One of the things modern monetary policy wants us to do is to spend more of our money instead of saving it (bring our consumption forward) and to rebalance our portfolios towards riskier assets (defined as the ones that one way or another have a hope of boosting growth).
It’s not working that well.
There is rising evidence that super-low rates terrify large groups of the population so much (older people in particular) that they cut rather than raise their spending. And if you look at my last post you will see that for large parts of the investing population the lower rates go the more government bonds they buy (this helps out with the UK’s public debt problem but it isn’t much good for anything else).
However, this Sunday’s Observer produced a perfect example of a member of the innocent public doing exactly what she is supposed to do: taking her cash out of the bank and rebalancing it into a more risky “investment” – in this case a VW van.
One-time saver Amy Jackson tells the newspaper that with casa Isa rates at 0.25% she has come up with an inventive way of using her money. Instead of putting the £13,200 she had for her ISA into a wrapper this year she has used it to buy a ten-year old converted van (£11,500 cost plus £1,700 in expenses and new upholstery). The plan is to keep it for three years and then to sell it – at an expected price of £11,000.
To the uninformed eye that might look like a loss. But look at is as Jackson does, and it isn’t. She and her partner are going to take all of their holidays in the van over the next three years, something she reckons will “save” them £6,000 on the cost of their usual holidays abroad. Add annual costs (servicing, tax and insurance) and she is, she says, not losing but making money – a total return of £1,700, or 12.9% over the three years.
This is nonsense, of course. Add petrol, food and the odd flat tyre and the £1,700 will soon vanish; if she is lucky (and I would assume she would need to be lucky to sell a high mileage 13-year old van for £11,000) she will come out roughly the same as if she had used the Isa and gone to Tenerife for a week every year.
But still, the point is that in this rare case, monetary policy is working – it is providing the justification for someone to spend instead of save. It’s just a shame it doesn’t work more often.