Interest Rates

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Monetarism was in the early stages of its ascendancy when I was studying economics. I remember one of my lecturers describing Milton Friedman, doyen of the Chicago School, as “that amiable fascist.” Now we are living with the fall-out of Governments’ delegating economic management to their central banks and using fiscal policy as a means of appeasing noisy interest groups and winning elections.

I came across this graph yesterday and felt I should share it:

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If this is how interest rates have to behave – even dipping into negative territory currently in Denmark, Japan, Sweden and Switzerland – to balance inflation and economic growth, we should all be on the lookout for flying pigs and white rabbits with pocket watches.

HM4MEN

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Are you a man with sole responsibility for managing a household?  Or do you know a man in that situation?  If the answer to either question is Yes, you should buy my latest e-book:

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It’s at Amazon, Apple, Kobo and all the other major e-book retail platforms and it’s priced at a derisory US$1.99.  Since it’s an e-book I can hardly say, “Hurry while stocks last,” but I can say, “Hurry before I realise that it’s grossly underpriced and whack it up to US$2.99.”

Foreign Exchange Spreads

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I’m so sorry.  I came to Armenia on a job two weeks ago and nothing here has made me stroppy yet.  Oh, wait a moment, there is just one thing…

I received a Moneygram transfer in US dollars, which I was paid over the counter in US currency.  I went to change it into Armenian drams and was pleasantly surprised to see the buying and selling rates displayed behind the counter: buying US$ at 475 drams, selling at 481.  That’s a spread of 1.25%.

Now, I ask myself, if an Armenian businessperson can rent and staff a small booth, provide security and make a profit with a 1.25% spread, what’s wrong with Travelex and its ilk?  What’s wrong with my bank, which adds transaction fees to its already healthy spread and has no associated costs whatsoever except a minute amount of electricity to drive a few bytes of data through a cable?

I look forward to a spirited riposte from someone in the banking industry, or the CEO of named-and-shamed Travelex.  I can think of no explanation for the outrageous charges for simple currency transactions that can be described without resort to such words as ‘extortion’, ‘monopoly’, ‘collusion’, ‘profiteering’ and ‘greed’.

 

 

Compound Interest 1 – Superannuation

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Albert Einstein was asked, “What is the most powerful force in the universe?” and famously answered, “Compound interest.”  I heard an interesting suggestion on the radio the other day.  It was that lactose tolerance evolved over 6,000–7,000 years in Europe, with perhaps a 5% enhancement in survival rates for people born with this trait.

That doesn’t sound like much, but over that period there have been about 260 generations.  The cumulative effect of a 5% advantage in each generation is 1.05^260 which is 323,000.  In other words, one could expect lactose-tolerant people to outnumber their lactose-intolerant peers by 323,000 to 1.

What is the effect of squeezing a slightly higher rate of return from one’s savings?  It’s not as dramatic, of course, but assume that a youngster joins the workforce at age 22 and works to age 67, saving $5,000 per year.  With an average annual return of 5% he or she would retire with a lump sum of $820,000.  But if that return were 6%, the lump sum would be $1.1 million.  One-third more.  Half-a-house more.  Enough to pay off a student loan for a medical degree and have some change.

How hard is it to squeeze an extra 1 percentage point annually from your super fund?  Well, bear in mind that it’s the net return to you that matters.  If you’re paying someone else to manage it, start by checking how much they’re charging you for that service.  If it’s more than 1% you can probably find someone else who’ll do just as good a job for less.  Read the fine print to see if you’re paying two fees: one to manage the fund and one for ‘advice’.  That happened to someone I know.

And how much risk are you willing to bear?  Over the long term, equities tend to perform better than bonds.  For one thing owning part of a capital asset gives you some protection against inflation.  For another, you might lose 100% of your money in a risky investment that goes bad, but you can’t lose more than 100%.  On the other hand if a risky investment succeeds there’s no limit to your possible profits.  Over a lifetime, the big gains are likely to outweigh the total losses.  Not certain, but likely.

Disclaimer:  I am not a financial planner, financial advisor, banker or anyone else with special insight; and I’m not trying to sell you a financial product.  I manage my own investments (with advice that I trust) and I suffered in the dot.com bust and the GFC like everyone else.  But I’ve recovered, just about, emotionally and financially.