Friday, 13 May 2011

Fill your boots with NS&I certificates

National Savings & Investments have launched their 48th issue 5-year index-linked investment certifications. These yield RPI + 0.5% over five years. However the return is loaded towards the final years. You can cash in any time but if you take your money out in the first year you get no interest, just your original investment back. At the end of the first year you are credited with RPI + 0.25%, then at the end of the second year RPI + 0.35% (thereafter RPI plus 0.4% then 0.65% then 0.86%.) After five years this works out at RPI + 0.5% over the five year term. RPI is around 5% at the moment.

There’s a minimum investment of £100 and the maximum investment is £15,000 per person but you can buy them for your children as well. The interest is totally tax free.

This blogger can see many good reasons to put any cash you have lying around into these certificates. First, you’ll struggle to get a guaranteed safe investment that pays anything like that amount of interest without a long lock-in. Most deposit accounts don’t even keep up with inflation – let alone add a bonus on top.

Second it’s a shot across the bows of the banks. These certificates are going to be in heavy demand. A lot of cash is going to leave the banks and trot across the road to NS&I. It wouldn’t be totally out of the question for £10bn to make the move. And banks haemorrhaging money will have to respond by raising their game. They will need to lure money back with better deals; much better deals. To beat RPI + 0.5% tax free the banks will need to be offering interest rates of 6% or more, otherwise they are really only of interest to very short term savers. For banks the era of borrow low, lend high and take home a massive bonus is coming to an end.

And one has to wonder: why is the government offering such a good deal at this time? The government can borrow on the debt markets at about 3.5% for a ten-year lock-in, ie, that’s the yield on a 10-year gilt-edged bond. So why offer a better deal to the public?

There are a few possibilities. Maybe the government expects RPI to drop like a stone. This is unlikely. Only yesterday Mervyn King gave a speech in which he said he expected inflation to continue rising. And anyway, if RPI fell significantly the money would leave NS&I as fast as it’s currently piling in.

So, nope, that’s not it. Second possibility is of course simply that they have succumbed to public pressure to provide a savings option which maintains the real value of people’s money.  Effectively they have been guilted into it. This option presupposes the government actually feels guilt. This blogger thinks not; plus if this were repentance they would be making a much bigger deal about all this in the press. So, seems unlike that this is the real reason.

Maybe it’s just to piss off the banks. Surely that’s reason enough in itself. Well, they do own several large banks now and they don’t want them or the others still at large to go bust, so probably not.

A more likely scenario is this. Last year the government borrowed about £160bn by selling bonds into the debt markets. This year they are going to want to borrow more than £140bn. But last year the debt markets didn’t really finance their borrowing. If you recall they also created £200bn in quantitative easing and used that money to buy back bonds from the markets. So they didn’t really finance the deficit by borrowing – they financed it by printing money.

Of course, back when they did the £200bn QE the inflation rate was on the floor, practically negative. QE is an accepted remedy to deflation (negative inflation) since it is (obviously) inflationary. However this year they cannot finance the deficit by doing the same again because CPI inflation is already twice its 2% target; last CPI number was 4%, in April. More QE with inflation already so high would be like squirting petrol on the BBQ – your sausages would turn to charcoal.

And let us not forget that the gap between wages growth (currently 2% pa) and inflation (RPI currently 5% pa) is a measure of the extent to which the economy will shrink. If people’s real income falls by 3% then they will buy 3% less goods and services, and businesses will have 3% lower profits, etc. (Not literally! People may save less, or dip into their savings, or do without that foreign holiday, so the whole 3% won’t be passed through into economic decline. But a proportion will be.) And next year if there’s another 3% gap it adds to this year’s gap and you have a 6% decline in the economy. And so on for all the years that follow until wages start growing faster than inflation.

So the government doesn’t want to trigger even more inflation. But it does need to have its deficit covered. So, solution, turn to the rate hungry public. Yes, folks, they want your savings to pay their overdraft. Well a small fraction of it anyway. And they are sufficiently keen to have your money that they are prepared to shaft the banks. So that’s very keen indeed.

Another benefit to the government of borrowing your money rather than asking the bond markets is that you don’t care about the value of sterling. As far as you’re concerned a pound is a pound. But to the bond markets a pound must be weighed up against a dollar or a euro and may be found wanting. If the pound falls then bond-bidders must be mollified with higher interest rates. You, in the main, won’t notice or care. If you’re inflation-protected then you’re happy.

So you’re tame lenders. You’ll put your money into NS&I and forget about it. That’s the kind of lender a government really wants. What are you waiting for? Call 0500 500 000 right now!

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