Placing cash on deposit with a bank – even with the government in the NS&I account – is an investment.
The promise to access your money and receive interest thereon is based on basic principles that:
• the bank retains liquidity
• what they do with your money remains safe
• your money they lend to other people can and will be repaid.
Given the extraordinary circumstances faced by us all today where the most robust and safe investments in the most credit-worthy companies are now at risk, therefor banks and cash are just as much at risk as anything else.
So, hold enough cash but spread it around many accounts and add to your NS&I accounts albeit in the last place even the government can seize up if they cannot raise the tax to pay the interest and deposits back.
The bank guarantee system is only as good as the government’s ability to raise the money through taxation or printing money to meet the promise they provide.
Following on from the above, it does not take a rocket scientist to realise that confidence in the system is wafer thin at the moment and if people start to wonder what currency, what deposit, what government promise is safe, this is the point at which inflation kicks in as we automatically bail out of deposits and hold physical cash under the mattress. The mattress does not work either as history demonstrates, the more we hold, the more the government prints and so it goes around and around until money is worthless.
Fixed interest, debt funds, gilts, treasuries etc
These are nothing more or less than cash. You lend your cash to a company or a government on the promise that they will repay you the money lent and in the interim the interest they promise.
But when they cannot, then both the interest and the debt fall into default and the values collapse.
These investments fall into the same category as cash because when they go down or out, they either get inflated away or simply disappear.
It is obvious from the above that so long as you can service the interest on the debt and this is falling all the time, it stands to reason to keep the debt as it is so cheap and may be inflated away. Your debt is some else’s investment going down in value.
Gold typically does well when investors are extremely fearful, however, it does not always provide protection and last week was a prime example, when markets fell heavily, and gold was broadly flat. It may do well if central banks create a policy error or investors thoughts turn to depression. It still remains a volatile asset class and does not always behave as one would expect.
Property and land
As Mark Twain observed: “they ain’t making it no more” in other words, we have to live somewhere and grow food to live on. In the end, property and land is the basic safety net in the system and will be reflated and will always be worth something, even if, in the short-term, the yield and rents may be depressed or default.
Notwithstanding that companies will and do go bust, most do survive even if their debt defaults: they rearrange the debt, or it gets cancelled or the debt is rolled into equity.
Yes, equity prices fall far and fast (as they are at the moment) but remember equity markets are a predictor for the future.
Like property, which may become stagnant if the rents are not paid, they still exist even if the share price goes down 75%, if the company is sound, if the product good, if the management effective, companies will survive and equity will recover and unlike, cash, fixed investment, which can be inflated away equity prices follow inflation and increase in value when recovery comes along if only to keep pace with inflation.