Just added a sister site about premium bonds at http://premiumbonds.moneywell.co.uk

I have seen it said that premium bonds are not really a good investment but I like the fact that your money is safe, readily available and any winnings are tax free. Not to mention that they add a little fun to personal finance and that is a rare thing.

We hear plenty of talk about recession and inflation these days but to many people these are just words. We have been fortunate in recent years not to experience either to any significant extent. So here is an example of extreme inflation to think about for those who don’t quite understand it’s effects.

When Zimbabwe became an independent nation in the early eighties they had the Zimbabwe dollar which was valued at $1.00 or so, which would have been roughly 50 pence. As you will see details hardly matter here.

Zimbabwe has just issued a $500,000,000 note and it is worth approximately $2.00

Inflation is running at some ridiculous rate and prices are doubling every week. Can you imagine what life must be like when the value of any money you have is half what it was a week ago? Prices double each week and you need your wages to double each week to keep up. Buy a loaf of bread on Monday or buy half that same loaf on Friday for the same amount of money. We may grumble about the price of a loaf of bread going up 20p but imagine it doubling in price every single week.

When our government or the bank of England refer to inflation this is not the sort of situation they are talking about, fortunately.  However, it clearly demonstrates how devestating inflation can be when it runs rampant with no control or end in sight. How people cope with inflation at levels like that I can not imagine. If we end up with inflation even if it were to run to 5 or even 10% maybe we should feel lucky that we don’t live in Zimbabwe.

How come people seem surprised that food prices have been rising? Why did anybody imagine that house prices could go on rising forever and why did people make forward plans with an assumption that oil would remain around $25 a barrel?

For the last twenty years or so computers have been commonplace and the one thing that computers are good at is making millions of calculations in the blink of an eye. You can set up a spreadsheet that will take all the figures you throw at it and it can make projections on anything that can be measured. So how come these price rises come as a surprise to anybody?

Governments have thousands of people doing these sorts of projections all day and every day. These people spend their lives working on figures, statistics and spreadsheets so they surely must have had these sorts of projections showing oil at over $100 a barrel, food prices rising and house prices peaking and dropping back. So why is anybody surprised?

We live in a world of supply and demand. If demand rises then a shortage of supply will lead to increased prices and the prices will continue to rise will demand is there and people can and will pay the prices demanded. Prices rise when there is more demand than supply and prices drop when there is more supply than demand. It isn’t rocket science.

So, as we have seen the growth of China, in particular, growing at around 10% per annum and other major countries growing almost as quickly we should not be at all surprised to see the demand for oil growing very fast nor be surprised that as China has grown it’s people have more money they want to buy more and better food. All this is happening at the same time as farmers are finding they can make more money growing food to be used as biofuel than they can if they sell it as food and who can blame them?

The farmers have always been the butt of jokes and the people who earn the least money in the food supply chain so if they can earn more money growing biofuel that should come as no surprise that they prefer that direction. While the suits in the city have been making millions in bonuses for doing a deal in pork bellies the farmer who produced them has been out in all weathers struggling to survive on the pittance he gets paid for them.

We should not be surprised. Everything we do has an impact and an effect. We should have been planning for expensive oil twenty or more years ago but governments sat on their hands and did nothing. We had the oil crisis back in the 1970’s which sent shockwaves around the world but it was patched over and everybody forgot about it.

The housing market demonstrates quite well that even though the signals are there to be seen people tend to ignore those signals. When house prices were beginning to peak experts were still saying houses were a great investment and that the minor blips in the market were nothing to be concerned about. The minor blips became bigger blips and the experts began to talk of house prices stabilising for a while, then they spoke of possibly a temporary but minor correction and eventually they started saying that maybe now wasn’t such a good time to invest in property.

The truth is that for most of us house prices are not too significant. Unless you bought in the final months of the boom you have a reasonable cushion of paper profit and even if you end up in negative equity you have lost nothing unless you have to sell and even then you would be buying another property at a lower price. Everything is relative and of course there are many people struggling to pay their mortgages already and if house prices fall they may lose out if they reach a point where they decide they can no longer be home-owners. Sadly these are the results of the supply and demand process. Some will always lose out by it but listening to experts and self interested advice doesn’t always help.
Everybody has their own point of view and for many that view is tainted by self interest. An estate agent would prefer you to buy the house he is selling. It doesn’t make him a bad person but that is his job and he gets his income from selling property. An investment adviser would prefer you to buy an investment through him. He has a family to feed and he makes his money from selling investments. Who can blame him for that? So long as people are honest in their dealings we cannot criticise them for trying to make a living but we must be more aware that it is in their interest that we buy and not always in our own.

In a world that revolves around money and profits, where the population is growing and supplies  of oil and food are becoming more limited we should not be surprised at rising prices. I think we have every right to be disappointed that our leaders in government have not been better at planning ahead to take account of these changes but they have self interest at heart too. The way our democracy works means that politicians are looking to getting votes at the next election. If governments back in the 1980’s had been investing heavily in energy reduction and alternative energy supplies they would have been voted out for ‘wasting’ money. With hindsight, how wise would it have been if they had? Who would be complaining now if we had huge supplies of cheap wave energy today? It is in the nature of our democracy that governments think short term but we need long term planning now.

Years ago things changed much more slowly and perhaps thinking four years ahead was perfectly adequate. With the rapid changes we see around us now we need strategic planning that can cope with change. We need a commitment to farming that ensures we have food supplies and commitment to energy supply that gives us dependable energy at a reasonable cost and we need planning for a future where we have a society that lives within it’s means in both energy and food. This should be a cross party issue where we should find general agreement and build a future we can all be comfortable with. It is a very serious issue and not one to be the subject of points scoring and sound bites.

We are used to going to the supermarket and buying anything we want. We have not experienced the problems of supply of food that our parents or grandparents suffered. Yet, on tv last night I was shocked to discover that rice is in short supply. Partly due to poor rice harvests in Asia but also due to growing demand there is less rice around than there is demand for even though the price has doubled in a year.

The experts may have got their projections wrong on house prices in part, perhaps, because they didn’t want to believe the figures. Governments may have got their projections wrong on oil prices and again that may have been because they didn’t want to believe it could happen but they had better be very, very sure they get it right on food supply and demand. When people start going to the supermarket and finding they can’t find food or can’t afford it they will become very angry indeed.

We need to stop worrying about politics and start worrying about simple human needs like food. I just hope government treats this issue with the seriousness it requires. My fear is that they will start off more concerned about sound bites and only start taking real action when the crisis hits us all. Perhaps we should all start digging for victory now rather than waiting for the politicians to start talking about it.