Last year I put 200k under my matress and my mate put 200k in Icesave.....

MrExample

The interest rates have !!!!!! all to do with risk. Most of us put our money into Icesave because it seemed like a SAFER place, out of the way of the chaos engulfing the US/EU.

Iceland was previously seen as an extremely stable, safe place to put money -- low inflation, low taxes, a decent properly-funded pension system (unlike over here).

Your argument is destroyed somewhat by your claim that putting £200,000 under your bed is safe and/or sane.

I hope your £192,000 under the bed is still safe. :-)

1694

Under the bed everytime:
This is how banking works (against you.)
-The bank has £0, you have £100 paper notes
-You deposit £100 in paper cash, you now have a bank statement of £100
-Someone asks for a loan of £100 and gets a £100 credit to their account
-They withdraw your £100 of cash-your bank statement remains at £100
-You can electronically transfer that £100 to anyone else if you want to buy something on debit card for example.
-So you have £100 on your debit card which you can spend, and the other person has £100 in cash to spend...the money is doubled!!! If the money available to spend is doubled but your £100 stays the same (plus a little interest) your buying power halves.
-If you choose not to spend on your debit card but try to withdraw cash, this is a run on the bank and the bank will ask for a tax payer bail out.

Since very few people do ask for cash, banks are permitted by law to do this nine times. The banks of course know form experiance that only 1/9th of demands will be in the form of hard cash so they always make up and lend a digital 9 times the original paper or coin. Every time you deposit £1 in the bank your buying power is reduced by a factor of 9.

Keeping your money in a bank makes you poorer, the only person that gains is the banker.

Deep down you already know this, but have never thought about it before.

(This stems back to a time when, gold bars were real money and gold certificates were the digital money. Goldsmiths could forge 10 certificates for every 1 bar of gold they had. As long as people were happy with the gold certificates and didn’t withdraw the gold things would be fine)


Now the real problem! If there was £100 to start with and £900 was lent at interest of 0.2% even if the borrowers took all the money of that originally existed and added it to their loans they will still be short of the total repayments: £900 at 0.2% interest is £1080. Where can that £80 come from? No where, someone has to give up something they owned before they borrowed. The process can take place slower if the interest rate charged is lower than 0.2% but compound interest on debts that will always end the same way.

We have simply come to the crunch, where is that extra money? It never existed to start with, it hasn't been magicaly created by fractional reserve....Stuck! We call it a credit crunch and borrow more to prop up the system.

dkmax_2

MrExample wrote: »

The interest rates have !!!!!! all to do with risk. Most of us put our money into Icesave because it seemed like a SAFER place, out of the way of the chaos engulfing the US/EU.

That makes no sense whatsoever. Iceland is a core player in the global mess.

You took your money out of the frying pan and put it safely in the fire. Everyone was warned about the Icelandic situation at least two years ago, it was an ever growing pyre in the making just waiting for a naked flame.

MrExample

1694 wrote: »

Under the bed everytime:
This is how banking works (against you.)
-The bank has £0, you have £100 paper notes
-You deposit £100 in paper cash, you now have a bank statement of £100
-Someone asks for a loan of £100 and gets a £100 credit to their account
-They withdraw your £100 of cash-your bank statement remains at £100
-You can electronically transfer that £100 to anyone else if you want to buy something on debit card for example.
-So you have £100 on your debit card which you can spend, and the other person has £100 in cash to spend...the money is doubled!!! If the money available to spend is doubled but your £100 stays the same (plus a little interest) your buying power halves.
-If you choose not to spend on your debit card but try to withdraw cash, this is a run on the bank and the bank will ask for a tax payer bail out.

Since very few people do ask for cash, banks are permitted by law to do this nine times. The banks of course know form experiance that only 1/9th of demands will be in the form of hard cash so they always make up and lend a digital 9 times the original paper or coin. Every time you deposit £1 in the bank your buying power is reduced by a factor of 9.

Keeping your money in a bank makes you poorer, the only person that gains is the banker.

Deep down you already know this, but have never thought about it before.

(This stems back to a time when, gold bars were real money and gold certificates were the digital money. Goldsmiths could forge 10 certificates for every 1 bar of gold they had. As long as people were happy with the gold certificates and didn’t withdraw the gold things would be fine)


Now the real problem! If there was £100 to start with and £900 was lent at interest of 0.2% even if the borrowers took all the money of that originally existed and added it to their loans they will still be short of the total repayments: £900 at 0.2% interest is £1080. Where can that £80 come from? No where, someone has to give up something they owned before they borrowed. The process can take place slower if the interest rate charged is lower than 0.2% but compound interest on debts that will always end the same way.

We have simply come to the crunch, where is that extra money? It never existed to start with, it hasn't been magicaly created by fractional reserve....Stuck! We call it a credit crunch and borrow more to prop up the system.

Your analogy is overly simplistic. You have also failed to notice that putting your money under the mattress also has risks associated with it; such as:

- The risk of theft.
- The risk of destruction (fire/flood, etc.)
- Inflation taking a huge chunk of if each year, even more so in times of crisis when fiat currency is being pumped out in huge volumes).
- The risk of simply losing bits of it (can you count all those pennies every day?).

The probability of all of my bank's depositor's wanting their money at the same time is very slim indeed. Even if they did, it's hardly as simple as your analogy makes out. Major banks pay very little in interest, but rake it in from loans.

MrExample

dkmax wrote: »

That makes no sense whatsoever. Iceland is a core player in the global mess.

You took your money out of the frying pan and put it safely in the fire. Everyone was warned about the Icelandic situation at least two years ago, it was an ever growing pyre in the making just waiting for a naked flame.

I don't recall anyone saying an entire country was going to go bankrupt, or that its major banks were to collapse. There were warnings that in the event of trouble, we'd need to claim part of the money from Iceland, but nothing more than that -- at least not what I saw.

I certainly didn't see it as a risk/reward scenario in any case. I chose Icesave because of its simple non-nonsense business model. At least it seemed that way when I opened my account.

nicholbb

danny69 wrote: »

I told him, long term, I would have a lot more money than him. Eggs, baskets........

Your mate will still have more money than you. Whilst your cash has dropped in value because of inflation, he now has his original 200K along with his interest. If you manage to find the equivalent rate and invest your money then you will only have made 1/2 as much as him even if it takes the full 6 months for the FSCS to send the cheques out.

Also he probably slept better with a less lumpy matress.

Aegis

The lesson to be learned here is that money under the mattress loses value in real terms far quicker than money in the bank. You can't really get worse than zero growth if your balance is guaranteed, and under the bed you don't even have such a guarantee if your house is robbed.

amistupid

Although I agree with you that investing in Icelandic banks had become risky, maybe its time you got onto your mattress and "let sleeping dogs lie."

1694

Aegis wrote: »

The lesson to be learned here is that money under the mattress loses value in real terms far quicker than money in the bank. You can't really get worse than zero growth if your balance is guaranteed, and under the bed you don't even have such a guarantee if your house is robbed.

You have that EXACTLY WRONG.

Read this: http://forums.moneysavingexpert.com/showthread.html?t=1210231&highlight=why+saving

the buying power of money is the ratio of goods and service to money in existence, If you allow banks to multiply your money your buyer power goes down, the piddly interest you recieve blinds you to this.

OracleXe

danny69 wrote: »

I told him, long term, I would have a lot more money than him. Eggs, baskets........

So - his money has gained interest in a bank with a decent rate, and he'll be fully compensated (including interest), suffering little or no loss, with some inconvenience of having to claim his money back.

On the other hand, your money has fallen in value due to inflation, been put at risk of theft and damage, and now also smells funny.

You could have put it into one of the many 'safe' UK banks and it would have been worth more. Even if you had put it in some bog standard Government savings scheme it would have been worth more than it is now.

If I were your mate I'd be laughing at your financial ineptitute.