My working-class parents – who lived through the dark days of the Second World War – were terrified of living on what they called the “never-never” – i.e. buying stuff today for which they would have to pay at some point in the future. They had a horror of debt.
Today, in our world where instant gratification has become the norm, we are all (including governments) living on the never-never. Who of us does not have and use a credit card? From Klarna, which allows you to buy today and pay later, to government debt mountains, the world has forgotten to live within its means. It now lives in ‘bubbles’, whether the ones aimed at preventing the spread of Covid-19, or the bubble of the credit economy. With Klarna, if you pay four equal instalments every two weeks you will be charged no interest. But if you take out a loan to finance your purchase you could face as much as almost 30% in interest payments.
Governments like consumer debt. They see the expansion of credit as fuelling economic growth, giving everyone a comfort blanket; the ‘feelgood’ factor will, they hope, ensure victory at the next election.
According to the US Federal Trade Commission, “a person with good credit will be able to borrow money at better terms… Lenders are less likely to loan more money to a person with bad credit…” This makes sense for the lenders but absolutely no sense for the ‘have-nots’, those who might be most in need of a loan. They can find themselves taking out loans from ever-riskier lenders who charge extortionate rates of interest.
Living in this unreal world, where credit is king – even though the charges for consumer credit cards are astronomical – one can easily lose sight of Shakespeare’s wisdom in Hamlet, when he had the loquacious buffer (yet sound adviser) Polonius tell the Prince of Denmark “never a lender nor a borrower be”. It was an exhortation to Hamlet to guard his finances. Guarding your finances will become more difficult in the months and years ahead, as the bubbles expand, Tesla and Bitcoin-fashion. US consumers appear unconcerned about credit card debt, which has expanded from $660 billion at the start of 2013 to more than $1 trillion today, aided in part by the sheer convenience of mobile payment systems.
Guard your finances
On 4 February, the Bank of England (BoE) made a very odd public statement. It said UK banks and building societies should prepare for negative interest rates in six months’ time – which would be the first time in its 327 years that it moved to negative interest rates.
The statement was odd because the BoE also said it was not intended to send any signal that “it intended to set a negative bank rate at some point in the future”. So – prepare but actually, it might not happen.
Negative interest rates; instead of paying interest on deposits, banks may start charging interest on deposits they hold. So instead of the measly rate of interest, you currently get you could find yourself paying the bank to hold your money. It’s all about trying to get cash out and spent in the system, to try to stimulate the overall economy. Instead of parking excess reserves at the BoE banks will supposedly be incentivised banks to lend to households and firms to boost economic activity. You can be sure that your credit card interest rate will not be going negative, however.
This has already been tried once before and didn’t work. In the Great Financial Crash of 2007-2009, when recession and global deflation threatened, central banks slashed their interest rates to near zero and failed to stimulate the economy. That’s when a new phrase, ‘Quantitative Easing’ began to be more familiar. The BoE explains QE on its website as involving the creation of “digital money. We then use it to buy things like government debt in the form of bonds… The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy”. It’s a trick in other words; one part of government (the central bank) ‘creates’ money and lends it to another part of government. It’s never-never land in spades.
The Swedish experiment
Sweden’s central bank was the first to introduce negative interest rates after the 2007-09 crash. It was followed by the European Central Bank, the Danish Nationalbank, the Swiss National Bank, and the Bank of Japan. A couple of Swedish economists have recently concluded that “at this early stage… the costs of negative interest rates to society most likely exceeded the wider benefits”. They go on: “Imbalances which had already begun to materialise before the Global Crisis have worsened. Real estate prices have risen rapidly, contributing to rising wealth inequality. Household debt has reached record levels… The Riksbank, the oldest central bank in the world, has just terminated its most recent experiment. In our opinion, the clear message from the Swedish experience of negative policy rates is: ‘don’t do it again’, at least not when the domestic economy is booming, domestic inflation is determined by foreign inflation, and the financial imbalances are rising through high asset price inflation”.
Say no to never-never
Last December Carmen Reinhart, vice-president and chief economist, wrote a blog in which she anticipated a credit crunch this year, “disproportionally hitting low-income households and smaller firms that have fewer assets to avert insolvency… The hope is that because the health crisis is temporary, the financial distress of firms and households will be, too”. She worries about insolvency for firms and households.
She is right to do so. The level of global corporate debt rose by almost 25% to a new annual record of $5.35 trillion in 2020. While the level of borrowing is expected to be much lower in 2021, the risk involved in such vast lending to even “junk-rated” companies is excessive.
Are we living in a bubble? It’s generally accepted that there are five stages to a financial bubble – displacement, when investors become entranced by a new paradigm shift (such as, arguably, Tesla and cryptocurrencies) followed by a price boom, then euphoria, then profit-taking and finally panic. With zero-to-negative interest rates, if a bubble exists (which seems likely given the recent sky-high valuations of many stocks and cryptocurrencies) then it can endure for a lot longer.
What is required right now for richer or poorer households and individuals is vigilance and avoidance if possible of the never-never. And if keeping an eye on things all the time sounds exhausting you have another option – gold.
Gold is trusted as a safe haven and an unparalleled store of value by many. Gold is the solution to secure your long-term financial security. Gold is security and Glint its key. We strongly believe that gold is the fairest and most reliable currency on the planet, but we obviously need to point out that it isn’t 100% risk-free. The value of gold can fall, which means the purchasing power of the customer can also fall.
And keep your eyes peeled.