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Business and Finance

Feeling (financially) repressed

Merryn Somerset Webb
Why the UK’s debt busting plan is actually working, thanks to a history lesson in interest and inflation.

You hear a great deal these days about how the government doesn’t have much of a coherent plan to get the UK out of its current difficulties. But this isn’t entirely true.

Take a close look at what is going on with your own money and you will see that it has a perfectly good plan – something economists call financial repression, which, in its simplest form, refers to running a policy that consistently keeps interest rates lower than inflation. How does that get us out of trouble? It gets rid of the debt.

The UK’s main problem is that not only is the population as a whole labouring under previously unheard-of levels of personal debt, but the state has also run up the largest ever peacetime public debt. These debts are too big to ever be paid off in any honest or straightforward way. Repression allows them to be gradually inflated away by transferring wealth from creditors to debtors.

Here’s how it works. Savers lend their money to banks (by leaving it in deposit accounts) and get back less in interest than they lose in inflation, while investors – and pension funds in particular – put their money in government bonds and suffer in the same way. The result is good for those in debt (they pay very little in interest and inflation makes their debt smaller in real terms) and absolutely awful for those trying to protect their wealth.

History with interest

The last time the UK government ran a period of repression was 1940 to 1956, when interest rates, as Tim Bond of Odey Asset Management points out, were lower than inflation for the entire period. The result? If you had been holding government bonds, you would have effectively lost 46% of your wealth over the period. Holding cash would have been just as bad.

However, there is one tiny piece of good news here: while most repression-era investments are a disaster, one is not. Over that same period, equities rose by 6.5% per year after inflation – not bad at all. And also good reason to make sure that – while you recognise the extreme volatility of stock markets in periods of economic stress such as today’s – you keep making long term equity investments. But how?

A long term view

A recent change in regulations has thrown up all sorts of new online advisers that purport to be able to help you. But rather than paying for advice – even cheap online advice – I’d be tempted to do a little personal research and then buy good investment trusts through an online investing supermarket such as Alliance Trust Savings or Hargreaves Lansdown. My own portfolio is full of the likes of the Personal Assets Trust, Scottish Mortgage and Finsbury Growth. Buy some of these, hold them for a decade and odds are you will be one of the few survivors of Britain’s second great financial repression.

Merryn is the editor of Moneyweek (moneyweek.co.uk). Follow her on Twitter @merrynsw. Image credit: Howard Lake.

there is one tiny piece of good news here: while most repression-era investments are a disaster, one is not

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