Why Be A Credit Crunch Investor?

Economy at 60-year low, says Darling. And it will get worse

Britain is facing "arguably the worst" economic downturn in 60 years which will be "more profound and long-lasting" than people had expected, Alistair Darling, the chancellor, tells the Guardian today.

Now, I’m not a great one for trusting politicians – especially not the debased bunch of shysters running the U.K. at present. But, when they are in government, one thing you can usually count on them to do is to paint as rosy a picture as possible. You know how it goes …“no more boom and bust” … “longest period of sustained growth in [however many] years” ... “economy is robust” … “prudence” … etc. … etc. …

So, when the chancellor of the exchequer goes on record as saying that we may face the worst economic downturn in 60 years, you know that we are, in the immortal words of The Daily Mash, “Well F*cked” Why, then, do I think it’s time to start investing?

Because you have no choice.

That’s not quite true, of course – you always have a choice. You can choose, for example, to not have any spare cash at all (although it may not seem like much of a choice – “Yeah, I want to live in poverty!”). Or, you can choose to pay off any existing debts that you may have (a very wise choice, in my opinion). Best of all, you can choose the ... emm ... Best option:

I spent a lot of money on booze, birds and fast cars. The rest I just squandered.
George Best

But, let’s assume for sake of argument that you do have some spare cash, and that you are very keen to at least hold onto it. So, what do you do with it? For most risk-averse people, the answer would be “savings”, either in a piggy-bank beside their bed or (more likely) a nice, safe little bank or building society account somewhere.

I’ve got news for you people. You’ve just made an investment, whether you like it or not. And, like every investment, it carries risks.

Money in the bank - what could be risky about that? Well, unless you are one of tiny minority with a safety deposit box and your own key, you don’t have money in the bank. Do you really think that your local branch has an old shoe-box somewhere in their vault, with your name scribbled on the front and a grubby roll of fivers inside?

No, that’s not how it works. When you give a bank your money, you no longer have the money. It’s theirs now, to do with as they see fit – mainly, to lend out to the first conman who comes along, who’s credit profile happens to tick their boxes. All you have is a statement of liability (more commonly called a bank statement), which details exactly how much money the bank now owes you. Why might this be a problem?

Well, it’s not, usually, as long as everyone doesn’t ask for their money back at the same time. But, what about when they do, and most of it has already been lent out to one conman or another (what is known as “fractional reserve banking”)? Remember those queues outside Northern Rock?

Aha, you say, but that’s not much of a risk, as our good friend the U.K. taxpayer (in the shape of our ever-benevolent government) guarantees bank deposits up to £35K and, in practice (see Northern Rock again), will step in to shore up the balance sheet of any bank in danger of going under.

Leaving aside the issues of (a) what if you have more than £35K on deposit and (b) the hassle and delay of getting your deposit compensated, there is one HUMUNGOUS risk associated with investing in a “nice and safe” bank account (or a piggy bank beside your bed). Actually, to judge from history, it’s not so much a risk as a certainty. And, recent government actions such as the shoring up of Northern Rock simply make it all the more likely.

I refer you to an excellent paper from the Office of National statistics, entitled Consumer Price Inflation since 1750

To quote:

• between 1750 and 2003, prices rose by around 140 times
• most of the increase in prices has occurred since the Second World War: between 1750 and 1938, a period spanning nearly two centuries, prices rose by a little over three times; since then they have increased more than forty-fold.

Put another way, the index shows that one decimal penny in 1750 would have had greater purchasing power than one pound in 2003

For the U.K. resident, at least, the lesson of history is clear – stick your money in the bank and its real value will be eaten by inflation.