Fiscal Fisting

[lupestripe]

Current CPI rate of inflation - 4.4%
Current RPI rate of inflation - 5.5%
Current rate of interest on my savings - 2.9%

I can't help but feel that the prudent ones amongst us are suffering for the avarice and greed of everyone else. Whilst the value of my savings decreases so does the value of the debt of those who took out loans and mortgages they could ill-afford.

I have a student loan, whose value is also decreasing over time (which is the only positive at the moment) but the worst debt I have ever been in is an overdraft of £800. Consequently I do not benefit from the current economic conditions and the message appears to be to get yourself into eyeballs of debt as you will not suffer as much as those who are sensible.

In a country which has a mantra of property is king - the rise in house prices over the last decade resulted in many people over stretching themselves and this is now the main barrier preventing a rise in interest rates as it would force many people to default on their mortgage. So prudent people like me must suffer interest rates on our savings which are wiped out by the rate of inflation. I have no intention of buying a house any time soon.

Not even stocks and shares ISAs will be sufficient now nor accounts in which you lock your money for a number of years. Clearly I made the mistake of not spunking all my money on material goods - I now know for next time.

*In response to some of the comments below, I will further the above by saying many people with mortgages were merely responding to market conditions. They shouldn't have been offered mortgages that they had no realistic way of paying back and the blame here should largely be laid at the banks and the previous government's lack of regulation. However, it was clear this country was in a property bubble and taking on such mortgages was a decision that these people made and some responsibility should lie at their door. Despite this, I think it was more down to market conditions than greed, a comment I reserve for those who have high credit card and store card debt etc. I probably should have checked this post before posting it but my bus had just arrived then my phone battery died - as crap as an excuse as that is.

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Comments

[rustyfox.livejournal.com]

get yourself into eyeballs of debt as you will not suffer as much as those who are sensible

What's that based on? Plenty of people have lost their homes, whether it be "deserved" or not. Your savings haven't decreased in value whatsoever. They're just not earning you as much free money.

I think there's a profound difference between loosing your home and not earning as much free money.

You said only a day or so ago you felt you were growing into a more left-wing mentality, but today it smacks of exactly the opposite - that attitude is actually deeply hurtful...

I'm in the polar opposite corner. I used this climate to my advantage and bought a house - something I honestly thought I'd never do. I didn't overstretch myself, on the contrary, I've had to humble myself rather a lot to achieve total independence. It may yet go pear shaped, I can tolerate a small to modest interest rate rise, but if it goes crazy I'm out on the street.

I'd really like to think you're not the sort of person to view that as a good thing in return for some more free money...

[dukefawks.livejournal.com]

Uhm, do you understand inflation? Interest 2.9%-RPI 5.5%=-2.1%. Your savings are costing you money in a way.

[rustyfox.livejournal.com]

Yes, I get that. It's still profoundly different from the life-shattering experience of loosing a home.

And that calculation is still only 'on paper'. No actual money is being deducted, and it's still only applicable at this present time. Whatever money isn't earning so much in a savings account today is still there to potentially earn lots more tomorrow. I'm sure in the long term, even the medium term, savings will still increase in value.

In the mean time why should anyone be exempted from the current climate because of how smart they think they are? It's a bum deal for almost everyone, but not earning so much (or loosing on paper) is in no way comparable to loosing a home, and the suggestion that anyone who does somehow deserves to through being "greedy" actually made me feel a little bit sick.

[lupestripe.livejournal.com]

Read my previous posts clearing up this matter. The greed relates to credit card debt and accruing of loans. I do think people on high mortgages were drawn in by the availability of cheap credit and didn't think about their ability to pay it back as thoroughly as perhaps they should have done. I know they were responding to market conditions but they do have to take some responsibility for the decisions they made. Despite this, I don't think these people are greedy, proving I should have checked my post before editing it as I have clearly conflated two issues.

[lupestripe.livejournal.com]

I am glad that you have used the current economic climate to your advantage. The greed I was referring to was those who have got themselves mired in debt on credit cards and cheap loans. This debt is now reducing in value as inflation is so high whilst people like me are seeing all savings wiped out and the value of what they have diminish set against current inflation rates. And yes, that does piss me off tremendously.

I do think that people also got themselves into too much debt in the housing market by taking out mortgages they could never afford to pay back. Of course, the banks should never have offered these mortgages in the first place and there should have been legislation against it. A lot of people are in difficult situations because of this and, sadly, they also need to take some blame for taking on such mortgages that they are never likely to pay back. I don't think this down to individual greed though, rather market conditions dictating ridiculously high housing prices which were unsustainable.

[stuart-otterson.livejournal.com]

To earn interest, money has to be in the account, so it's not a clear cut free money. As soon as the money is withdrawn, the 'free' money earned is less.

[rustyfox.livejournal.com]

Also, concerning the "greed of everyone else" - what about the industry that got us into this situation?

I think it's much less simple than just blaming everyone who borrowed too much. I see it this way. When I was at school, money-management was not part of the curriculum. What to do in the real world was taught by ones family. At the risk of also generalising a little too far myself, I suspect most people were taught little beyond "you save some money, you get a mortgage, you buy a house, and you work to pay it off". A lesson from the day when houses were affordable, from a generation of people who bought often whopping big houses for almost pocket money today without expecting to make enormous returns, and a lesson from an age when lenders actually checked you could pay it off.

But I gather that stopped happening, and thinking back to news stories around the time this all went pear shaped, mortgage lenders were often only too happy to not even care to check - or even encourage lying on mortgage applications. Certainly there's an element of stupidity on behalf of the borrower in that scenario, but I can forgive some level of naivity if a bank is willing to lend huge sums of money.

Mostly, I blame the banks for lending far too much, which really means a much smaller group of human beings making crazy decisions than mortgage borrowers. Somehow I doubt those individuals suffered much personal hardship though.

Obviously there's more stuff gone on than just that, from my experience last year it seems that buying a house to live in was almost an unheard of idea - everyone I talked to, literally everyone assumed I was just another buy-to-let investor. It was freaky, so I also suspect a smaller pool of very wealthy people have seriously screwed with our housing market with enormous property portfolios, driving up prices for everyone else. Another reason why I find it difficult to lay much blame on people who just wanted a home - just like virtually all of our parents afforded themselves. I doubt they had to compete much with property tycoons intent on making serious money from every day homes.

[lupestripe.livejournal.com]

I think the greed of the banks and a lack of government regulation are the main problems but I also think that individuals do need to take responsibility for getting themselves into mortgages that they could never afford to pay off. I agree they should never have been offered these mortgages in the first place and I don't think these individuals were greedy, but I also think that these people didn't think the decision through properly.

Despite this, I also agree with what you say - a lot of people were responding to market conditions and this was hideously inflated at the time.

[stuart-otterson.livejournal.com]

Takes 2 to tango, the banks wanted to give these mortgages out and others wanted to take them.

[lupestripe.livejournal.com]

This is the main thrust of my argument. Where were you earlier? :P

[stuart-otterson.livejournal.com]

Oh you know me, fashionably late, got distracted by the pub and whatnot.

*tangos with pink mohawk you*

[lupestripe.livejournal.com]

Yeys for tangos! And pinkness!! *dances*

[rustyfox.livejournal.com]

Which as I've touched on is still a too simplistic and high-level assessment, although even then the fault would still at best be 50% the lender's, but it truly amazes me how quickly we forget that. I guess perhaps because we all need banks' services, but not those of complete strangers.

The entire system was corrupt. It doesn't much matter how truthful or fair or sensible individuals are if the system is broken, or whether they're borrowing money or investing money. Everyone looses.

Well, probably except for those deep inside the system, obviously. Indeed, the system got a phat bailout that we're all paying for.

[avon-deer.livejournal.com]

The entire system was corrupt. It doesn't much matter how truthful or fair or sensible individuals are if the system is broken, or whether they're borrowing money or investing money. Everyone looses.

You're getting more and more like me every day.

[rustyfox.livejournal.com]

Hmm, I guess moving out didn't save me then! :P

But yes it seems pretty obvious the system was corrupt and due to implode, and those running the show, who I consider for their enormous financial rewards and awesome responsibility bloody well should know better, are more responsible for the mess than Joe Bloggs is for taking advantage of the credit they offered. You can't throw away your money and then complain that it's the fault of those who took it when it's all gone. It's just a nonsense argument. If it wasn't offered so irresponsibly it wouldn't, nay, it couldn't have been taken so irresponsibly. Ergo the system screwed everyone, IMO.

(I gather this is more applicable in the US, although I've certainly read reports of UK lenders convincing borrowers they can pay back ridiculously huge mortgages too)

[stuart-otterson.livejournal.com]

People asked for money and complained they were given it. Flipping it on it's head.

Plenty of us are innocent, but we're just collateral damage of other people's irresponsibility. Borrowing is an evil necessity, but we know the risks and sometimes we're going to get burned.

Sometimes society just has to admit that we as a collective didn't do enough together to make excessive borrowing a taboo. I'm ready to hold up my hands and accept my share of the blame and learn from this experience. Next time I see a friend living beyond their means I'll make clear I disapprove rather than say nothing, least I'll have played my part.

[lupestripe.livejournal.com]

Although I think some people were coerced into taking out mortgages they couldn't afford, whilst others were blatantly ill-advised by the banks, the point is that many people didn't have to take on these mortgages at all. Surely some responsibility must lie here too?

[dukefawks.livejournal.com]

I have the same problem here. Have never owed or borrowed a single penny. Currently way too much money in the bank that is devalueating fast atm. I'm seriously considering buying some gold to protect some of it.

[lupestripe.livejournal.com]

It's frustrating and has been the case for about four years now. I do wonder why I am bothering saving when I am actually losing value regarding the money I have put away.

[stuart-otterson.livejournal.com]

Like bad refereeing decisions, don't these things just even out over the long term of your life? We've had great years of saving, now it just balances out. Presuming we're all alive in a decades time interests may well be nice and high for savers.

[lupestripe.livejournal.com]

I hope so, I guess I am just frustrated that at the point in my life where I can become a regular saver, I am not getting any return for that investment. Thanks also for putting the main thrust of my argument in a far more eloquent way than I did above :)

[stuart-otterson.livejournal.com]

I don't blame you for feeling frustrated. Sometimes the stars just don't align the way you want them to. Well we can't all decide to take the responsible step of saving and expect the world conditions to be right. It'll be fine mate, just keep hoping and by mid decade we'll be laughing and all this will seem a long time ago. I guess it's easy to be frustrated by the short term gains we hope for, but it's all about the long run. After all saving is about using it in the future.

[lupestripe.livejournal.com]

I live in hope but this seems to be going on forever. Inflation will be between 4-5% for the rest of the year, forecasts now say, and won't go down to 2% until 2013. Interest rates were thought to rise in May but these are going to be postponed until August now, I read. It is very frustrating.

[stuart-otterson.livejournal.com]

Also I think this is the second time you've mentioned about my eloquent turn of phrases. The word eloquence gives me some sort of strange desire to read a book of quotations from Eric Cantona and start spurting out mystical French accent sentences.

[lupestripe.livejournal.com]

How eloquent are you after a bottle of cider, I wonder :P

[mortonfox.livejournal.com]

It's funny how so far, no one has blamed the central bank for setting interest rates too low, producing tech and commodity bubbles, and igniting real estate speculation. Here, in the USA, I totally blame the Federal Reserve for that.

I try not to keep too much money in money market and savings accounts because of the problem you mentioned at the beginning. When interest rates are lower than the real rate of inflation, hard assets are the way to go.

[lupestripe.livejournal.com]

In the UK we had a property bubble. House prices rose but wages didn't rise with it. Lack of banking regulation meant many people bought mortgages which were up to 10x their actual yearly income. When interest rates rise, it is inevitable they will default. This is the crux of why interest rates are so low (0.5% and have been for 18 months) at the moment.

[avon-deer.livejournal.com]

In the UK we had a property bubble

had have.

House prices (and therefore rent) are still too high.

[coyoteodin.livejournal.com]

Well, compared to how much inflation we have, 4 - 5% is still not a nightmare ... at least when compared with the situation in my country ... We in Belarus in the last few days, the ruble fell by about 27% (from 3000 to 3800 rubles per dollar, although the National Bank officially holds the course at around 3040 - but with a sense that is not enough - as in foreign currency exchange offices simply do not) and within two months earlier depreciated further by 20 percent

So compared to what is happening in my country - you have "prosperity" ... 4 - 5% is not 47% of the threat of default and incipient hyperinflation ... during the previous hyperinflation (1993 - 2002) inflation have made ​​about a billion percent and the country experienced two currency reforms (1994 (10 old= 1 new)and 2000 (1000 old = 1 new)

[lupestripe.livejournal.com]

How bad did things get in Belarus during periods of hyperinflation? I am fortunate enough never to have lived through such a spell - what sort of things happened?

[coyoteodin.livejournal.com]

During the period of hyperinflation in our major problem was the multiplicity of exchange rates. So, for example, in the autumn of 1999 the official exchange rate was about 300 000 - 320 000 rubles per dollar and the market - 700 000 - 750 000. And it is problematic to change the currency, so you buy in exchange offices was impossible to sell - to lose half the money ...but if you buy with it - was a big risk run into cheaters, and the police for it mercilessly fined

and, yes ... denomination bank notes - one million rubles banknote ... five million one bank note ....

PS by the way - say as a historian, that the first hyperinflation in our country was in the 17 century, when King Jan Casimir copper shillings were issued at a price of silver, although their real value was only 15% of their nominal value

[coyoteodin.livejournal.com]

Well, has already begun ...
Link
http://coyoteodin.livejournal.com/11718.html

[megadog.livejournal.com]

See Here - bonds linked to RPI.

At least that will keep pace with inflation. And you *might* just be able to leverage said investment as collateral for some borrowing at below-inflation rates: my bank recently offered me a 364-day secured line-of-credit up-to-£250K fixed at 0.5% above BoE base-rate.

[lupestripe.livejournal.com]

Thanks for the link, very much appreciated. It's tough for savers at the moment - I do hope things will change.