I often write on Quora.com, where I am the most viewed writer on financial matters, with over 438.2 million views in recent years.
In the answers below I focused on the following topics and issues:
- How did the British pound regain its value against the US dollar so fast?
- Are there actually 50-year mortgages, or is the 50-year mortgage just a myth?
- Would you rather live in Germany for 70k euros or London for 85k pounds? To give a bit more context, I’m married with no children and I’m currently living in Stuttgart, Germany.
- Does anyone benefit financially from inflation?
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How did the British pound regain its value against the US dollar so fast?
The UK Pound hasn’t gained strength against the USD, if we look at a longer-term horizon.
Historically, 1:50 or 1:60 was about average, at least in recent decades, even if over 2:1 used to be the norm.
A recent height was hit in 2007, when one pound bought two USD. Since then, the overall trend has been down, even if there have been significant rises along the way.
Since this graph was made just after Covid-19 started, the trend has been downwards again, dipping below 1:20:
In the last month, the exchange rate has been hovering at between 1:18–1:23.
Of course, the USD has became stronger against many currencies, including the Euro and almost all others.
Nobody can predict the future direction of currencies. The Pound might come roaring back to 1:40, 1:60 or above.
Yet with so much uncertainty around the UK at the moment, it wouldn’t be a surprise if parity was hit with the USD.
That would, in turn, push up inflation, and further hit savers real rate of return, considering many imported goods are linked to the USD.
Either way, keeping cash in the bank is certainly not safer than having a sensible, well diversified, investment strategy.
A UK expat living overseas, or a non-British person hoping to use savings in the UK to buy an asset overseas like a property, would have seen their savings eroded by about 65% since 2007.
That is due to a combination of currency devaluations and interest rates being lower than inflation.
Inflation and devaluation is a silent, and often slow, killer of wealth.
Does anyone benefit financially from inflation?
It depends how high the inflation is.
Moderately low, but relatively consistent, inflation, can benefit many people.
Think about the largely non-inflationary growth we saw in the late 90s and 2000s, when GDP was increasing, but inflation was only running at 2%-3% on average.
Likewise, in fast growing economies, it is normal for inflation to be high, but wage growth to outpace that inflation.
What is more difficult is the kind of inflation we saw in the 1970s and 1980s, which went on for years, or this year’s inflation.
In that case, the only real winners are borrowers. If you were lent money to grow your business, or have mortgage or margin debt, then the inflation is eroding the value of the debt.
That is at least until interest rates increase to lower inflation, and thereby making the interest rate payments higher.
That is one reason why governments who have high debts are likely to prefer moderately higher inflation, even if they don’t state it in public, without wanting consistent runaway inflation which erodes confidence in the currency.
Asset price inflation, in comparison, can benefit large percentages of the population, as most people have pensions and other assets.
With that being said, average stock market performance under high inflation has been weaker than under moderate inflation, coming in at 3%-4% real returns annual growth per year, versus a historical average of 6%-7%.
Each inflationary period is different in nature, so it is always wrong to assume causation.
As an aside, I don’t think this inflationary period will last, unless wages increase dramatically, resulting in a wage-inflation spiral, or external issues, like another war, push up the rate of inflation further.
One-off issues such as the disruption to the supply chains from lockdowns has been a hug contributing factor to the inflation we have seen.
Would you rather live in Germany for 70k euros or London for 85k pounds? To give a bit more context, I’m married with no children and I’m currently living in Stuttgart, Germany.
This is what 255k-300k of real estate buys you in some parts of London, which shows that this isn’t just about nominal salary.
So, let’s break this down.
85,000 Pounds is about 102,000 Euros.
Taxes are comparable, so your take home pay will be about 20% higher in London.
The cost of living is much higher in London than Stuttgart as per Numbeo’s calculations.
Rent Prices in Stuttgart are 53.23% lower than in London, and it doesn’t end there.
So, at best, you probably won’t be better off in London.
However, that isn’t comparing like for like. London is the most expensive city in the UK. Stuttgart isn’t even inside the top 5 in Germany.
If you compare Stuttgart to a commuter town like Milton Keynes, you will find that costs are comparable, even if slightly higher.
Therefore, from a purely financial basis, you will probably be better off if you commute into London, than living in Stuttgart or London.
From a non financial point of view, it depends what you want from life, so it is hard for me to make suggestions.
London is good if you want a lifestyle similar to what you want expect in New York or Hong Kong – high-paced and with several social opportunities – but not if you want the quiet life.
Are there actually 50-year mortgages, or is the 50-year mortgage just a myth?
In the US, they used to be available. Not sure if they still are.
There is speculation that they will be available in the UK soon. It is a terrible idea.
You don’t need to be an expert to work out that supply and demand is king, and therefore, only stimulating demand and not doing anything about supply will push up prices artificially.
With all the other stimulus that has gone on, including help to buy, it will only make the situation worse, together with some green initiatives which make homes more expensive to build.
A better solution would be to focus on supply. In several countries, properties have gone down, as supply has overwhelmed supply.
That is hard to do when there are initiatives which make it difficult to build homes.
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