Pondering the Long Term Future of Fixed Term Deposits ...

meunier

Having come through the Iceland nightmare - and thankful for not having lost any of my capital - VERY thankful indeed - I last year split up all of those resources up into an assortment of £85,000 bundles in five year fixed term deposits (as then recommended by this board) to let them rest over time. I'm glad I did now as so many of these items appear to have (i) now disappeared from the market and, those remaining have seen (ii) their interest rates shorn/shrunk - certainly relative to what many might once have thought to be 'the recent past'.

This has made me wonder what the long-term future for fixed deposits will be. I had always thought it was fairly secure as I rested my faith in the fact that banks and building societies would always need money. Perhaps now/today this is less true. (Forgive my ignorance in these regards.) Sitting here I am wondering what you might think. Your kind advice will be much appreciated.

With thanks in advance ...

Reaper

I'm afraid you are in crystal ball territory with that question. Fixed term/fixed rate savings & investments are great as long as inflation and interest rates stay the same or go lower. So you have to decide which way things will go.

Banks remain short of money, hence why the rate you can get on savings accounts is so much higher than the Bank of England rate, and often higher than mortgage rates too. While not sustainable indefinitely I see no reason for that to change in the foreseeable future.

Inflation is another matter. Left to itself the economy would be deep in recession right now with poor liquidity, high levels of bankruptcies and deflation. But it has not been left to itself, instead QE has been used to pump "fake" money into the system. By itself this would be inflationary, and if inflation takes off the normal reaction would be to raise interest rates. Both are powerful opposing forces.

Then there is the worst case scenario where they stop being opposing forces and we get both - recession plus inflation, or "stagflation".

So cutting through my waffle the simple answer is - I don't know if you would best off sticking with fixed interest products, and nor does anybody else. It's a gamble either way. I have a number of fixed rate savings and investments but only time will tell if that was a good or bad move.

meunier

Bless you Reaper for taking the time to reply. It means much.

gadgetmind

meunier wrote: »

I had always thought it was fairly secure as I rested my faith in the fact that banks and building societies would always need money.

They are now getting this money pumped directly into them from HMG's printing presses via QE and cheap loans.

I'm afraid that getting any decent income now involves taking a degree of risk with your capital (which can be mitigated by using a multi-asset income approach) but I get the idea that you want to stick with protected savings.

RetiredInThailand

Yes, blame QE for taking money from anyone with savings and giving it to all the spendthrift idiots with too many debts who caused all the global economic problems in the first place.

I also tied up a lot of money in 5-year deposits when they were giving a good return last year, and I dont regret it for one second.

If and when QE stops and the economy recovers then interest rates will get back to some sensible level. But it wont be for several years.

grey_gym_sock

RetiredInThailand wrote: »

the spendthrift idiots with too many debts who caused all the global economic problems in the first place

you mean the banks?

gadgetmind

RetiredInThailand wrote: »

But it wont be for several years.

I tend to agree. I keep looking at some way sub-par FRNs but then think "Naaa, not yet."

RetiredInThailand

grey_gym_sock wrote: »

you mean the banks?

Banks, and anyone with more debt than they could support (ie just about everyone and everything with any debt).

Debt is the fundamental problem with the global economy and until everyone (people, banks, politicians) realises that you must save first and spend later nothing will ever function properly.

grey_gym_sock

RetiredInThailand wrote: »

Debt is the fundamental problem with the global economy and until everyone (people, banks, politicians) realises that you must save first and spend later nothing will ever function properly.

do you mean absolutely all debt should be avoided? i think that's going a bit too far the other way.

for individuals (other than when running a business), i'd say mortgages are usually the only sensible debt to take on, and obviously that shouldn't be excessive. well, and student loans.

for businesses, debt can be perfectly sensible, though it's certainly been massively overdone in many cases.

for governments, ... well, it's currently a bit of a mess ... but given where we are now, i think the government needs to spend more on infrastructure, training and education, though that will mean borrowing even more, because there is no other plausible way to get the economy out of this depression.

Thrugelmir

grey_gym_sock wrote: »

because there is no other plausible way to get the economy out of this depression.

The alternative is to increase productivity. Which has been steadily falling in the past decade. As speculating with borrowed cheap credit has meant that hard work alone no longer pays.

In the past 15 years. 2.5 billion people have joined the global workforce. Many of whom want your standard of living. Their well educated, entreprenurial and driven to succeed.

Times have changed. No time for complancy.

grey_gym_sock

i'm not sure what complacency has to do with it. it's not necessarily a problem for "the West" if we're overtaken economically by asia. the UK has been in relative economic decline (from when it was the world's leading economy) for a long time, but the standard of living in the UK has risen hugely during this period.

increasing productivity is going to be gradual. in a 5-10 year time frame, i can only see a government stimulus programme being effective. of course, if you're prepared to let the depression go on as long as it takes, productively gains may eventually make things pick up. but the social costs of that delay are very high.