Jill Kirby on Radio people with sums on deposit losing 10% recently due to fall in €

I heard Jill Kirby on the Derek Mooney show on RTE1 this afternoon.

There was a discussion on personal finance where she referred to people having large sums on deposit losing 10% in the last few months due to the euros drop in value. She said this had cut the 'spending power' of cash in bank accounts by 10%.

This makes no sense to me.

If you live in Euroland, and you have euros on deposit - the only effect you've seen on your spending power is a very small eurozone inflationary value of 1.4%. You should be getting up to 3.1% on deposit - so the actual growth in your money value is +1.7% surely?

On the other hand - if you want to move to China and buy a house, yes, the fall in the euro has had a -20% effect on your spending power.
How many plan to do that?

Has Jill Kirby gotten a bit confused?

She was referring to the spending power of the Euro versus Sterling and other currencies, i.e. US $. She recommends holding a % of your savings in either gold, Norwegian Krona, Can $, Swiss francs or HK$s to avoid the effects of the Euro's slide which she reckons will continue.

Sure. But unless you're a currency trader or making large purchases in STG or USD - why should you care? She's telling Grannies to get into FE. Load of nonsense.

Is there a thread on exactly how to do this?

I have asked a few question on the Investments Forum here. There are a few answers floating about on there. Slim

Starbuck said:

Sure. But unless you're a currency trader or making large purchases in STG or USD - why should you care? She's telling Grannies to get into FE. Load of nonsense.

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I think her point was that if you hold large deposits in Euro and she says she meets over 50s who have up to €500k on deposit, then the loss of value against Stg, $ etc will eat into their savings somehow, inflation, cost of imports etc.

Slim

Absolute rubbish. You need to be a currency trader to figure that one out.

Too many risks involved- Euro fluctuates?

Commission and FX charges?

I agree....long term, inflation in the eurozone may rise, and that will affect the buying power of cash on deposit. But she referred to CURRENT losses, of up to 10% in 'spending power'.

I say again - where?? This makes absolutely no sense. She is referring to EXTERNAL buying power of the euro!

And I also agree with you rustbucket. Currency speculation is NOT for widows and orphans. This was just plain bad advice!

She's a Canadian. Perhaps she does a lot of business in Canadian Dollars - maybe has a mortgage or other expenses requiring her to convert euro to Canadian. She must be feeling the pinch then. But she's forgotten - we're not ALL in the same boat as her.

Starbuck said:

I say again - where??

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Have you filled up your car recently?!?!?! You are falling for the most common fallacy of economic analysis which to only look at the most obvious visible effects, in this case external buying power. The single biggest imported product for most western countries is oil and gas, when these rise then transportation, energy and heating costs rise. All of these have a huge impact on local businesses selling on the local markets; increased production costs means increased prices. This doesn't happen over night, but takes a few months to trickle down, but believe me, it will happen.
Also take a look at how many consumer products are imported from outside the euro zone, like electronics, cars, pharmaceuticals, kids toys, the list goes on and on.

Starbuck said:

And I also agree with you rustbucket. Currency speculation is NOT for widows and orphans. This was just plain bad advice!

She's a Canadian. Perhaps she does a lot of business in Canadian Dollars - maybe has a mortgage or other expenses requiring her to convert euro to Canadian. She must be feeling the pinch then. But she's forgotten - we're not ALL in the same boat as her.

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I don't believe she is advocating currency speculation, but rather a diversification out of euro only holdings. If someone believes that the euro's value is under threat, then you do not need any knowledge of currency trading or speculation.

Jill Kirby comments - wrong ?

So if I have say 20k euros I understand it perhaps to be a good idea to say buy UK stocks to that value in sterling lets just say for argument sake Aviva PLC which is currently paying a divided yield of approx 7.75% gross. I would be holding the stock as sterling and that would be a hedge against the declining euro. Would this be one scenario she would be advocating.

Thanks

Chris - are you honestly suggesting an OAP with 500K on deposit in euro should switch it to other currencies to save 50 cents a litre when they buy petrol? Do you suggest the OAP goes to the bank to exchange their Kroner or Sing Dollars when they need money to fill up?

In any case, the rise in petrol is not due to currency costs, but to speculation.

Daddy said:

So if I have say 20k euros I understand it perhaps to be a good idea to say buy UK stocks to that value in sterling lets just say for argument sake Aviva PLC which is currently paying a divided yield of approx 7.75% gross. I would be holding the stock as sterling and that would be a hedge against the declining euro. Would this be one scenario she would be advocating.

Thanks

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This scenario would be diversifying out of the Euro, but I think it would be like jumping from the frying pan into the fire. An ealier post listed some strong currencies that should be looked at.

Starbuck said:

Chris - are you honestly suggesting an OAP with 500K on deposit in euro should switch it to other currencies to save 50 cents a litre when they buy petrol?

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Firstly I never suggested that an OAP should transfer all their money out of euro into another currency, and as pointed out by Slim, the recomandation was to hold a percentage of wealth in non-euro assets or currency.
Secondly, you are again only looking at the visible effect of higher oil prices in euros, i.e. higher petrol/diesel prices. This increases transportation costs of all the goods you buy in shops. Higher electricity prices due to higher gas prices also increase production costs. All this leads to higher prices on the most basic consumer goods.
Thirdly, what would you say to an OAP if the value of their €500k was decreasing increasingly fast due to inflation? Lots of OAPs lost huge portions/all of their wealth as they had it invested in one Irish bank, because it was percieved to be the prudent thing to do. Having all your wealth tied up in one stock, or one asset class or one currency is a massive risk, weather you are in your 20s or a pensioner.

Starbuck said:

Do you suggest the OAP goes to the bank to exchange their Kroner or Sing Dollars when they need money to fill up?

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This is a nonesense comment, as (1) this would assume that the person had physical posession of the foreign currency rather than in a bank account and (2) it wrongly assumes again that all of the person's money be held in the foreign currency.

Starbuck said:

In any case, the rise in petrol is not due to currency costs, but to speculation.

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Complete and utter nonsense that is spewed out all over the place. Prices of all products are dictated by supply and demand. A speculator could only drive up the price of oil by influencing demand upwards or supply downwards. If a speculator heavily buys oil futures resulting in a rise in price, but the demand for oil at that higher price is lower at maturity of the futures then the speculator heavily loses. The speculators prediction (through buying or shorting) in the price of oil ultimately has to be verified by demand and supply.
If you have some logical proof that speculators can drive up the price of anything then I would love to hear this.

Chris said:

If you have some logical proof that speculators can drive up the price of anything then I would love to hear this.

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Sorry I cant resist..I am assuming you don't live in Ireland then and havent seen the massive rise in housing over the last few years then that led to the present crash then?

You assume wrongand you are hardly trying to say that a small group of speculators drove up house prices are you? It was a huge amount of people, from 20 year old student first time buyers, to middle aged people buying holiday homes, that presented the huge demand, more accurately called real estate obsession. That demand was fueled by government incentive, and low interest rates. It wasn't some small select group of speculators, like is being pointed to when there is talk of oil or bond speculators.
I repeat my point, a speculator can only make money by buying cheap and selling at profit a short time later, if there is demand on the market. It is total demand on the market that influences prices.

Chris the reason for recent oil price rises is only partly demand driven - the world recovery is not that strong yet. So where is the demand?
You say it can't be speculators because they don't have the economic clout - yet we're currently witnessing the collapse of the euro as a result of speculators betting against a eurozone member - Greece. Bond traders in cahoots with the Ratings Agencies.
Speculators drove the GBP out of the ERM, remember?

During the oil price surge of late 2008, where was the demand? The world was in the throes of economic collapse! Speculators money went into commodities - and in the case of oil it was widely reported that tankers were being kept in holding patterns at sea to strangle the supply side. Speculation drove the price sky high.

By the way - the price of oil is now falling....why? Did the demand suddenly dissapear? Did the supply suddenly free up?

I agree with all your points about diversification of investments by the way. But remember what started me off - the claim that euro holders (in the eurozone) have ALREADY lost 10% in spending power. I still say thats wrong.

Starbuck said:

Chris the reason for recent oil price rises is only partly demand driven - the world recovery is not that strong yet. So where is the demand?

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The demand is coming from China. Despite the global downturn daily oil usage continued to increase from 83 mb/d in 2004 to 89 mb/d by the end of 2008 (http://www.ssb.no/ogintma_en/tab-2008-04-28-12-en.html). Global oil demand never significantly declined!

Starbuck said:

You say it can't be speculators because they don't have the economic clout - yet we're currently witnessing the collapse of the euro as a result of speculators betting against a eurozone member - Greece. Bond traders in cahoots with the Ratings Agencies.
Speculators drove the GBP out of the ERM, remember?

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You correctly point out that reason for the euro's value collapsing is due to Greece. However, the only one that can be blamed for the higher bond yields is Greece. Those buying Greek bonds will only do so at a significant premium; if Greece is not happy with this high yield, there is a very simple solution: get your finances in order.

Starbuck said:

During the oil price surge of late 2008, where was the demand? The world was in the throes of economic collapse! Speculators money went into commodities - and in the case of oil it was widely reported that tankers were being kept in holding patterns at sea to strangle the supply side. Speculation drove the price sky high.

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There is absolutely no economic empirical evidence that speculation drove up oil prices. I won't paraphrase here, but read this article by Robert Murphy for an exact analysis of the increase: http://www.econlib.org/library/Columns/y2008/Murphyspeculators.html
If oil suppliers really wanted to decrease the supply of oil to drive up prices, they would simply leave the oil in the ground rather than pay for it to be stored in a tanker. While there was indeed wide reporting of oil being held in tankers it was never backed up by any facts. Any significant increase of oil being held in tankers would have been recorded in official above ground inventories. Above ground inventories have stayed pretty much unchanged for the last 10 years.

Starbuck said:

By the way - the price of oil is now falling....why? Did the demand suddenly dissapear? Did the supply suddenly free up?

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It is estimated that a 1% swing in oil demand or supply has an effect of about 10% on the spot price of oil (http://www.youtube.com/watch?v=hq4IagUK0p8). So yes, demand has reduced due to economic uncertainty and has caused lower oil prices.

Starbuck said:

I agree with all your points about diversification of investments by the way. But remember what started me off - the claim that euro holders (in the eurozone) have ALREADY lost 10% in spending power. I still say thats wrong.

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As pointed out in a previous post, the 10% decline in spending power is from a euro currency point of view, not consumer point of view. The immediate effect to the consumer first exists only in imported products, but as I outlined above, this soon trickles down into other consumer products.

It is usually politicians or lazy economists that quickly point the finger at some mysterious, evil speculator entity, but this is nothing more than bovine dung, that doesn't stand up to economic scrutiny.

Jill Kirby spouts many fallacious arguments and this was more of it . Self publicist like mcwilliams.

Is the majority of our fuel costs not made up of tax and duties?

Chris said:

You correctly point out that reason for the euro's value collapsing is due to Greece. However, the only one that can be blamed for the higher bond yields is Greece. Those buying Greek bonds will only do so at a significant premium; if Greece is not happy with this high yield, there is a very simple solution: get your finances in order.

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Yes indeed - thats the solution to Greece's problems. But while you blame the Greeks for letting this situation arise lets not forget (and you didn't deny it) that the Bond Traders are indeed speculating against the Greek economy first and the Euro second, and creating the mayhem we are witnessing in the euro value. Thats what I said was happening! Whose fault it is is another debate. The point is the Bond Traders and Ratings Agencies are out to make a killing on the Greeks and/or Euro. They've spotted a weakness and they are going in for the kill like a pack of wolves.

There is absolutely no economic empirical evidence that speculation drove up oil prices. I won't paraphrase here, but read this article by Robert Murphy for an exact analysis of the increase: http://www.econlib.org/library/Columns/y2008/Murphyspeculators.html

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Thats a very technical piece, and I'm no expert - but what jumps off the page at me is that - having spent a lot of effort absolving the speculators - he then walks away without explaining exactly WHAT was the cause of a rapid DOUBLING of oil prices. Methinks he doth protest too much. Is he a Broker? Duh?

If oil suppliers really wanted to decrease the supply of oil to drive up prices, they would simply leave the oil in the ground rather than pay for it to be stored in a tanker.

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I didn't blame suppliers - I blame the Traders.

While there was indeed wide reporting of oil being held in tankers it was never backed up by any facts. Any significant increase of oil being held in tankers would have been recorded in official above ground inventories. Above ground inventories have stayed pretty much unchanged for the last 10 years.

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So says Mr.Murphy. Who may have a vested interest in pulling the wool over your eyes. Here's another writer who says exactly the opposite of Murphy - that speculators drove 60% of the 2008 oil price rises, and that inventories DID increase at the same time: [broken link removed]
Who to believe? You can Google any version you like!
We're all just so many dry leaves in a financial hurricane. Its a joke asking the little people to rush from one currency to another to try and save themselves, when the next target for the speculators is wherever they've headed.
Gold bubble next?

Is the majority of our fuel costs not made up of tax and duties?

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Yes, but the taxes and duties are fixed - unlike the spot price.

Chris said:

Complete and utter nonsense that is spewed out all over the place. Prices of all products are dictated by supply and demand. ...

If you have some logical proof that speculators can drive up the price of anything then I would love to hear this.

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Ultimately an exchange rate is driven by the supply and demand for the goods and services produced in that currency. However, it is quite clear that recent FX movements are not in the least caused by shifts in trade supply/demand. A grand scheme is announced and up jumps the Euro. A hung parliament in the UK and down falls sterling. These movements are all caused by the speculative motive not by shifts in supply/demand on the merchandise trading front. I think you are narrowly defining speculators as a clique of market manipulators. I agree that these are a fiction. But in the short run at least it seems to me that an exchange rate is the equilibrium between those who think (speculate) that it will rise and those who think that it will fall.