In recent years, interest rates in most countries have gyrated from double or even triple digits to low single digits. The “true rate of return” is generally considered to be the interest paid less the (anticipated) local inflation rate, less withholding taxes. Thus when the rate of interest in the US is below 12 per cent, with 6 per cent inflation and a 6 per cent effective tax the American gets a negative return. Some first class German banks paid 10 per cent per annum interest with no withholding tax and historically low inflation. This is an all time high for Germany where the inflation rate has, since World War П, been under 3 per cent per annum in most years, and there is no withholding on interest paid to foreigners. In the United States during the same period, where inflation has averaged around 10 per cent, interest rates hit below 4 per cent, an all-time low. Thus the important thing to remember is to read the financial papers. Keep up with the news. Place your funds in bonds or for nice long periods like a year or more when you are convinced that interest rates are peaking out. If you buy medium to long term bonds, when interest rates go down again, you can sell the bonds at a big capital gain. Some investment newsletters have a pretty good record at recommending when to get in and out of bonds. The only trouble is that for the unsophisticated investor, there are so many recommendations and so many tantalizing investment opportunities discussed, that one seeking only a high interest return is likely to get confused. But better to be exposed to opportunities than to be ignorant of them!
One reason that people are afraid of making a deposit or buying a bond in a foreign currency is the “currency risk.” This means that if you put US $100,000 into a British institution in pounds, for a year, and if at the end of a year the pound had gone down from a value of $2 per £1 to $1 per £1, you have lost 50 per cent of your money on the currency – if you go back into dollars. The fact that you made 15 per cent interest (reduced to 7.5 per cent by the currency decline) in the pound doesn’t soften the pain either. But the currency risk factor is also an opportunity to benefit from potential weakness in your own currency. If the dollar goes from a value of £1 = $1 to a value of £1 = $2, during the same year, you have made 100 per cent on top of your 15 per cent interest. The interest in turn has turned into 30 per cent interest because of die upward valuation of the pound. The smart investor diversifies in currencies as well as in the type of investment.
If you are looking for a country with a relatively stable currency and a relatively high interest rate, banks in the United Kingdom have, until recently, paid an interest rate of between five and ten per cent per annum for the past 25 years. If you keep your money in pounds, the funds are going to be on deposit in a British bank – even if your actual account is with a non- British fiduciary. Thus, remember, you can have an account in sterling with a bank in Vienna, Hong Kong, or anywhere else. Likewise, you could have a dollar account with most international banks of the world. But remember, in the unlikely event that all the major banks of America fail, you will lose your money even though it is with Swiss Bank Corporation. Why? Because an American fiduciary account held in the name of a Swiss bank is not protected against the failure of the American bank(s) where the ultimate asset is held. Note also, that you get a slightly higher interest if you make the deposit direct. The nature of a fiduciary account is to deduct a small slice (usually one-quarter of 1 per cent of your principal) as the service charge for giving you anonymity.
But getting back to the pound as a recommended currency for deposit. During the last couple of decades the pound had had a trading range of between $1.25 and $1.90 for most of that time. At the extremes, the pound has gone as high as $2.50 and as low as $1.05 – for brief periods. There has been very little change in the pound in recent years against European currencies as the pound was, until the fall of 1992, in an internationally sanctioned currency stabilization arrangement known as “The Snake”. For purposes of an over-simplified explanation, the Snake doesn’t permit more fluctuations than about 12 per cent versus other EU currencies. [Note: To our perfectionists, I know this isn’t exactly right, but for now, and for this section, it is a good simple explanation!] Interest rates in the UK are currently low, but history shows they will rise again shortly. The major British building societies (Savings and Loans) all pay 2-3 per cent per year more than the banks. The difference between a bank and a building society is simply that the main business of a bank is supposed to be commercial loans. The main business of a building society is supposed to be lending on long term mortgages. As a result, the building societies pay the highest interest on funds that are tied up for a year or more. In short, they offer less liquidity. Many of these building societies plus all big British banks have “offshore” branches where you can have accounts that draw interest without any tax withholding or reporting. The Isle of Man, Guernsey, Gibraltar, Jersey and Cayman Islands are probably all equally good as places to keep your money in a major British bank or Building Society. Another thing to consider is that there are less misunderstandings when your banker is a native English speaker. Here are a few suggestions:
If you would like a personal introduction to a Swiss banker, please write to Scope International. No-one with even a hint of any criminal connection or sources of funds will be accepted.