Friday, April 1, 2011

Saving Wars: Episode IV - A New Hope

Inflation-beating bonds offer fresh hope to UK savers

One NS&I product not withdrawn from sale last year and that has gone on attracting business is Premium Bonds. Although the interest rate used to calculate the prize is a miserly 1.5%, there is a chance of winning the monthly £1m jackpot.

WTF!

National Savings and Investments

NS&I manages around £98 billion in savings, 9% of the UK savings market. This accounts for 16% of the UK's national debt. As funds from NS&I are a relatively cheap source of government borrowing, the bank sets interest rates both to attract savers and provide low-cost finance for the government.

13 comments:

Mr Slippery said...

I think this is a cool idea. The lottery is mostly a regressive tax on the poor. With this bond, the government can nudge people into saving who otherwise might spend that money on lottery tickets.

Stagflationary Mark said...

I would argue that adding the lottery to "premium bonds" is also a regressive tax on the poor. Are the wealthy also enticed into earning a miserly 1.5% interest rate due to the £1m jackpot?

Keep in mind that the UK inflation rate was 4.4% over the last year. A 1.5% rate therefore represents a roughly 3% annual loss in purchasing power.

That said, I guess if one must choose between a lottery tax on the poor and bonds with lottery aspects for the poor, the less lottery the better. So you've got me there. Sigh.

In any event, I don't see these bonds intended to increase prosperity or promote great social good, but rather to supply cheap funding by exploiting the "get rich fast" genes of the public. Just an opinion of course.

Mr Slippery said...

Yep, it is a lesser of two evils thing.

Anonymous said...

These worked in South Africa as well. At small levels of savings, interest rates don't look that exciting anyways.

Coba

Anonymous said...

http://www.freakonomics.com/2010/11/18/freakonomics-radio-could-a-lottery-be-the-answer-to-americas-poor-savings-rate/

http://www.freakonomics.com/2010/12/02/freakonomics-radio-who-could-say-no-to-a-no-lose-lottery/

Also now in Michigan.

Coba

getyourselfconnected said...

I used to work at a convenience stor in college and this guy from the neighborhood would blow $300-$500 a day on scratch tickets and daily numbers. Too bad his kids had no shoes and only one set of clothes. It made me so sick. I did not want to seel him the stuff.

Stagflationary Mark said...

Coba,

From your link:

One state, Michigan, now has a PLS program called “Save to Win” that has awarded its first $100,000 prize — to an 87-year-old woman who won it after depositing $75 in her credit-union savings account.

Michigan? Doesn't that just figure.

GYSC,

Too bad his kids had no shoes and only one set of clothes.

The state lottery can't "win", if you don't play. Sigh.

dearieme said...

"Are the wealthy also enticed into earning a miserly 1.5% interest rate due to the £1m jackpot?" Yes: it's popular as a convenient place to temporarily park money. The prize is tax free, and the deal is so popular that you're limited to a 30000 GBP investment each. Not a lot of The Poor have 30000 GBP. But a couple with, say, four chldren can park 180000GBP. The scheme has been running since 1956.

But it's the return of the very wonderful Index Linked Savings Certificates that I'm looking forward to: tax-free inflation protection. Yes please.

Stagflationary Mark said...

dearieme,

The scheme has been running since 1956.

Gambling in the United States

In 1931, Nevada legalized most forms of gambling.... The town rapidly developed during the 1950s ...

Gambling: A Context

Until the mid-1950's, gambling in Canada was looked on as a social vice.

Coincidence?

Gambling started a new phase in 1985, when electronic gambling formats such as VLT's (video lottery terminals) and Internet gaming were legalized.

...

Two main outcomes have resulted from this new phase. First, government revenues have escalated (Campbell & Smith, 1998). Second, an increasing number of addictions are appearing.

dearieme said...

I doubt whether Premium Bonds are addictive, because you don't repeatedly buy a ticket and hope to win with it. What often happens is you get born, Grandpa and Grandma celebrate by buying you a 100GBP bond, and you perhaps win one prize, typically 25GBP, before you go off to University. But, from age (let's say) eight, you can budget for what you'll spend the million pound prize on.

getyourselfconnected said...

Hey Mark! Hope all is well.

dearieme said...

On reflection, you win. I've posted the form to sell all my Premium Bonds. Silver here I come!

Stagflationary Mark said...

Still alive!

I'm just taking a break.

I have a silver junk quarter. I've had it for decades. The markets say it is worth a whopping $7.50 now. Amazing.

My dad also left me a junk fifty cent piece that is now worth $15.00. It was minted the year I was born. It is partly responsible for the purchase I made in 2004.

Had I kept all the junk silver coins I had purchased in 2004 (and sold in 2006 for a 50% profit) they would have retired me an additional time. Go figure!

Hindsight is 20/20 of course. I would never have kept them this long anyway. The first parabola scraped me off. The second would have too.

I was fortunate that I could not be scraped off the investment that did retire me. I was forced to hold it since it was an investment in a private company.

$7.50 for a common "junk" 1963 quarter (filled with 90% silver) does not inspire me to think that prosperity is just around the corner.

The Billion Prices Project shows real-time inflation is still running hot.

(I also have that silver dollar that GYSC sent me. Thanks!)