How to Speak Money

"John Lanchester was a novelist who set out to write a book about London life in the first decade of the 21st century and realised that finance was a big part of London life in the first decade of the 21st century. He decided he’d better learn about what was going on in finance and wrote a novel, Capital, which is very well worth reading, but not appropriate as one of your five books. He also produced a book about the crash called Whoops! Get the weekly Five Books newsletter He then had the idea that, having accumulated this knowledge of finance, he should write what is, in effect, a glossary of financial terms for people like him. I suppose the kind of book that he would have liked to have had when he started his project. This is it. It’s not just a dictionary. It’s a book you can read through and enjoy. There are certainly definitions I would quibble with but the standard is high, yes. And, as he discovered, and as my wife and other people have discovered, it isn’t that difficult to tune in with a modicum of effort – and help. Yes, that’s right. That’s probably the most striking example. It means he can write well, which is not true of most people writing books about finance. I find it very strange because bonds used to be regarded as incredibly boring. Not in The Long and the Short of it , but in Other People’s Money, I wrote about the contrast between F Scott Fitzgerald’s The Great Gatsby where the completely colourless narrator is a bond salesman—because that’s about the most boring activity Fitzgerald can think of—and the Bonfire of the Vanities , the great American novel of the 1980s, where the vainglorious, flamboyant anti-hero is a bond salesman. Probably not right now, no. Right, and that’s terrible advice. People tend to confuse certainty with safety and security. The way I framed it in a talk the other day is that a person who knows they’re going to be hanged tomorrow has got certainty but not security. If you buy bonds now, that’s pretty much the outcome you get. If you buy bonds to provide for your retirement—which is what a lot of people are encouraged to do—you’re getting certainty that you will have a pretty low standard of living in your retirement. The market for bonds has been completely distorted by the fact the government has been buying them. Historically, governments have always been the main issuer of bonds, but now around a third of total government bonds in issue are owned by the Bank of England through its Asset Purchase Facility. This is the so-called quantitative easing that has gone on for the last 10 years. “What I say in my book—and I can’t say it often enough—is that the Efficient Market Hypothesis is illuminating but not true” People regard the 30-year German government bund (as it’s called) as one of the ‘safest’ investments in the world. I think I say in my book that if instead of buying that, you bought an apartment in Berlin and the rent remained constant over 30 years and the flat were worthless at the end of those 30 years, you’d still do better than you would with that bond. Given that comparison, quite why anyone should want to buy the bond is hard to understand. In present circumstances, no. The market for bonds has been dominated by these government policies and as a result bonds are just very unattractive to private investors. If and when interest rates go up, you’ll hear about it. It really will be the first item in the news. It’s not going to happen soon, at least on any scale… When long-term bond yields get up to more traditional historic levels, you might start thinking about holding some. Yes. Imagine a bond that’s never going to be redeemed, to keep it simple. If it’s yielding 2% and interest rates go up to 4%, a new bond will be yielding 4% forever. Your bond is only worth half the value of the new bond. That’s why the price goes down if interest rates go up. There are also index-linked bonds which are linked to the retail price index for both the interest and the redemption payment. In Britain, index linked bonds currently yield negative amounts, so these aren’t very interesting either."