - or will they?

On 19 July 2010, National Savings & Investments (NS&I) abruptly withdrew Index-Linked Savings Certificates from general offer to the public - for the first time ever. These plans were launched in 1975 and were originally available only to pensioners, at a time of high inflation (24.2% for that year).

Yet last July, inflation was only running at 3.1%, so why stop the offer at that time? The Bank of England base rate was at an historic low of 0.5%, therefore inflation was comparatively 6 times higher; but the difference in numerical terms was only 2.6%. In 1975, the BoE rate varied from 9.75% to 12%, with RPI running at more than double that and the rate difference was over 12%.

One reason for the NS&I hiatus will have been the emergency general review of Government borrowing requirements following the General Election. But another may be the kitten-weak condition of the banks, which are trying to fulfil two contrary directives, namely, to lend money again and also to rebuild their cash reserves. Perhaps they are to be spared too much competition. The anticipated rush for NS&I index-linked plans is such that they have set up an email alert system. When offered, the new certificates could sell embarrassingly fast and draw the public's attention to the Government's suspected inability to address worries about growing inflationary pressures.

But how much, exactly, are they going to offer, and when? Like many others, I misunderstood the Press (e.g. the Guardian) as saying that £2 billion would be on sale; but NS&I's release (23.03.2011) merely states that the target for the total funds they manage, spread over all their products, is an increase of £2 billion, which will "allow NS&I to plan the re-introduction of Index-linked Savings Certificates for general sale in due course. Subject to market conditions, NS&I expects to be bringing Savings Certificates back on general sale in 2011/12."

"... in due course", "... subject to market conditions"; one could hardly call that a blast on the post-horn.

Going back to the Government's own Budget plan as stated in the "Red Book" (Annex B, page 90), the guidance is merely that "National Savings and Investments (NS&I) is expected to make a contribution to net finance of £2 billion", without even a hint that any of this must be from inflation-linked plans.

By contrast, the same page sets a target of £38.4 billion of index-linked gilts. That sounds interesting, except most if not all of that may be taken up by institutions such as occupational pension funds in order to underpin their guarantees to retired members.

What about general savers? Few commercial outfits, if any, can offer guaranteed inflation-proofing and anything like 100% security, let alone exemption from income tax and CGT. This recent article from the Daily Mail details some options, but they are either taxable or risky.

So in some ways, even though inflation is still far from what it was in the mid-1970s, we may be worse off today. Theft by devaluation may have become official, if unstated policy.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Things I don't know about Libya

Who is the legitimate ruler, or what is the legitimate government, of Libya? Is is Gaddafi, or Zaid Hamid, or who?

Is there a legitimate government at all? If so, why has 40% of its ground forces been destroyed? If not, why has the situation not been resolved in 40 years?

How do we decide who should rule? Does any outsider have the right to decide?

Who(m) are we "helping"? In what way are they "better"? What will they do if they win?

At what point does the destruction of the "government's" forces constitute an attempt at "regime change"? Is this legitimate, or not (there seems to have been considerable wobbling about this in HM Government recently)?

Is this whole thing like Italy's (Mussolini's) campaign in Ethiopia in the 1930s?

Should the UK have declared war on Mussolini as soon as we perceived that he was a ruthless dictator?

What happens if we stop now?

What happens if we don't stop?

How do other African and Arab nations view our actions?

Is this going to imperil us at home?

How did these Arab rebellions really start? Did Western secret services have anything to do with it?

When will we get some in-depth, non-partisan discussion on the mainstream media about these issues?

When will I get my State Pension?

What with women's State Pension Age rising from 60 to 65 in stages, and proposed further deferments for both sexes, you may be confused about when you're actually going to get your State Pension.

Click here for the calculator from the Pensions Advisory Service and find the answer! They work in conjunction with the DWP so it should be right.

Please note that legislative changes may change the answer so check again when you hear further news on this topic.

I have also placed this link in the right-hand sidebar under "Other helpful sites".

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

US credit wobbles; hold cash not bonds

The fuss about S&P's "AAA with negative outlook" for US credit is remarkable mainly for being so far behind the curve.

The Beijing-based Dagong credit rating company gave America a significantly lower "AA" with negative outlook, back in July 2010 (and the UK was one level worse than that). Remember that China is a business partner and needs a clear view of how commercial operations are proceeding; this is not about Oriental mischief-making.

On the other hand, the talk of US Treasury default is wild, and I quite understand how it makes pensions expert Leo Kolivakis decidedly impatient; after all, that "negative outlook" comment is screwed to the side of a continuing AAA rating. But I do rather doubt that current US bonds will be honored in the sense of preserving and slightly increasing your wealth.

Charles Hugh Smith's thesis, on which I commented a few days ago, is that the American plutocracy will consolidate its gains by forcing a bond strike; personally, I think it's unnecessary to postulate a conspiracy in order to agree with him about the consequences. With interest rates at an historic low in the Anglo-American sphere, there's really only one direction in which they can change. Why would you buy now? And more importantly, why would you hold, when a rate rise could savage the tradable value of your holding?

Those who need to keep exports flowing, such as China, may be prepared to pay the price of maintaining the status quo, making on profits what they're losing on bonds, but as I said in February ("Global Credit Warfare"), the language over there is getting rather anxious and aggressive. Dagong's report bluntly states that America is exporting inflation worldwide.

Having said that, inflation in prices is very uneven and unfair. Proportionally to income, the rising costs of food and energy are hitting the poorest worst: I can cut back on brandy and weekend leisure trips, but how does the underclass cut back on hamburger helper? And with a large wad of ready cash, the better-off are in a position to snap up residential property cheaply, and bargain hard for luxuries such as cars, computers and other shiny gewgaws. I should think this is a great time to go to bankruptcy auctions, especially since the taxman isn't much bothered about setting a reserve. So in many ways, inflation hasn't yet really reached the rich.

But invulnerability is an illusion. When the remains of Mayan civilization were discovered, no wealthy Mayans were found sipping mai tais among the half-finished stone carvings.

We're all in this together, and because it's global now, we're mutually involved in a way that hasn't happened before. As Adam Fergusson relates in his chilling book(recently reissued) "When Money Dies", during the 1923 Weimar hyperinflation and the period leading up to it, German export business did very well, so well that the jealous and punitively-minded French wondered who'd won the war. Speculators also prospered, until the currency was reorganised, at which point they "took off for Paris and went to work on the franc, their departure the first signal that stabilisation was a fact." For a long time, reports Fergusson, visitors to Germany would see apparent national prosperity, simply because the cafes and restaurants were full of the winners; they didn't see the middle class exchanging their pianos for a side of ham.

But now, with an increasingly integrated international economy, it's getting more difficult to evade the problems simply by moving to another country. Tensions are rising, and not just in the Arab street.Western governments are deferring the day of reckoning, consuming their own debt like the serpent Ouroboros but without the element of timelessness. The present state of affairs cannot continue indefinitely, as Karl Denninger has been saying since 2007.

What are the possible outcomes?

Outright default? Don't hold bonds.Bond strike, interest rate rise, savage economic retrenchment? Don't hold bonds.Total collapse of the currency? Don't hold bond. High inflation? Don't hold bonds.

The least nuclear of all the options is the last, so unless we have a collective death wish that seems the most likely. Jesse thinks the dollar won't go to zero, but have a few zeroes knocked off it, like the French franc in 1960 (not that that stopped the decline): "I think the reissue of the dollar with a few zeros gone is inevitable. It is the timing of that event that is problematic. It could be one year, or it could be fifty years. There is a big difference there for your investment strategy." Reminds me of the scene in an old Cheech and Chong movie where they offer a peasant dollars and he spits on the money, saying you haven't got Mexican? Except this time he'll want a chicken or a silver necklace, instead, because inflation now respects no national boundaries.

Whether the debt-accelerated system manages to slam on the brakes without hospitalizing the vehicle's occupants, or hits a tree (everyone got airbags?), or simply grinds to a rutted halt in a cornfield, buying into the bond market now without some ulterior motive looks like wanton self-sacrifice.

Don't take it from me; take it from Bill Gross, who "sees no value in U.S. government bonds at current interest rates" and has dumped them altogether.

Meanwhile, let's start a national debate about social cohesion. That or wait for the jungle to recolonise the abandoned temples.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

US university invests heavily in gold

The University of Texas has doubled its holdings of gold in 2010, bringing the total to nearly $1 billion, according to Bloomberg.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Hold cash now, buy bonds when interest rates rise?

On Friday, Charles Hugh Smith posted a theory that I can accept as at least plausible: America's rich will consolidate their long-term gains by engineering a bond crisis - a refusal by the Federal Reserve to keep financing government spending.

This will make interest rates soar (collapsing the tradable values of bonds and, I'd have thought, equities); new bond issues will have to offer much higher income; the rich move in with their huge reserves of cash; then comes the demand for serious economic retrenchment; interest rates fall; because of their locked-in high yields, the capital value of new bonds shoots up; hey presto, another killing for the millionaires.

If that's so, the strategy will be to copy the rich (if you have the resources) - hold cash patiently and pile into the bond market when interest rates peak.

Other implications that occur to me: don't owe any more money than you have to, don't overinvest in residential or commercial property, don't be in a business that depends on people's discretionary spending. Reconsider your balance of shares, bonds and cash. It may even be worth thinking about moving somewhere with historically lower crime rates.

What about "inflation-protected" investments, such as NS&I Index-Linked Savings Certificates (due to become available again soon)? Smith observes: "Holders of TIPS [Treasury Inflation-Protected Securities, in the USA] will do OK, unless the government fraudulently sets the rate of inflation well below reality. Hmm, isn't that exactly what's it's already doing?" But presumably there's a limit to how much the government can misrepresent inflation; and besides, Smith's thesis is that we are headed for deflation because inflation robs the rich.

He could be wrong; but if he's right, the word passed down the ranks of cash holders is "Stand fast!"

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.