Posts Tagged ‘Yield’

A peculiar economy and Otto.

August 19, 2019


“In the past two weeks the proliferation of negative-yielding bonds has erupted — 30 per cent of the global, tradeable bond universe is being sold with a guaranteed loss attached to the coupon.”

I understand the basics of adding and subtracting of numbers but in that little sentence above, a whole new world is threatening our survival. We know that when it rains and we stand outside we will get wet. Perhaps our survival will be enhanced when standing in the rain. Who knows?

We are faced with negative yields on our savings. It means that instead of earning interest from the banks on our money we might have to pay the bank in holding our money. We will be borrowing money that promises us that we not only don’t have to pay interest  over the term we borrow money, but that we actually owe less money than the original amount, at the end of the term. To put it simply; we borrow let’s say $10 000.- over ten years. We do not pay any interest on the borrowing, and at the end of the ten years we pay back less than the $10 000.-

We are getting a miniscule pension from the Australian Government as a result of having some savings which are ‘deemed’ to earn some interest. However, try as I might, at the moment long term interests is almost zero. This results in us eating up our savings. So far, no problem. You can’t take it with you to that place beyond our final journey. The difficulty is figuring out the number of years one might still have ahead and then divide the savings by the number of years that one can still breath upon ahead with some dignity, and hopefully without getting bashed-up in some ‘Aged-Care’ home by one’s own slippers or shoes.

This might entail a risk whereby an underestimation of the number of years ahead could involve a rather financial painful end. If one figures, lets say another ten years or less, and divvy the savings by ten, no problem. But what about the other way, and one languishes for another fifteen years? What then? The financial plan was spread over ten years and not fifteen.

I have a good example by my good friend Otto. Otto is now ninety. I never expected him to reach that age. He wasn’t interested in exercise or strenuous physical activities. He never kicked a ball, did summersaults or hung from crossbars. He walked slowly and deliberately, and with care. Otto liked his food but ate well, avoided fat, sugar and salty food. He was Dutch, born in Indonesia which gave him his dietary habits and a love for vegetables. He also had a rather eccentric habit of drinking lots of water mixed with some cider vinegar.

Two months ago, Otto caught a bad flu and was hospitalised. After he fought off the virus and became reasonably well, it was apparent that Otto could not live independent anymore. He owned his own place but wasn’t mobile enough to look after himself.  His younger sister who looked after him during Otto’s times of need, told the hospital she no longer could. Otto now lives in a retirement home. He had to pay $200.000.- upfront for a space and his pension is just short of $75 weekly which pays for his main keep. This money will be deducted when his place gets sold. He shares his room with another inmate.

I spoke to his brother, Roderick, and in conversation I marvelled how Otto managed to get to his 90th year despite his seemingly corpulent figure and his dislike for any physical activity. His answer left me somewhat flummoxed. ‘ Yes, Gerard, Roderick said;” “but he never married like we all did’! ‘We brought up children,  had a marriage, a wife and all, and Otto never had that kind of worry.’ No wonder Otto lived so long. he seemed to imply!

Anyway, that’s how it goes, does it not? My worry is not the future for our grandchildren of negative monetary returns, but a world with a change of climate making the world uninhabitable.

That would be a much worse outcome.