It is Obvious

Chris Rick has got altogether too much to say

Lot of rats about

Posted by chrisrick13 on March 28, 2013

It is obvious: I can count

1997 – I was faced with an uncertain future (sic).  I had also watched, so called, investments going in only one direction.  House prices had just started what I judged to be a long upward climb and not the jet-propelled elevation that happened.  I decide to buy a second house rather than just a bigger one to live in.  It had to earn its keep which it just about did and I funded the mortgage by stopping payments into one of my pension funds.  Not cashed in yet, though neither have I done so with my pensions, but it is the best investment I have made…apart from shares in Unipalm.

If I make nothing from it there is one big advantage it has over a pension.  All you can do with a pension is look at it from a distance.  Rather you can look at someone else’s description of it from a distance.  At least with my pension I have been in it, slept in it, rodded its drains, painted its walls and dug its garden.  Look at numbers on paper is all that many of us might ever do with our pensions.

An investment returns earnings based upon the risk associated with it and its liquidity.  A pension is mostly illiquid at the extreme end.  All you can do with it is buy an annuity.  It is supposedly risk free but as an Equitable Life pension holder I could have a long conversation about that.  It has tax breaks.  However even in a good pension I am convinced there are much better things to do with your money.  The exception is when your employer chips in with some cash…lots of it.

My wife has just joined her Local Authority pension scheme retrospectively for last year.  £6,000 has gone into the fund of which she has paid £4,500.  Not quite.  She got £1800 tax relief.  So she has paid in £2,700 that she could have otherwise spent in Cafe Nero.  She could tomorrow declare the fund done and take out £1,500 as cash tax free.  This means that she would have paid in £1200 net.  What does she get for that?  A pension of about £360 for the rest of her life or until the global financial system collapses.

In yesterday’s world that deal is an easy one to judge.  She could have put the money, after tax, into a bank account earning interest that is also taxed and does not come close to matching inflation.  That is the price of risk…or the lack of it.  But she could call at the bank on her way to Nero and grab a tenner for her coffee any time of the day or night.

Except that it is no longer the case in Cyprus.  You can look at your money, but you can’t touch it.  Someone already came along and threatened to take 7% and if you are unlucky enough to have a lot of money then you have lost it all (trust me).  So this meets all the requirements for a very high interest product: you can’t touch it and it is very risky.  Alas the interest rates on these accounts has been move to zero.  Oh dear.

But it does not matter you can get 300 Euros a day if you live in Cyprus.  They are in the eurozone so what is that all about?  Thought there was free movement of money?  Thought that the Euro was the same everywhere?  Clearly it isn’t in Cyprus.  So all the eurozone rules about debt and deficit levels and common currency are just abandoned when convenient…or inconvenient.  So this money does have some liquidity.

But it is OK these look but don’t touch rules are only going to be in place for 7 days.  Did you get that: 7 days.  Are you counting?  Day 1 is done.  I’ll be back in a week.

Eurozone banks are leveraged at about 26 to 1.  I bet the Cypriot ones are bigger than that.  Cyprus is not a big country, I lived there long enough, and now it is in two bits so both bits are pretty small.  Say there are 100,000 local accounts in the various banks then for every 3 days the banks are open £1bn disappears from the banks.  On its own that is a huge logistic problem.  Also the career move in Cyprus now has to be burglar.  However every 3 days there are £26bn of loans that have no backing whatsoever.  Another 6 days.  Just £2bn and then the floodgates open.

It cannot go on long.  The motivation levels in people with all they have worked for destroyed and no future are very high.  They will force things soon enough.  The politicians will do what the people want which is fair enough…but, cowards.

I have said that you ought to have some cash sitting around (losing value) because you need to bridge a bank holiday.  Did I really believe that I would see one?  Perhaps my equation was that I would get peace of mind for a small cost each year.  Keep my irrationalities happy.  Now I am thinking beyond that.  What happens if a million people in this country decide to stick £1,000 under the carpet?  Will we have a bank holiday?  Will Greece or Italy?

6 days…I am counting.

It is obvious: I can count but I do wonder about the ECB, IMF and EU.  (BoE as well for that matter.)

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