The Press WEDNESDAY, SEPTEMBER 23, 1964, Preserving Value Of Loan Investments

Press, Volume CIII, Issue 30553, 23 September 1964, Page 16

The Press WEDNESDAY, SEPTEMBER 23, 1964, Preserving Value Of Loan Investments

An investor who put £lOO into shares in 1954 would today have an investment worth almost exactly £2OO. The Government Statistician’s index of share prices has moved from 942 (1955 equals 1000) to 1994 in that period. The investor’s annual income from his investment was probably about £4 in 1954; today it would be more than £lO. The cost of living, as measured by the consumers’ price index, has risen from 976 to 1261, so the shareholder is clearly better off now than in 1954. The investor who put £lOO into a Government loan 10 years ago has not fared so well. Ten-year loans were being floated then at interest rates of about 4 per cent. The holder of this bond has received an annual income of £4, and the £lOO he receives from the Government when the bond is redeemed will buy only three-quarters of the goods that £lOO bought in 1954. That is the reason why the idea of “ index-linked bonds ” (discussed in a special article on this page today) should interest investors—and borrowers.

If an “ index-linked ” 4 per cent Government bond had been sold in New Zealand 10 years ago it would have been redeemed by the Government this year at £129, not £100; and the annual interest payments would have risen, with the consumers’ price index, from £4 to £5 4s. Although an “index- “ linked ” bond would still not have shown the investor as good a return as an investment in ordinary shares over this period, it would have protected him from the erosion of capital, which is the inevitable lot of the lender in a period of inflation. Ironically, the “ gilt-edged security ” offers today’s investor neither security of capital nor security of income, in real terms. The justice of the investor’s claim to receive back from the Government the equivalent, in real terms, of what he originally lent the Government can scarcely be questioned, though the political difficulties of changing the present system cannot be ignored. The implications of “ index-linked ” Government loans are far-reaching. They force other borrowers to insert “index-clauses” in the terms of their borrowings. They attract funds to the public sector, enabling the Government to reduce rates of interest on its public loans, or force the private sector to increase its rates of interest. In .short, “ index- " linked ” bonds give a Government a vested interest in stability, instead of —as at present—an incentive to inflation. For an exporting country such as New Zealand price stability would be a boon to exporters and a big step towards solving the chronic balance of payments problem. “ Index-linked ” bonds are not, by themselves, a guarantee of sound fiscal and monetary policy, but they could provide a good framework for it. The novelty of the idea should not be a barrier to its close consideration.