Simple Pound

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Reading the Healthcare Economist, I came across an article from the Economist that discusses the world’s wealth distribution. While the global income distribution has been debated frequently, no one ever attempted to measure the wealth distribution because the underlying data was (and is) somewhat patchy.

The first study was now undertaken by the World Institute for Development Economics Research (WIDER) and is supposed to give further insights into the distribution of financial assets, real estate, consumer durables and livestock (!) around the world in 2000.

Unsurprisingly, the world’s wealthiest can be found in the States, Europe and Japan while Asia-Pacific, India and Africa dominate the poorest deciles. In numbers, you are deemed to belong to the richer 50% of the world if your financial assets amount to at least US$2,161 or (currently) just over £1,000. With assets worth more than US$514,512 you already belong to the top 1% of the wealthiest people in the world.

As with any global information, these numbers are of limited applicability to the UK or even US because our higher living standards accordingly require higher expenses than the average African family can expect. Nevertheless, these figures should be a gentle reminder that a little can go a long way in developing countries and that the £20 you won’t miss can make an enormous difference somewhere else..

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The case Brennan vs. NatWest is still dragging on. After three days of hearings on whether the case should go to court or not, the judge reserved his judgement.

In the meantime, you can feel that NatWest, represented by barrister Pilling, is getting rather annoyed with Brennan and the idea of being made a precedence:

“It is not for Mr Brennan to set himself up as a consumer champion - that is exactly what his claim is all about.”

“He is pursuing this action for the benefit of other people, not himself - he is pursuing a crusade”

You have to admit, he has a point. That’s why I don’t like lawyers. They always seem to have a point no matter how wrong you want them to be…

Update: Apparently the judge estimates to need six weeks to reach a final decision. Read a very comprehensive summary about the last day of the hearing here.

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While we are all eagerly waiting for some progress in the Brennan vs NatWest case, a first court order filed in Birmingham established the lawfulness of overdraft fees.

The claimant was suing his bank Lloyds TSB over £2,545 of unauthorised overdraft fees, which he claimed were illegal contractual penalties. The judge concluded:

“Having held that the charges complained of are not charges for breach of contract but part of the price of the services provided by the bank…he has not satisfied me that he has any ground in law for recovering from the bank the amount of any charges which he has paid to it.”

Even though this ruling comes from a District Court and is thus not binding on any other court, it might adversely affect the number of bank charges claims that are successfully settled before the first hearing.

Read the BBC story here.

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Everyone who is even just remotely interested in financial markets or personal finance is eagerly waiting to see whether the Bank of England will decide an increase in interest rates today.

We currently have a base rate of 5.25% which means that the Bank of England (BoE) charges 5.25% interest for loans that high-street banks take out in order to lend money to their customers. That means when the BoE decides to increase interest rates, any retail bank that seeks to borrow money will have to pay more interest on it. Since banks don’t usually like to decrease their profit margins, an increase in the base rate will almost certainly be passed on to consumers.

Now, how does that help with inflation? Inflation is the result of more money being spent than output produced - prices increase in order to bring down demand. As a matter of fact (and especially with the growing debt level in the UK) the money people spend isn’t necessarily money they have earned (i.e. a salary) but frequently money they have previously borrowed from a financial institution. Think houses, cars but also any balances carried forward on credit cards…

If the BoE now increases interest rates, borrowing money gets more expensive as high street banks adjust their offers. While you might be able to borrow £10,000 with 5% interest in a time where the base rate is 4%, you will certainly have to pay at least 7% when the base rate approaches 5.5%-6%. Assuming a loan period of 3 years, this results in a difference of roughly &pound20 a month. While £20 doesn’t sound too much, you still end up paying £300 in interest more a year. Therefore, with an increase in the base rate, it gets more expensive for people to take out loans or a mortgage. This in turn should make people think harder about whether they really need to take out this loan, and hence reduce demand and thus spending.

On the other hand an increased base rate means that people are likely to get more interest on their savings (because banks get more money for theirs at the Bank of England…). If you can suddenly earn 7% a year in interest when before only a meagre 4% were available, you are more likely to leave your money in the bank, rather than go out and buy some more shoes . It’s easy to see that more money in savings means less money being spent…

The overall effect of an increase in interest rates is therefore a reduction in demand and associated spending. This in turn reduces inflation as now production can keep up with demand and we (theoretically) return to the equilibrium price for our goods. If you’re keen to find out more about how monetary policy works, the Bank of England website is a very good place to start reading…

Back to real life - the interest rates meeting is on today. Analysts and the City in general have been speculating for weeks what the outcome of said meeting might be. While about a week ago, the BBC published an article that proclaimed interest rates would have to be raised to at least 5.75%, predictions got a lot more modest now.

One of the strongest indicators for a potential increase in interest rates on Friday is the fact that the Bank of England failed to hold its 2% (CPI) inflation target. Inflation was at 3.1% in March and in order to bring this back down, raising interest rates seems like a sensible option. And while you could panic because an increase would bring the interest rate to its highest value since 2001, putting it into perspective shows that it has been, in fact, hovering around a historically low value - especially if you compare it to figures for the early 90s.

However, there are some voices in the market who suggest that a raise in interest rates might not at all be necessary. First of all, the effect of the high energy prices that contributed to the rise in inflation is coming to an end as utility companies (are being forced to) pass on their cost savings, which will reduce people’s utility bills. Further, the growth in house prices is finally slowing down (yes! ) and the number of approved mortgages is even decreasing! All these signs could mean that we’ll be back on track with 2% inflation by the end of the year.

Let me know whether you think an increase is likely, and why (or why not). We can later check who got it right and even though the first person who guessed correctly won’t be getting a freebie, you can still prance around knowing you’ve got it all figured out.

Update: The Bank of England announced an interest rate increase of 0.25% to 5.5%.

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The hearing for the NatWest vs. Brennan case on unlawful bank charges finally took place (after being postponed earlier in April) two days ago and the only reason I haven’t updated you immediately is that nothing really exciting happened. People are still trying to figure out whether or not this case should actually go to court or not - a hearing about a hearing, as Neil @ Fool.co.uk puts it .

However, if you really crave some details on what’s going on, I figured I might as well share a link with you that is the best cover of the events I’ve come across this week - from someone who has actually sat through the hearing. Read the story here.

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I couldn’t have said it better. Except for, maybe, bourgeoisie… that’s a word not as commonly used anymore as it was back when Lenin was busy planning a revolution. But the same principles still apply - even if you manage to stash some money away and not spend it all in one go, you will have to beat tax and inflation for your money to actually increase in value over time.

Cliff @ Fool.co.uk has written an elaborate article with lots of examples on how taxes and inflation will affect your money. His conclusions: take advantage of tax-free returns by making full use of your ISA allowance or buying Index-linked Savings Certificates, which are guaranteed to beat the RPI-rate of inflation (currently 4.8%) over three to five years.

The RPI index is currently at its highest since 1991 and even though this might give some people mighty grief, other dramatic examples prove that we should be thankful to live in a stable and secure economy like the UK. Zimbabwe is currently suffering from the world’s highest inflation rate of 2,200%. Compare this to what we call a “scandalous” 3%… If you had put £10 under your mattress last year its buying power would be reduced to £9.71 now (assuming 3% inflation). If a farmer in Zimbabwe would ever be lucky enough to own the equivalent of £10 and he would have buried it in his backyard a year ago, the same money would now only be worth £0.43.

If you’re still worried about inflation in the UK, here is a calculator that let’s you determine exactly how much value your money’s lost over the years. Just promise you won’t be upset…

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