Another busy news day…
@Roadkilled I understand that, but inflation right now isn’t caused by rising demand as people are buying less because external factors are pushing up prices. Rising the interest rate will restrict people’s spending even more which does mean that there will probably be a recession and all that but will it tackle the actual problem? I’ve heard that it’s also to support the pound, this makes an awful lot more sense than the other theories.
@Albino-Kangaroo That’s impressive, best here is 1.71% with Virgin Money (I remembered that off the top of my head, I’m very pleased with myself).
@notsomethingstructural Exactly, current economic problems are caused by supply issues (stemming from the pandemic and the war in Ukraine) which does mean there’s more demand than supply, but not for normal reasons. An interest rate hike won’t do anything to help that and will mean people will struggle more with their finances.
@Gabriella Perhaps the only nice thing about the mexican government is Banxico. It does not suck like the ECB.
@tae Good for them, I don’t think our Bank of England is that bad.
@Gabriella I mean 13% inflation forecasted in the UK is ridiculous. At least they're hiking rates a bit better than the ECB.
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@Gabriella our banks here in OZ have boosted the rates 0.5 the last three times. it's now at 1.85%
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Exactly, current economic problems are caused by supply issues (stemming from the pandemic and the war in Ukraine) which does mean there’s more demand than supply, but not for normal reasons.
Why do you assume these aren't the "normal" reasons? Historically, inflation has followed geopolitical shocks, with war being the most common. There are localized cases of inflation when a government decides to go crazy printing money, but the more widespread inflation has usually followed conflicts. For example, the steep inflation in North America and Europe of the 1970s followed the 1967 and 1973 Arab-Israeli wars which led to OPEC embargos cutting off fuel supplies. I keep hearing "the highest inflation since 1980", which was the tail end of that inflationary period.
@tae It will be ridiculous, I don’t know what it’ll be like.
@Roadkilled Normal probably isn’t the right word, I was more thinking something within the nation that is predictable, a war and a pandemic not so much. I need to look up causes of inflation, my economic knowledge extends to reading an A Level economics textbook three years ago and whatever other people say.
@Gabriella pft. In Mexico government bonds pay between 8-11%, private bonds pay anywhere between 8-20%
That said, Mexico does have higher inflation, so the real yield varies between 4-6% when you convert it to dollars. It's a bit of a bet between forex, inflation, and time horizon. Lately the Mexican peso has held up quite well against other EM peers but you can't really expect it to hold that nicely forever.
@tae It’s not good but there was great excitement when that rate was announced, I can’t remember the premium bond ‘rate’ (not really a rate, more a chance of winning a competition) off the top of my head - 1.4%, I had to look.
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@Gabriella socioeconomic and fiscal factors mean that the UK, US, EU and JP get these zero or negative rates. Developing countries always pay more for their government bonds. We even had "negative real rates" for a few weeks because the government bonds paid below the reported inflation. That freaked out some people.
My understanding is that the bank of england believes that in order to boost the UK's economy they need to offer terrible rates. So investors need to look to riskier assets in order to get a return. They basically don't want you to keep money in the bank.
In mexico it's the opposite, to keep the currency stable they must offer good rates, meaning they want you to keep money in the bank and not invest. Which again, is moot because if inflation matches the rates it's like being between a rock and a hard place. If you look at real rates in britain then... It's negative twelve or thirteen on a deposit account. Jeez.
But if you look at the dollar return of Mexican bonds it's also close to zero. So idk.
@tae I’m only any good at how the English system works, I do know that quite well but what anyone else does is not really on my radar, however, I’ll try and sting a sensible analytical sentence together.
In the UK, government bonds (NS&I Premium Bonds) are like a lottery, every week people win amounts from £25 to £10,000 (or more, I can’t remember) and the rate reflects the chance of winning and average return on investment (1.25%). I assume anywhere else it’s just a normal investment?
In the UK, it’s an event for a three year fix savings account (those tend to have the highest rates) to go above 3%, if that happens, the financial press go wild. They do lower rates to stimulate the economy as that encourages spending rather than saving whereas higher rates encourage people to save and not spend (which right now will still send inflation soaring and we will enter a recession). My main focus is how things affect people rather than the whole country (that needs to change but I’ve spent 8 years with this focus) and from that perspective I still think the rate rise is a terrible idea as the resulting financial hardship will cripple many families and the government support will not be sufficient.
Higher rates do encourage people to save, that’s just how it works but in the UK 1.75% is a high base rate and 1.71% (top easy access) is an exciting rate for savers. I suppose in Mexico they are used to high rates and probably save a lot whereas in the UK most people have more debts than savings (probably due to cheap rates).
It’s negative twelve or thirteen percent
I’ve never thought of it like that. I suppose it is as the spending power of your savings is diminishing but as a nation an interest rate of over 1.5% is an exciting event and that’s just what we’re used to
@Gabriella in the UK people are used to low inflation so the idea of a nominal versus a real return rate isn't as important. But if they're forecasting 13% inflation then things change.
Mexico really has two systems. A system for people who pay taxes and are inside the financial system, and those who get paid in cash and don't. Those who pay don't pay taxes can buy pretty much nothing except the overnight treasuries... and that's only assuming they use the government sponsored development bank called BanBienestar, which isn't very popular yet.
So, we have a simpler system in Mexico. We have three basic bonds that individuals can acces.
treasuries last between a day and a year, and those are publicly traded and have a floating rate depending on demand. Treasuries don't pay cupons, they pay out the entire value on expiration
inflation protected bonds
these bonds have a return above the reported inflation. So, if the bond says 4% that's 4% above the reported inflation, which might be 7% or 3%. So, some years these bonds are better and some it's worse. These bonds pay cupons plus a premium upon expiration. these last anywhere from three years to thirty.
These bonds pay cupons plus a premium and they're publicly traded so the return depends on demand for the bond. these last anywhere from a year to thirty
@tae That makes logical sense, here, everyone who earns over £14,500 (I think) has to pay tax regardless of how the money is earned.
So treasuries are like a normal investment but with a guaranteed payment at the end?
Inflation bonds are like a savings account with a high interest rate protected by inflation?
And development bonds are like any other investment just in the government?
Am I roughly there?
We also have Cash ISAs (tax protected savings accounts) and Stocks & Shares ISAs (where people can invest in things without paying tax) but the former was rendered useless with the personal savings allowance.
@Gabriella yeah, except on the inflation bonds, because those aren't really a savings account; if you pull your money out prior to expiration you do loose a bit of the bond's appreciation. If I could call any of those a "savings account" it'd be the overnight treasuries. As we speak those are at an anualized rate of 7.45%, so it's not as good as the inflation protected ones, but way easier to cash out, and much better than the banks. My bank, BBVA, offers 3% on a 180 day deposit... which sucks. other banks are more competitive, but none of the comercial banks beat the return of the overnight treasury, and it has been this way for years.
The private bonds I was mentioning come from smaller unregulated banks called SOFIPOS and SOFOMS ( multi-objective financial services companies ), but these are not the most ethical corporations, so I don't invest in them. They often take advantage of people with bad credit scores and give them expensive loans. But their 180 day deposit might pay out anything from 9-11%, beating the treasuries.
We have a very stupid savings system for stocks and bonds. It's called an AFORE and basically banks compete to be awarded chunks of savings accounts based on their return. But their returns have lagged that of the overnight treasuries for years now whilst being much riskier because they invest in stocks. The only benefit of AFORE's is that you don't pay taxes on them. AFORE's are obligatory for salaried workers. I don't count as one so thankfully I never had to deal with one.
If you're a bit more savvy you buy overnight treasuries for your short term savings, and you open a stock account for your long term savings. Stocks accounts are taxed, but at 10% over appreciation which is less than half of what americans pay. We also don't have to pay taxes on capital gains if the returns are realized at age 65 or older, which is when the government considers your stocks account as a retirement fund.
Keep in mind that the "foundation" beneath each rate quote is key. Michael Lewis wrote a great history of the early days of the 2007-08-09 crash, specifically regarding the banking frenzy in Iceland. They were offering MUCH higher rates than anywhere in mainland Europe... but it turned out to be completely speculative. A lot of capital chased higher rates to Iceland. however... When it crashed, it hurt a lot of banks and their customers across Europe, contributing to the crisis.
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@Roadkilled in 1979 my parents got the last 10% home mortgage in town. After that it went quickly to 12+%. Yeah it was bad but it got better once OPEC opened the taps making gas cheap and the resulting lower cost of doing business helped. However, the ability to process the oil is not what it was and neither are the US relations with OPEC. so the resolution is a good question given limited options.
if you pull your money out prior to expiration you do loose a bit of the bond's appreciation.
That’s similar to how it is with our ‘fixed’ savings accounts and there’s a peculiar penalty on cash ISAs (there’s a complicated system about how withdrawals work with the pay-in limit which is too long to explain)
My bank, BBVA, offers 3% on a 180 day deposit... which sucks.
To me that’s an amazing rate, I’m currently earning 1% on my savings!
They often take advantage of people with bad credit scores and give them expensive loans.
We used to have ‘payday loans’ for that job (short term, high interest) but the providers had to pay so much compensated that most went bankrupt (serves them right!).
The only benefit of AFORE's is that you don't pay taxes on them. AFORE's are obligatory for salaried workers. I don't count as one so thankfully I never had to deal with one.
So like our Stocks & Shares ISAs as they’re not the best way to go about investing. They’re not mandatory here, only fiscal thing that could be considered is the government-backed employee pension (different to the state pension but not really comparable).
@SantaBarbarian I’ve never seen that before anywhere. What does it refer to? We don’t have that terminology here.