A.I.M. Users Bulletin Board

[ls7550]

yet in the greater part of the inhabited world government spending and taxation policies seem to such that we should expect a far higher equilibrium real rate

The cost of the UK deficit is around a third lower than in 2007. Whilst the debt has near trebled. Broadly the UK had a debt of GBP500B in 2007 - and was perhaps paying a average 5% (25B) in yearly interest. Under QE the Bank of England printed and bought 350B of that - and they return all interest received from those Gilts back to the Treasury (might as well not exist). The Treasury created around 900B more Gilts - that span out over many years to maturity (40+ in some cases) - at a guess of 2% average yield. Factor in 25% inflation since 2008 and overall the cost of servicing the UK debt is around two thirds that of the 2007 rate.

A nice thing about Treasury's (Gilts) is that mostly they are fixed term fixed yield. 2% for 40 years for instance. The Bank of England are also under remit to target a 2% inflation rate. So a large debt for many years that in real terms costs nowt. A risk is rolling over those debts (selling other gilts to raise funds to pay back the amounts on maturing gilts), but that's phased over many years and can be managed on a some rolled, some repaid out of other areas and not replaced type basis. And any periodic spikes in inflation during those years will help erode the debt.

What is the real core inflation rate? I have only nominal faith in the Consumer Price Index that is generated by the U.S. Bureau of Labor Statistics.

I recently looked at how a three way equal weighted combination of UK small cap (FT250 index), US stocks (BRK) and gold compared for both a UK and US investor since the 1970's. The real rewards were remarkably similar considering the difference in UK and US inflation (6% UK and 4% US) and that broadly the GBP declined at a 1%/year rate relative to US$. UK had a 1% better nominal annualised compared to US investor, but a 1% worst annualised real (after inflation). Which is perhaps indicative that both the US and UK CPI figures aren't manipulated.

It is the time-value of the AIM Cash Reserve that has to pay its own way these days. This is because of the very low real and inflation adjusted interest rates available.

What exactly is 'cash'?

Gold in the (US) past was removed from (investment grade) circulation (1933) just before the gold/$ price peg was raised 70%.

Treasury Bills are taxflated (and in the US I understand that even TIPS have the inflation element taxed (in the UK we don't - but equally TIPS don't negative repay whilst in the UK they do (i.e. if there's overall deflation you get back less than what you paid)). During the (UK 1970' and (US and UK) 1980's, double digit inflation, double digit interest rates and high taxation on nominal gains left investors with less purchase power. A alternative is for smaller levels of negative real yields for prolonged periods of time - which is more akin to recent times. Assets such as T-Bills tend to be priced as being 'risk-free' - but they ain't.

A safer form of 'cash' is perhaps something like http://investorshub.advfn.com/boards/read_msg.aspx?message_id=112250271 and as your more recent watercolouring highlights


even during the high US inflation 1980's years that 'cash' came through reasonably well. And when 'cash' rewards reasonably there's less pressure to overweight other more volatile assets such as stocks. Again as you've also highlighted in periods when that 'cash' did lag, generally the lag was relatively little and just a short lived dip.

When the gap between stocks and 'cash' is much narrower, then 50/50 stock/cash can be a reasonable choice so that you're more inclined to top up when stocks are relatively low, reduce when high ...etc. If 'cash' contains 33% stocks (the rest in bonds and gold) then overall you're holding a 66/34 stock/others blend of assets. For some investors just holding 'cash' alone might be sufficient - and be safer than holding all of a single riskier asset such as T-Bills, or gold or .... whatever.

So if you hear anyone complaining about cash earning nothing in recent years - you can assume that they're risk takers and have all of that money in a single risky asset such as T-Bills/notes/bonds.