Finance | money to burn

Burning money

If you burn paper money, do you destroy it? The answer is technically, no. The value of money is all about supply and demand and so if you burn a 50 pounds note, a 50 dollar note or a 50 Euro note; you are decreasing demand and making all the rest of the money in circulation more valuable. You may be destroying one note, but you aren’t destroying overall value! The Bank of England is currently doing the opposite, creating rather than destroying money but in doing so they are increasing demand and so making the money already in circulation less valuable.

Understanding Money

It is important to understand the nature of money if you are to make a few quid! The Bank of England is buying back it’s bonds with this new money. Why? Bonds are pieces of paper just like money, promising to pay the bearer; with interest. Money doesn’t pay interest and so by swapping money for bonds the Bank of England saves money. The price of bonds goes up in the markets and the investment banks and governments that own bonds sell them to the Bank of England at a higher price and make oodles of cash. Everyone’s a winner. Right? Wrong… The value of the money in your wallet and bank account goes down; you are the loser…

Bonds

The price of bonds has gone up and so on paper the Chinese government who own lots of them has made money. They haven’t really made money because if they dumped all their bonds on the market, that would increase supply and prices would drop! The only people making real money are the investment banks, speculating. You’re surprised aren’t you? Investment bankers making money? Shock horror!

Equities

Now if the investment bankers sell bonds to the Bank of England. What do they do with the money they get for them? They buy equities on the stock market and prices go up! On paper they make oodles of money! Again! Give them a bonus!

So where do you invest your money? Buy bonds? They have given a great return over the past ten years. I won’t be buying bonds they only go up in price if interest rates drop and there is more demand. The increase in demand is likely to be temporary and interest rates are rock bottom. How about equities, shares on the stock exchange? This is a better investment in the short term as investment bankers are increasing demand and shares prices will rise when inflation goes up. Some share prices will outstrip inflation. Shares that are about basics like banking, water, energy and food will do well. Even companies into non-essentials like holidays will do well eventually as the economies come out of recession leaner and meaner.

Risks

I wonder how the Chinese government will react to falling bond prices when interest rates do climb? Will regulators allow water and energy companies to increase prices when inflation takes off? There are still unanswered questions and uncertainty. There are risks and possible rewards for risk takers.

I hope this has made you think a little, we all like money; can you make money even in a recession? There are more amazing blogs on the Home Page.