There’s a long, ongoing battle between so-called Keynesian economists, who follow the writings of John Maynard Keynes, and those of the Austrian school, which was exemplified by Friedrich von Hayek.
- Keynes believed Governments and central banks can and should intervene to stave off the worst excesses of the economic cycle in capitalist societies
- Hayek wasn’t Keynes alter-ego exactly, but he was a full-on proponent of free markets and liberalism. Essentially he believed that meddling made things worse.
Over the past two years, what was a nerdy debate has taken center-stage, as Keynes and Hayek’s different theories have been put forward as the best guide to the financial crisis.
Overwhelmingly, the Keynesians have won the day – partly because his interventionist stance fits with a politician’s desire to be seen ‘doing something’.
But as this amusing Keynes Vs Hayek rap shows, there’s two sides to the story.
As of April 6th 2010, income tax in the UK has effectively gone up. But a straw poll of my friends over the weekend suggests most people haven’t noticed.
It’s easy to see why:
- The new 50% income tax rate only applies to those earning more than £150,000 a year.
- The extra 1% in National Insurance contributions will effectively be a 1% income tax rise. But NI rates don’t go up until next year.
So where’s the tax rise?
My weekly roundup of the week’s posts and links.
With the first sunny spell here in the UK since, oh, 2008, I don’t expect many of my British readers to tune into this installment of Weekend Reading until Monday morning.
If you’re reading this at your desk after a great 48 hours (or even your Easter holidays), my commiserations. Hey: you’ll always have the sunburn!
Anyway, there’s no doubt many of us are spoiled with our modern burdens, whereby a hard day at the office means slumping in a meeting with a bunch of clueless bosses, eating digestive biscuits and being simultaneously annoyed at not being able to speak, yet dreading being held accountable in a system where we have no control (or was that just me? 😉 ).
My article of the week brought this home very strongly.
- What are the benefits of corporate bonds?
- What are corporate bonds?
- What causes corporate bond prices to fluctuate?
- The main types of corporate bonds
- Convertible bonds
- Other kinds of bonds you may come across
- Stocks vs corporate bonds
- Historical returns from corporate bonds
- Corporate bond prices and yields
- How to calculate bond yields
- Bond default probabilities: by rating
- Does opportunity knock in the UK retail bond market?
- How to create your own DIY corporate bond portfolio
When government bond yields are too low to be attractive and investment grade corporate bonds are no longer cheap, ever-greedy investors often look to high-yield (junk) bonds as a way of getting more income for their money.
In early 2010, for example, junk bond sales were at a record high:
Companies worldwide issued $38.3 billion of junk bonds in March, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg.
Yields fell 0.95 percentage point to within 5.96 percentage points of government debt, the narrowest gap since January 2008.
Most of that buying will have come from specialist funds and institutions. But plenty of those funds will be driven by private investor demand – and some private investors may also be buying junk bonds directly.
Investing in junk bonds is a dubious idea at the best of times; personally, I think most of us should skip corporate bonds and stick to Government bonds and equities, although that’s hard when Government bond yields are very low.
But certainly, investing in junk bonds when everyone else is doing so has to be a recipe for potential disaster.
Bond default risks are very real
Corporate bonds can and do default. The probability of a bond default is strongly reflected in the credit rating assigned to the bond by the rating agencies.
Non-investment grade bonds – the less scary name for high-yield or junk bonds – have seen pretty high default rates in the past.
A recent advert for the Natwest Black Card states it charges an APR of 51.8%.
Now, everyone knows that RBS Group, the megabank that owns Natwest, is a bit down on its luck. It’s 84% owned by the UK government after seeking shelter from oblivion during the credit crisis, and it can use all the cash as it can get.
But to qualify for a Natwest Black Card, you need to earn £75,000 a year.
Who – models, and footballers aside – could hold down such a job, and yet be dumb enough to pay an APR of 51.8% on a credit card?
Also, would the Government really allow ‘their’ bank to charge the sort of interest rates you’d normally associate with doorstep lending and a donkey head in the bed if you get behind on your repayments?
