If you enjoy reading this blog, please leave a star rating on <\/span><\/em>WealthTender<\/span><\/em><\/a>. Thank you!<\/span><\/em><\/span><\/p>\n<\/div>\n <\/a><\/figure>\n<\/div>\n<\/div>\n<\/div>\n 19th century Irish poet and playwright Oscar Wilde would wake up, read the paper, then, if he wasn’t in the obituaries, get up. My own early morning routine is to read the financial papers and, if I find an example of financial illiteracy, I get up feeling irate. <\/span><\/span><\/p>\n<\/div>\n I am rarely disappointed, which is to say that financial illiteracy and thus sources of irritation are plentiful. You may say that if I am that sensitive to what many would see as innocent mistakes then I deserve to be miserable, and for the entire day. Perhaps, but improving financial literacy is a noble and warranted cause, and I want to be part of it. Also, the mistakes should not necessarily be considered innocent.<\/span><\/span><\/p>\n<\/div>\n First, let’s be clear what is meant by <\/span>financial literacy<\/span><\/em>. According to the National Financial Educators Council, a US social enterprise organisation based in Las Vegas,<\/span> <\/span><\/em>financial literacy<\/span><\/u><\/span><\/em><\/a> is “understanding the topic of money”. It is therefore something that pertains both to members of the public who would not ordinarily be expected to be financially literate, as well as to the experts who are required to set a good example. <\/span><\/span><\/p>\n<\/div>\n This latter group can be divided into experts who have a specific mandate relating to improving financial literacy, and those who write or talk about money in some other formal capacity, financial journalists or fund managers, say. Whether the audience of this latter group is other experts or the general public is, to me, irrelevant. Illiteracy at any level will permeate across an entire population, whether immediately or eventually.<\/span><\/span><\/p>\n<\/div>\n In fact, it is financial illiteracy among experts that I find the most obnoxious. Sure, it is hard to read <\/span>comments from survey participants<\/span><\/u><\/a> such as “I’ve heard about this ‘real terms’ thing. [I] keep hearing it on the news and things like that. But I think it’s just word play, a little bit. I don’t really buy into it.”, but it is surely the experts who are ultimately to blame for this sort of financial illiteracy, not the members of the public themselves.<\/span><\/span><\/p>\n<\/div>\n This misunderstanding between real (i.e. adjusted for inflation) and non-real\/nominal (i.e. not adjusted for inflation) terms in relation to financial quantities is particularly common, and one that is frequently perpetuated by those who should know better. The article that cited the aforementioned survey response tried to explain the difference but itself got it wrong. Referencing two headlines which, respectively, mentioned wages in nominal and real terms, the author of the article wrote that, “One focussed on the cash increase, the other on pay after inflation was taken into account.” <\/span><\/span><\/p>\n<\/div>\n Wrong. “Cash” can either be presented in real or nominal terms, i.e. it does not pertain to the latter only. That is the entire point of the two concepts! I know what the author <\/span>meant <\/span><\/em>when they wrote that “One focussed on the cash increase” etc but it would have been better (correct!) to say that one was adjusted for inflation, the other wasn’t.<\/span><\/span><\/p>\n<\/div>\n My own approach to “understanding the topic of money” is and has been for as long as I can remember to completely disregard amounts that are <\/span>not <\/span><\/em>adjusted for inflation. Nominal wages do not buy real bread and milk. Only <\/span>real<\/span><\/em> wages can do that. In other words, nominal wages, as with nominal <\/span>anything<\/span><\/em>, are meaningless. Otherwise public sector workers would not be striking at the moment.<\/span><\/span><\/p>\n<\/div>\n I understand some will balk at this approach. However, if you think about it, nominal amounts are only useful in so far as they are required, along with the consumer price index or some other measure of prices, to calculate real amounts. <\/span><\/span><\/p>\n<\/div>\n I also understand that the concept of real amounts is harder for non-experts to understand than nominal amounts. But therein lies the problem. The financial industry does a very bad job at explaining to the general public why attributing meaning to nominal amounts can be dangerous (I say ‘can be’ because if inflation is close to zero or if you are comparing amounts over a very short period then there is little difference between real and nominal. Normally, however, the difference between real and nominal is material).<\/span><\/span><\/p>\n<\/div>\n This real versus nominal mistake is rife in the media. Today’s spot was “<\/span>Shell reports highest profits in 115 years<\/span><\/u><\/span><\/a>“. In fact, there are two things wrong with this headline. First, the ‘profits’ referred to are not adjusted for inflation, and so meaningless. Second, one might assume that Shell’s profits were the best in 115 years but not as good as its profits <\/span>116<\/span><\/em> years ago. Wrong. Shell has only been in business for 115 years. If you saw the equivalent headline, “Semiconductors most advanced in 149 years” (note 1), you would immediately realise its absurdity.<\/span><\/span><\/p>\n<\/div>\n Another thing that experts get wrong is first and second derivatives. Let me explain. If you are driving a car, three things you might be interested in are distance travelled, speed, and acceleration, which, for sake of argument, are measured, respectively, in metres (m), metres per second (m\/s), and metres per second squared (m\/s2). Speed is the first derivative of distance in terms of time, acceleration the second.<\/span><\/span><\/p>\n<\/div>\n We can apply this to consumer prices, in which case the first derivative is the rate of change of prices (i.e. the inflation rate) and the second is the rate of change of the rate of change of prices (i.e how prices are accelerating, equivalent to the rate at which inflation is rising or falling). <\/span><\/span><\/p>\n<\/div>\n You may well think I am being petty. However, whether you like it or not, attention to detail matters. Some apparently <\/span>small mistakes<\/span><\/u><\/a> have <\/span>major ramifications<\/span><\/u><\/a>. In this case, however, the point is not that individual mistakes matter but that small mistakes <\/span>collectively<\/span><\/em> pollute the effort to improve financial literacy. Moreover, why shouldn’t experts who should know better, whether financial journalists or finance professionals, be called out? I know in my own case that I am always appreciative when readers point out errors in my articles.<\/span><\/span><\/p>\n<\/div>\n While the mistakes mentioned thus far are basic ones, there are many others that get made that are less clear cut. And by those who <\/span>really shoul<\/span><\/em>d know better.<\/span><\/span><\/p>\n<\/div>\n For example, he invoked Russia’s invasion of Ukraine as having been a major contributor to higher inflation. In the US, pre-invasion inflation was 7.9pct. At the time Rajan wrote his op-ed it was 8.5pct. In other words, most of the rise had occurred before the invasion.<\/span><\/span><\/p>\n<\/div>\n The FT’s generally excellent <\/span>Swamp Notes newsletter<\/span><\/u><\/span><\/a> last year wrote, <\/span><\/span>“Of course, if we save, interest rates have to go up.”<\/span><\/u><\/span><\/a>. The interest rate represents the price of money. If we save, the supply of money increases, and the price of it, the interest rate, falls. If we consume rather than the save, on the other hand, interest rates rise. Indeed, the FT’s own Martin Wolf has <\/span><\/span>written<\/span><\/u><\/a> on <\/span>numerous<\/span><\/u><\/a> <\/span><\/u>occasions<\/span><\/u><\/a> <\/span>about how increased savings drove down interest rates in recent decades.<\/span><\/span><\/span><\/p>\n<\/div>\n Then, the FT’s even more respected <\/span><\/span>Lex column<\/span><\/u><\/a> wrote in July last year in an article titled <\/span><\/span>Gold: rising production costs add to price pressure<\/span><\/u><\/a> that the gold price would come under pressure (downward) both from rising production costs as well as gold’s zero yield having to compete with rising bond yields. <\/span><\/span><\/p>\n<\/div>\n Production costs rising puts marginal cost producers out of business, reducing gold supply and thus putting upward, not downward, pressure on the gold price. As for yields, the FT makes the mistake of conflating nominal and real yields. Bond yields may have risen in nominal terms but because of rising inflation they had fallen in real terms, going from negative to even more negative. As bond yields became more negative, gold’s zero yield would become <\/span>more<\/span><\/em> attractive, putting <\/span>upward<\/span><\/em> pressure on the gold price, not downward. Since the Lex piece was published, the gold price has risen around 10% (yes, in real terms) which, for a lowly volatile instrument, is a huge move. <\/span><\/span><\/p>\n<\/div>\n I wrote emails in relation to the above to both Lex and Swamp Notes but did not get responses. Both columns invite readers to write in, but, as a result, are probably inundated.<\/span><\/span><\/p>\n<\/div>\n It should be noted that I am an avid reader of the FT, not least because I know it does not often make mistakes (it is, in my humble opinion, the best global financial paper by far). Moreover, I cannot call out lesser financial journals because I do not read them. At least not as a matter of course.<\/span><\/span><\/p>\n<\/div>\n Anyway, I was delighted to see a year or so ago that the FT had launched its <\/span>Financial Times Financial Literacy Campaign (FLIC)<\/span><\/u><\/a> and gladly accepted the general invitation to readers to get involved. I wrote in, saying that I, via my blog and elsewhere, had a particular interest in investor education, and that I would be keen to help in any way I could. I received a response in June last year thanking me for my interest, and saying that the team would be in touch in due course. <\/span><\/span><\/p>\n<\/div>\nThe effort to improve financial literacy in this country itself needs to be improved<\/span><\/em><\/span><\/h3>\n<\/p>\n
<\/wow-image><\/div>\n<\/div>\n
\n<\/span>Rajan then wrote that once central banks had succeeded in bringing inflation down, we would probably return to a low-inflation, low-growth world, one subject to the headwinds of, among other things, de-globalisation. De-globalisation is inflationary, not deflationary!<\/span><\/span><\/p>\n<\/div>\n