Zug millionaires are non-practising

From time to time, journalists turn up in Zug tasked to write stories of affluence and privilege for the UK media.

They search fruitlessly for the spoors and watering holes of the rich, the exclusive bar, or shop or restaurant. They trudge the streets – and this doesn’t take very long in compact Zug – in pursuit of evidence of extravagant consumption and signifiers of affluent life. Invariably, the only icon to consumption they find is the single Ferrari dealer on Baarerstrasse. There they construct a story around the long waiting list for the most expensive model –dishonestly making no comparative reference to the long waiting lists common to all Ferrari dealers worldwide.
The really interesting story in Zug is that there are millionaires and billionaires living here, but they are non-practising.  Few of the icons of wealth are visible here. There is a marina on the Zugersee, and a waiting list of 200 for the mooring slots, but in the main, the boats are just practical cruising and sailing tubs, no Ferrari equivalents, Monaco it is not.

A cup of coffee costs much the same anywhere in the city. You cannot buy an expensive cup of coffee if you try. This is not a problem in London. But you can’t find a cheap cup of coffee in Zug either, and for me that sums it all up. There is a flattening up of differentials here. No special provision for the rich or the poor. It just isn’t possible to be poor in Zug the way it everywhere else. To be poor, you need to be provided for. The provision of inferior facilities and amenities is lacking here.

But also lacking are the private health clubs, exclusive bars and stretched limos, the private schools (the only ones are those set up by the ex-pats, and they offer inferior services compared to the Cantonal version). There is no special access via money to private medicine as in the UK, because all medicine is private and all citizens have equal access to it.

For example the public swimming pools here are of superior quality to the private clubs I used in London. Even if there were private pools, I wouldn’t need to use them. In London if you haven’t got enough money for a car or taxi, you must use expensive and unreliable public transport. In Zug, everyone (i.e. including billionaires) uses the public transport system in preference to the auto, because it is faster, more efficient, high quality as well as being inexpensive.

In London if you are poor you can find inferior accommodation, transport services, food, and clothes. In Zug there is a basic level below which there is simply no supply. You can’t be poor in Zug because there is no provision for it. The most inferior housing is still vastly better than the worst housing in London.

To be a practising millionaire you need places of worship, and they don’t exist in Zug

Inflation on its head?

People ask me about inflation in the 70s and 80s, usually because they want to position themselves advantageously for the inflation they now anticipate. “The only solution to all the debt is to have inflation” they say.

But the inflation of the 70’s felt like deflation. Although retail prices and incomes were rising fast, real and nominal prices of investment assets were falling.  Most residential and commercial property prices were (as they are now) determined by people’s capacity to borrow. As interest rates climbed, their ability to service a constant loan size declined faster than inflation lagging incomes and rents could boost their capacity to service it. The same pressures lowered equity valuations, earnings yields ratcheted upwards and prices plummeted.

However for residential property buyers actual net borrowing rates were generally lower than inflation. With the tax relief available to owner occupiers in the 1970s, it was possible to pay a net annual interest rate on your mortgage of less than the annual rate of inflation.

Trouble was, there was loan rationing everywhere, even from building societies, and the building societies were only lenders to owner-occupiers High street banks wouldn’t lend on property for investment at all, and rarely for occupation.  In 1976 I was offered a detached freehold house in Finchley (NW London) arranged as four flats yielding £4,500 per annum, for £16,500 .

It was desperately cheap but I couldn’t find finance, which was of course the main reason residential property investments were so cheap.  Residential investment property prices were falling because there was credit deflation.  In those days I had three credit cards maxed out up to my combined credit limit then, of £6,500, for the purpose of buying residential property investments.

London auctions were stacked with properties yielding 25% but no buyers. Most auction rooms had rows of empty seats in 1976.

But it was standing room only by 1979.

So my advice is counter intuitive. Liquidate everything for cash. In the coming inflation, market rates of interest will overwhelm central bank interest fixing (look at Italian bond yields last week for an example of markets setting yields against central bank diktat), and rise to levels which force holders of assets bought with borrowed money, to release them into a falling market.

And cash, ie real, folding money, will be king again for a while.