Here’s an interesting statistic for you. The average Briton today is worth some £110,000. That’s according to a report just released by the Office for National Statistics.
The report was titled the National Balance Sheet. And if you have a morbid fascination for this sort of stuff (as I do), it’s incredibly illuminating.
The figures can be interpreted in one of two ways. An optimist would say we’re rich. Despite the dire economy, net wealth grew by over 3% for the year ending 2011.
But the realists among you will be sceptical. And you have every right to be, in my opinion. Let’s take a look at the accounts...
Are we really this rich?
The following chart shows how the UK’s net wealth has seen fantastic growth since 1987. As you can see, the latest financial crisis was but a blip.
UK Total Net Worth 1987-2011
Source: Office for National Statistics
But what, exactly, is this wealth?
Well, it turns out it’s mostly housing. Of today’s near £7trn of wealth, housing accounts for about £4bn. Add in ‘other buildings and structures’ – which amount to over £1.5trn – and you’ll see that most of our wealth amounts to property.
As for real wealth, that is productive capacity, ‘plant and machinery’ comes in at well under £500bn.
Now, don’t get me wrong, I like property – both as an investment and a place to live. But we know that property values are cyclical. They are dependent on debt and interest rate cycles. And right now our national wealth is heavily dependent on the changing interest rate cycle.
That leaves financial wealth – all those stocks and bonds we own. Surely as a nation we must have an awful lot of these assets?
Well no. We can’t consider that real wealth either. Here’s why...
Financial wealth is an illusion
I’ve said this before, but I suspect many readers didn’t believe me – financial wealth is illusory.
Every investment you own is a promise to deliver something, sometime in the future. If you buy a corporate bond, that company has to make good on its promise to pay you back. If you buy a stock in that company, your claim is not as reliable.
Now these promises might be very valuable to you as an individual, but they even out when you are looking at the balance sheet of a nation. This is an important concept, so let me re-iterate in the words of the ONS:
“Financial assets comprise means of payment, financial claims, such as loans, and economic assets which are close to financial claims in nature, for example shares. Each financial asset has an equivalent liability, with the exception of monetary gold and special drawing rights.”
Looking at it from that point of view, financial assets are merely a tool for allocating the spoils of wealth. They are not real wealth.
The point I want to make is that if, as a nation, we hit hard times, then you should be prepared for some changes to how your financial assets work for you. The government may find they need to bend the rules on your promissory notes. And in a way, it’s already begun….
An exclusive report from The Right Side
The massive gap in government finances
You don’t need me to tell you that the zero interest rate policy of the Bank of England is sapping your wealth. But believe me, matters could get a lot worse.
Take a look at this chart. It shows the government’s share of the nation’s balance sheet…
Central Government Net Worth 1987-2011
Source: Office for National Statistics
And what a shocking chart it is! The chart covers exactly the same period as the one I just showed you – you know the one that said we were getting richer and richer.
Successively selling off the family silver (and gold!) through privatisations and property sales has helped whittle away the real wealth of the nation. At the same time, the government has loaded up on debt through government bond issuance, setting the nation’s finances on a hopeless course. We tackled this issue recently... despite attempts to tackle the national debt, we’re going the wrong way!
That spells another few years of rock-bottom interest rates. We should also prepare for more money printing. And we can’t rule out financial repression. Who’s to say what measures the government might take to squeeze you, the private investor? I’m certainly wouldn’t be surprised to see a few stealth taxes introduced over the next year.
How to protect your wealth
It is not my intention to doom monger here. I just want to make sure you understand the risk you’re taking on with financial investments. It’s not just a banking bust that could take down these promises, it’s the government too.
A healthy dose of tangible investments in your portfolio would be wise, starting with gold. You know where I stand on gold. Gold is an asset without a promise attached. It is nobody’s liability. And that means it can’t be meddled with. I recommend that you hold 5% to 10% of your wealth in gold.
In the past I’ve also written about how to invest in physical silver too. In my opinion, some emerging-market assets should help your portfolio along over the coming decades too.
You also need to grow your wealth. Though it’s a risky bet, I mentioned one stock on Friday that I think could be very interesting, if you missed it, click here – I think you’ll like it.
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