Financial Repression Has Redefined Risk

The deliberate policy of financial repression which has been adopted by the British government (and many others around the world) has redefined the conventional notion of risk.

Key to a successful policy of financial repression are negative real interest rates, that is, interest rates well below the rate of inflation, and this is what we have today. As a result, investments that were previously deemed “risk free”, are no longer without risk.

All too often I here savers tell me that their cash is “safe” and that “at least I won’t lose any money”. This is a very dangerous belief and one that is patently false. Yes their monthly statement will continue to say X £’s every month, but in an environment of financial repression the nominal value of assets quickly becomes much less relevant. What matters is their real value, i.e. their value adjusted for inflation.

Even though Retail Prices Index (RPI) inflation has fallen from 5.6% in September 2011, to 3.9% today, the majority of investors are still losing money.

Typical Scenario: 5 Year Bonds Paying 3%

Let’s take a typical scenario where a saver (call him Brian) has £50,000 invested in 5 year bonds which yield 3%. After 5 years, assuming interest rates remain at 3.9%, Brian’s statement will say £52,290.87, however he will only be able to buy £19,116.05 worth of goods and services.

This scenario illustrates the insidious nature of financial repression. The fact is, unless you are earning at least 3.9% on your cash in the bank, you are losing money.

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