Cover of MoneyWeek magazine issue no 427

Victory over recession

20 March 2009 / Issue 427

Our experts' tips on what to put in your bunker... PLUS:

  • Why you should buy this mining stock now
  • Should you become a Name at Lloyd's?
  • Britain's most feared divorce lawyer


Why I’m buying shares

MoneyWeek has a history of being too early when it comes to spotting bubbles – I’ll admit that right away. We first declared that British house prices were ridiculously overvalued in 2004, and that we were heading for a crash. They were, and we were, but that didn’t stop prices from rising for another three years.

Given that prices have now fallen back to 2004 levels, and have a lot further to fall, we don’t feel too bad about that. But why am I bringing this up? Because I feel the same way about gilts today as we did about house prices then. UK government debt is a bubble – artificially inflated by cheap money, and destined to explode with a bang. I don’t know when it’ll happen. But I do know that I can’t see any sensible investment case.

The Bank of England is trying to pump up to £150bn into the economy (quantitative easing, or QE), largely by buying gilts. Of course, that’s sent gilts sharply higher and forced yields down. But the whole point of QE is to drive inflation higher. Inflation is toxic for bonds. So if QE works, bonds will sell off massively and, as Edward Chancellor put it in the FT this week, “owners of government debt will be the chief victims of this great monetary experiment”.

What if QE doesn’t work, as our regular columnist James Ferguson suspects will be the case? Then the gilt bull market could be here for quite a while longer. The good news is that regardless of whether we’re headed for hyper-inflation or a never-ending Japan-style slump, there are far better places to put your money.

• Read the full editor’s letter here: Why I’m buying shares