7 May 2010, 12:49pm
personal finance:
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  • what can you do to preserve capital these days

    Money performs two roles in the economy, One is to provide a medium of exchange and intermediation. If I have a goat to sell and exchange it for pounds, I can buy a loaf of bread from the baker even if he doesn’t need a small piece of a goat at the time 🙂

    For most people, who earn money, and (ideally) spend what they earn but no more on their lifestyle, that is all they need money to do for them. It lets them transfer the value they gain from selling their services to their employer to paying out to whatever they need to support their lifestyle.

    However, since I am trying to save to give to my future self, I need money to perform a second role. That role is one which the Great British Pound Sterling seems ill-suited to perform for me. That second role of money is as a store of value. If I forego a £100 worth of bread now, I would like some mechanism to be able to buy the same amount of bread in the future.

    In theoretical terms I did quite well last year with global index ETFs, even after the hammering of recent weeks I am still about 20% up, in pound terms. However, against that I have to allow for the corrosive effects of inflation, currently at 5% and rising. I experience RPI-X as I have no significant housing costs being mortgage-free, so I experience higher inflation, as housing costs are artifically depressed by Government action on interest rates. Fuel and food in particular have gone up seriously over the last year.

    I chose L&G’s global ETF in an attempt to diversify out of the UK, for in Britain we have been living beyond our means for almost a decade and these chickens seem to be coming back to roost.

    RPI - 5% and rising

    RPI-X - 5% and rising

    However, we seem to be entering a dangerous period of probable monetary inflation, as a result of printing money, euphemistically called quantitative easing round these parts. That looks like being coupled with a nasty dose of asset deflation as the stock market rally falters or starts trading sideways, for the reason that there don’t seem to be any good underlying reasons for the rally to continue, other than providing a home to park some of that government-issued money.

    So the question is, really, what can a chap do to store value? What I need is real stuff that holds its value, preferably something which can’t be printed by the government to devalue its debts. Commodities and land are the obvious choices, and yet both are lethally illiquid, and land is not fungible either. Preserving capital looks like it comes with some nasty baggage.

     
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