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Keeping money in the bank was historically a sensible move for savers. Blessed with high-interest rates, savers often had to do little more than deposit money into a bank account and watch it grow.
Central banks change interest rates as a way of stimulating or cooling economies. When an economy is moving too fast, central banks increase interest rates to encourage saving and conversely, when economies need a boost, central banks drop interest rates to discourage saving.
Rewind to 1989, the Bank of England’s interest rate was 14.88%, at the same time in the US, interest rates were 9.90%.
Since those peaks in 1989, interest rates around the world have slowly dropped. In 2020 interest rates in have reached record lows. The bank of England’s interest rate is currently 0.25% (illustrated below) with the FED in the US offering the same figure.
Source: Trading Economics
Maynard Keynes famously coined the term the money illusion. In short, the money illusion refers to how we cognitively see money in nominal terms instead of real terms, by ignoring the powers of inflation.
As an example, if a person has $100 in the bank and leaves it there for 3 years, they will still have $100 plus interest of about almost a dollar. The saver has a marginally larger nominal value of $100.75 and if inflation wasn’t a thing, then the saver would have increased their wealth.
Unfortunately, inflation is a thing. And in most developed markets it operates at around 3% a year. So whilst the saver now has $100.75 in the bank, their purchasing power has been reduced by 8.25% leaving them with a real value 8.25% lower than their original. In the image below, we see how inflation has decreased peoples purchasing power.
Quite simply, savers now have two choices:
1. Keep money in the bank and accept unprecedentedly low-interest rates and the constant erosion of savings by inflation
2. Demand better
We know savers are looking for security, value and capital appreciation. We believe our structured notes offering provides all three.
Security – This product is which is held with an investment bank that is rated A by Fitch, A3 by Moody’s and A- by Standard and Poor’s.
Value – This product has no entry fee.
Capital appreciation – This product generates 2.5% per-quarter – assuming certain market-dependent criteria is met.
Here to explain further deVere CEO Nigel Green
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