Premium Bonds.

Premium Bonds are a UK government security that I rather like despite the declining state of the nations finances. More or Less (a BBC4 radio programme) estimates that government cuts only amount to a 0.6% reduction in real terms and government debt will continue to pile up for many years.

Despite this I believe the bonds to be safe. This is because it is political safer for the government to generate inflation than for it to default on its savings schemes and politics rules economics as far as government is concerned.

Where will your money be invested? It will not be invested at all! It will go to partially cover the budget deficit and to buy the state some time. The real choice is not between debt or no debt. The choice is between debt to China and debt to the British public. I would rather the interest payments on this debt go to British pensioners than the government of China. This also has the effect of isolating the state from financial crisis and rumour to some extent. Some of us may welcome a crisis in the hope that it forces the government to make much needed reforms but I do not think many of us would enjoy the experience if it comes.

The very fact that the money will not be invested is actually a good thing. Every recession has been preceded by a lending boom brought about by government policy. Austrian economists argue that the lending actually causes the crash through malinvestment. Right now the UK government is trying to repeat the same trick through low interest rates and flooding the banking system with credit. This is a poweful stimulus but it results in lending that would not otherwise occur. In other words it sows the seeds of the next crunch. If you believe this will all end in tears (as it always has) then Premium Bonds become an ethical (non) investment.

The arguments for premium bonds fall into two camps.

For the individual.
Tax free and simple. No need to declare on your tax return.
Fairly liquid. You may have your funds within the month.
State guaranteed.
They now offer Internet access and a neat little app for the iPhone.

For wider society.
Keeps your money away from greedy bankers.
Gives the government some shelter from financial storms.
Counters asset bubbles that precede every recession.

I have decided to park my freedom fund in premium bonds. Ultimately I will spend this money on projects that will bring freedom for me and my readers, but in the mean times I will try to invest it where it does some good.