Investment masterclass: ‘Money is basically a fiction’

This is an audio transcript of the Money Clinic podcast episode: ‘Investment masterclass: ‘Money is basically a fiction’’

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Claer Barrett
Money is basically a fiction that everyone has chosen to believe in. At least that’s what today’s Money Clinic guest Rob Dix believes. Rob is a professional investor, podcaster and author who has spent the last 10 years building up a national business as a private landlord and property investor. His latest book is called The Price of Money: How to Prosper in a Financial World That’s Rigged Against You. Now it isn’t just a guide for people wanting to get a grip on their investments. It also explains how the global monetary system shapes our everyday personal finances.

Rob Dix
Money is created when loans are made. The amount of debt has gone way up, which means there is now loads of money, loads of debt. And it’s kind of got to a point where it’s not sustainable.

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Claer Barrett
Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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In today’s investment masterclass, Rob Dix will be sharing his tips for growing wealth in times of high inflation and why he thinks it’s harder to get by financially now than it used to be. Plus, I’ll grill him about the property market and his experiences of being a buy-to-let investor. So. Rob, welcome to the show.

Rob Dix
Thank you so much. Great to be here.

Claer Barrett
Well, your book came out last month and there’s quite a story behind its creation. Share it with us. 

Rob Dix
Yeah, well, it came about during Covid. I started researching the book when it first hit because it was such a weird time and everything went nuts. But the world of money went particularly nuts. And we’ve just been hearing for years how there’s no magic money tree. That was the thing you kept hearing all the time. And then there’s a, oh, this unexpected thing’s happened. So we need an extra £450bn? No problem. There it is. What’s going on here? So I kind of realised that I’m pretty good on all the personal finance stuff. I do this for a living, but when it comes to what money actually is and where it comes from, I don’t have much of a clue. And if I don’t, then presumably no one else does either. So I started researching the book and Henry Ford’s got this classic quote: If people understood our money and banking system, there’d be revolution before tomorrow morning. And after digging into things a bit, yeah, it’s probably pretty spot on.

Claer Barrett
Hmm. Well, I mean, certainly there are many things in it that fascinated and surprised me. But let’s talk about your journey towards becoming an investor because you started investing your spare cash at really quite an early age. And that developed into an obsession, in your own words. So tell us how it all began.

Rob Dix
Yeah, I think, sure you’ll agree we kind of take on the money blueprint of our parents.

Claer Barrett
Definitely.

Rob Dix
And so my parents were always very sort of frugal and sort of sensible with money. And there were never any lectures about it. We just kind of absorbed it. And then from just having part-time jobs from the age of 15, I just naturally found myself saving. And obviously, as you know, saving isn’t the way to wealth. It’s great, it’s essential. But saving in its own, on its own needs to lead towards, lead towards investment. And then it’s when I discovered, I sort of like dabbled with Isas and things like that. But when I discovered property, I thought, oh, well, this is really fun. And that was like a gateway because property, I think people find it appealing because it’s really easy to understand — it’s simple, it’s tangible. And so that was kind of what got me into investing more broadly and the point at which it did become an obsession. And happily, it’s sort of my job as well.

Claer Barrett
Well, yeah, a career. And in broadcasting too. And one thing I ask everyone, Rob, who comes on the show is: what’s your earliest money memory?

Rob Dix
Yeah, it’s a bit embarrassing. I must have been probably about five-ish, and I was doing what five-year-olds do, which is badger your parents for things that you want . . .

Claer Barrett
Oh, OK. (Laughter) There are many things they do.

Rob Dix
True. Yeah, I’ve got one. I’m very familiar with it. And my mum said, so well, we can’t afford it. We cannot keep buying you things. You don’t have enough money. So I said we go to the cashpoint all the time. Can’t you just go to the cashpoint and get some money out? And she’s sort of, you do realise that to get money out of the cashpoint you have to put money in? Oh, right. I hadn’t made that connection at all. I thought, I kind of thought about, you know, you just go here and you get money out. And that’s the point at which it all clicks. And it’s like, right, OK. So that’s why dad goes off to work and everything else. And so it all sort of came into focus. Probably should have got there a couple of years earlier, really. But I don’t remember much from my childhood. But I remember that because it was sort of quite a things clicking kind of moment.

Claer Barrett
Mmm. So, I mean, let’s kick off with some of your out-there, bigger-picture ideas about money which make your book such compelling reading, starting with the following line: Money is basically a fiction that everyone has chosen to believe in. I mean, that seems as good a place to start . . . 

Rob Dix
Yeah! And well, when you think about it, it is! Like money in itself doesn’t have any particular value except the value that we give it. So it works because everyone believes in it. And on a kind of a more big-picture level as well, the same kind of thing applies. So money does literally get created out of nothing. Like when you go and get a loan from a bank, from mortgage or whatever else, there’s no concept of, Oh, well, I don’t want to go and check if we’ve got any money in stock, like . . . 

Claer Barrett
In the vaults. Yeah.

Rob Dix
Yeah. I mean, they’ve got, like, liquidity ratios and things like that. But essentially they just, they type the money into existence. They type some zeros into your account and suddenly you’ve got money that you can go and spend. So it’s all completely abstract and it works. I’m not saying it’s a bad thing, it’s a brilliant thing, and end up by, able to have this kind of shared belief we can do things that never would otherwise be possible. But because it’s now become so abstract that it is all completely based on confidence and faith, and if people’s faith in our current financial system wavers, which might do, then we could end up with problems quite quickly.

Claer Barrett
Well, yes. We’ve been seeing in the past few weeks. Now how to cope with inflation is one of the big questions that you set out to answer in your book. But you also argue that inflation is really an entrenched part of the capitalist system. So tell us, Rob, why is everything getting more expensive and why do you think it might continue to do so?

Rob Dix
It’ll happen because governments and central banks want inflation, like, they set out to create it. And so there’s this famous 2 per cent target, which there’s no particular reason for a 3, 2 per cent. There’s just, the numbers are picked ones. But they sort of set monetary policy to make that happen because they don’t want deflation, the opposite. So they want to have inflation. And the way that they do that is to control the amount of money in the economy, which kind of sounds a bit weird at first, but if you think about it, if we woke up tomorrow and everybody had an extra million pounds in their bank account.

Claer Barrett
That would be nice.

Rob Dix
You think it would be nice and it would be for a little bit. But what would happen? Our prices would immediately have to increase. The price of everything would go up because otherwise . . . 

Claer Barrett
Because everyone’s got a million.

Rob Dix
Yeah. So there’d just be a complete scarcity of everything. So prices correct upwards. And that’s a really extreme version of what always naturally happens. So they sort of try to come back, create the amount of money in the economy to keep prices growing slowly. At the moment, of course, prices are growing more than slowly, and a large part of that is because so much money was created during Covid. And that’s not a judgmental thing. So I needed to create some amount of money. How much is the right amount? I don’t know. It’s impossible to know. And so they overdid it. And all that money is now kind of passing its way through the system, which is one of the reasons we have such high inflation. It’s not the only reason, but it’s one of them.

Claer Barrett
Now you’re great at explaining the why of finance. Now anyone watching the news will know that the central banks, including the Bank of England, have been raising interest rates to try and bring inflation down. But why is this and why isn’t it working?

Rob Dix
The reason that they are, they raise interest rates, is the idea is by doing that, it makes borrowing money more expensive. And when it’s more expensive to do something, you’re less likely to do it. So if your repayments are cheaper, you’re more likely to go and buy the house or take the holiday or do whatever else. So by making money more expensive effectively, which is what raising interest rates does, it means that less money gets created because when a loan is made, money is created. So that’s the intended mechanism. Why it’s not working is, I think it will but it just hasn’t happened yet. Because when you make a change like that, it takes time for it to work its way through the system. So it can take months or it can take years. And so the volume of money creation has gone negative, which means inflation will come down. But there is a complication, which is when people become aware of inflation, and as you know everyone’s hyper-aware of it at the moment, which means that people will start going, well, I need a pay rise then, because everything’s getting more expensive. People get a pay rise and then that means that companies need to put their prices up, which feeds them into inflation. And you get this inflationary spiral which central bankers don’t like, which is why you get Andrew Bailey coming out and saying things like, you shouldn’t ask for a pay rise, which is a terrible thing to say, but that’s the logic of it.

Claer Barrett
Yeah, I know we did a podcast about that. I think it was our best listened to episode of last year. Now before we move on from this topic, is inflation actually good for anyone?

Rob Dix
Yeah, if you’ve got that, it’s fantastic. If you, because if you’ve got a mortgage, then your mortgage payments might be going up because of interest rates going up, it might be soon and that’s not a good thing. But the actual value of the money you’ve borrowed is eroding. So if you imagine you’re not paying anything off your mortgage at all, so you borrowed £200,000 and you still owed £200,000, then the amount of pounds isn’t going down. But the value of each of those pounds is.

Claer Barrett
Purchasing power.

Rob Dix
Correct. Yeah. So if your earnings go up in line with inflation but your debt stays the same, then it becomes easier for you to pay that debt off in the future. So it’s great if you’ve got debt. And who’s got more debt than anyone else? The government. 

Claer Barrett
Yeah. 

Rob Dix
 . . . which is one of the reasons that they’re quite keen on it.

Claer Barrett
Well, I’m sure that will be of some comfort to listeners who are really struggling with those higher mortgage payments at the moment because, as you know, most of our podcast listeners on Money Clinic are under 40. Not all of them, but quite a few. And many of them are still hoping to get on the property ladder, trying as hard as they can to invest and save regularly to get to that day. Now this quote from your book will really resonate with them: “For the past 14 years, you’ve been suffering from your money’s hopelessness as a store of value even more than you would have done in the past, whether you’ve been aware of it or not.” So, Rob, why is this? And can you offer younger listeners anything to be cheerful about?

Rob Dix
We’ll see on the cheerful, you might get . . . there’s sort of two parts. So one is, so for the majority of the time in the past you’d be able to put money in the bank and come out ahead, so inflation would be eroding the purchasing power of your money, be earning as much and more in the bank, so you’d be getting . . .

Claer Barrett
Through your interest . . . 

Rob Dix
Through your interest that you’re receiving. And that’s not been the case since 2008. So for that whole time, you’re guaranteed to lose money by keeping it in the bank, which is not great. So if you’re saving up for a house, then you’re kind of your, it’s gonna be getting harder and harder to save if the money you have saved is losing value. The other part of it is because of quantitative easing, which happened in the wake of the last financial crisis . . . 

Claer Barrett
They’re called money printing.

Rob Dix
Yeah, exactly. It’s a fancy word for money printing. It sounds more official and serious (laughter) if you call it QE, but part of that, into the intended mechanism of that, was to generate something called the wealth effect, which basically means that people who’ve got assets like houses or bonds or stocks, you increase the value of those assets, which makes them better off and feel better off. Therefore they go and spend more money in the economy, keeps the economy going. It stops the recession being as bad as it could have been. That’s the logic of it. But what it means practically is if you had, if you owned assets in 2009, great, because the value of those has been going up and up and up.

Claer Barrett
‘Cause prices have soared, the stock markets boomed.

Rob Dix
Anything you can imagine has gone up. If you didn’t own assets in 2009, tough luck because they’re getting further and further out of your reach and the money that you’re saving to try and get them with is losing value. So you can debate the merits of QE but what it absolutely has done is stoke inequality, which kind of takes us back to the Henry Ford quote.

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Claer Barrett
OK, Rob, we’ve heard you set out your stall and different theories about where the investment world is headed. But let’s hone in now on some practical takeaways for listeners and how as investors, we can minimise that damage from inflation that you talked about. Now, my favourite chapter of your book was the penultimate one. You revealed how you invest your own money, not as a template for people to follow, but just as a way of understanding how you put your theories about the world into practice in your life as an investor. And you’ve come up with five guiding principles that could help people make most of their money. So shall we quickly talk a bit about each of those? What’s the first one?

Rob Dix
So the first one is to be aware that saving isn’t gonna get you there. So for the reasons we spoke about, with the fact that you’re guaranteed to lose purchasing power in the bank. So even though you can now actually get something in a bank, you could’ve get, gotten like three and a half per cent . . . 

Claer Barrett
4 per cent, Santander’s Isa, yeah . . . 

Rob Dix
Even 4. Well, that’s great, but inflation’s at 10 per cent so you’re still losing. And OK, inflation will come down and so if you lock money up for a few years, you might end up getting ahead. But the core hasn’t changed and you’re still gonna be losing purchasing power. So it’s still really important to save. You need to save before you can invest.

Claer Barrett
You need an emergency fund.

Rob Dix
You need an emergency fund. If you’re saving for something like a house, you don’t want to have that exposed to the markets where anything could happen over a short period of time. So I’m not saying don’t save, but I’m just saying be aware that it might feel now like your savings are doing something for you, but because inflation is higher as well, it’s kind of not.

Claer Barrett
So don’t neglect your investments. And the second principle?

Rob Dix
So this is to use debt responsibly. So again, even though interest rates have increased and so it’s like, it’s more expensive to get a mortgage or whatever else, it’s still, because inflation is higher and it’s going to remain that way on average, your, the real value of that is being paid down. And so in exactly the same way as the government is going to use inflation as a tool to reduce its own debts, because it’s the only way it can do it, it’s got no hope of actually paying any of it off, so inflating it away has to be the answer. You can make use of that same principle. So debt, obviously, is not something to take lightly and it always involves, introduces risk. But you can use debt as a tool, sort of like align yourself because people who have debts are probably gonna do better than those who are trying to save.

Claer Barrett
OK. Controversial. But what about the third principle?

Rob Dix
So the third is to be wary of fixed-income investments. And so that includes bonds. And so the reason for that is the income is fixed. And so if you’re getting like a sort of 3 per cent on, then, on your bond, then that’s great. But again, if inflation is higher than that, it’s not doing any . . . you any good. And then let’s say that you put £100 in, you then get £100 back at the end of however many years. Well, the purchasing power of your £100 is decreased by then, so you’re almost guaranteed to lose money. And if you’re investing in a bond fund or ETF, rather than holding them to maturity, then you’ve got the possibility of capital loss as well. So I’m not seeing a lot of upside in bonds. And lots of financial advisers will completely disagree with me. I’m not a financial adviser, so you shouldn’t necessarily listen to me. But the reason for, that you’ve always been given that having bonds and stocks in your portfolio is, well, the bonds move inversely. So when the stock market is doing badly, your bonds will cushion you.

Claer Barrett
They’re the shock absorber.

Rob Dix
Exactly. But it didn’t work last year.

Claer Barrett
It didn’t, no.

Rob Dix
And I’m not convinced it’s gonna work in the future either.

Claer Barrett
No. And it’s been a really big problem even for older colleagues in the FT who hadn’t realised they were being lifestyled and having their pension investments moved more into bonds as they got older. So that’s another tip . . . 

Rob Dix
Yeah.

Claer Barrett
. . . for listeners. Check to see what your assumed retirement age is on your scheme, because for many people it could be as young as 60 and then they’ll start gliding you towards more bonds without you knowing it . . .

Rob Dix
Yep.

Claer Barrett
. . . as soon as you reach 50. Now, what about the fourth investment principle?

Rob Dix
The fourth is to favour real assets. So this is sort of the things that you can touch, like a property, but also infrastructure, commodities, things like that. And obviously I’ve got a bias towards property because that’s what I do. But what’s at the core of that is that real assets have utility and they’re scarce. So value comes from scarcity. If something is abundant and there’s just loads of it, no one’s going to pay you much for it. So if you’ve got something like property or even gold or something like that, then there’s only so much value. There’s a natural built-in scarcity there which is going to become more and more useful over time. And with something like property, then of course it’s something that people actually need to live in and there’s always gonna be a need for it, which kind of gives some kind of value to your investment. So, in general, as we have moved into inflationary times and possibly more challenging times, it’s always are things that people actually need that are going to perform better.

Claer Barrett
Mmm. And finally, the fifth principle. I quite like this one. Be boring.

Rob Dix
Mmm. Absolutely. So if you’re gonna invest in the stock market, which most people should be doing to some extent, then doing so boringly, I think, is the way to do it. And I mean two different things by boring. So, I mean boring as in not sort of stockpicking, which for most people is a bad idea. And even if it’s not a bad idea, you could probably for the same investment of time, you could probably just go and, like, earn more sort of . . . 

Claer Barrett
Doing something else, yes. (Chuckle)

Rob Dix
Doing something else. (laughter) So that’s one. And the other is favouring boring companies. So it’s like, when money is free and everything’s going great, then all your kind of Teslas and Netflix and all those exciting companies that are maybe possibly gonna make money one day, are very attractive. When that’s not the case and we’re now in a more high-interest-rate environment and gonna stay there, but your kind of boring, kind of consumer staples, again, things people actually need, and they’re probably been trading a bit cheaper over recent years, again, going to be more appealing. So we’ve, that’s obviously a correction we’ve already seen. But what I’m saying is it, I think, is gonna stay that way because the conditions are going to remain in place. So keeping it boring both in terms of what you invest in and how you invest in it is probably a better way to go.

Claer Barrett
And what do you do with your own investments, Rob? Do you adopt the boring principle there?

Rob Dix
Yeah, I do. So I’ve obviously got a lot of property in there. I do a bit of trading just for fun. The rest of it is just more boring old index trackers, got some gold, not too much gold because it doesn’t pay you anything. But it’s still good to have for inflation protection and nothing in the way of bonds. So I’m kind of practising what I preach there. And like I said, it’s, not saying this is what I do so it’s what everyone should do, because for a start I might not be right. And even if I am right, everyone’s situation is different. But if you buy into this vision of how the world is likely to be in the future, then that’s a way of applying it.

Claer Barrett
Absolutely. Now, Rob, tell us about your experience as a landlord and the kind of lessons that you pass on to people who are aspiring to get there.

Rob Dix
Yeah, well, first of all, I choose to rent because I like the flexibility, so I fully do so in London, where rents have gone up a lot. So I fully see that side of things as well. But that’s, also kind of shows why I like property as an investment, because the rents do tend to rise in line with earnings and inflation. So you’ve got an income stream that sort of rises over time. In terms of actually getting into property, though, it’s not something to be taken lightly.

Claer Barrett
No.

Rob Dix
It’s really tough.

Claer Barrett
It’s hard work.

Rob Dix
It’s, really it is. And you can be, even if you take the passive approach and so you hand everything off to a managing agent and everything else, you should be doing a huge amount of research and really understanding what you’re doing because you’re taking, if you’re doing the buy-to-let route, then you’re taking a huge amount of money and locking it up in one asset. So you need to be pretty convinced about that one asset. And so, and even if you’ve got somebody else doing things on your behalf, you maintain the legal responsibility. So you really do need to understand all the legislation around it and you should do because uniquely that’s a financial asset, but it’s also someone’s home. So you need to be doing it properly. So definitely not something to get into lightly. But if you’re, if it’s something that you are able to commit a decent amount of capital to and want to take it seriously and stick with it, then it can obviously be highly rewarding. And it doesn’t mean the house prices go up forever. They don’t. They will come, they will come down, there will be booms, there will be crashes, but over a very long time, properties always perform well.

Claer Barrett
Now, for our listeners who are renting, what have you got to say to them? Because they might say, well, one of the reasons I can’t invest is because rents in London are so high.

Rob Dix
Mm-hmm. Yeah, but there’s not a great deal you can do about it because rent controls are sort of superficially attractive. But then it kind of comes back to the, you’ve got a, like a real scarcity. The reason rents go up is because wages go up so people can spend more on rent and there are more people wanting to rent in London, say, than there are properties available. And so prices have to rise until some people are priced out. That’s kind of how it works. If you had a cap on the amount of rent that could be charged, then you just end up with even more competition for the same amount of space. So it doesn’t really solve it. So the only solution really is to create more supply, which historically we’ve had a terrible record of doing. So I don’t have a great answer to it. My own rent has gone up enormously over the last year and I wish it hadn’t, but I don’t think things are gonna continue at this kind of pace.

Claer Barrett
Your own rent? So even though you are a landlord, you rent the property you live in?

Rob Dix
Yeah.

Claer Barrett
Tell me more about that.

Rob Dix
I just like the flexibility of it. And so actually it works out as a better financial decision as well. I’ve run the numbers and I’m actually better off renting rather than owning the property that I choose to live in. But I also just like the flexibility.

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Claer Barrett
OK. Well, to return to the question that we asked at the start of the podcast, money is just a fiction that everyone has chosen to believe in. Now, with all the issues right now, Rob, in the financial system, do you think there will come a point where that faith in the financial system will be shaken or even lost?

Rob Dix
It definitely will. I don’t mean this in a negative way. I don’t know why, but it definitely will, because in the book I kind of like traced back through financial history and what it shows you is that every system of money comes to an end at some point and is replaced by something else.

Claer Barrett
So how would you define the current era of money that we’re in?

Rob Dix
You can trace it back to the early ‘70s, which is when something called the gold standard was kind of completely abandoned. Previously, money was backed by gold. And so there was something giving money its value. Now, what gives money its value? Nothing. Money has value purely because it does. And people agree that it does . . . 

Claer Barrett
Because we believe.

Rob Dix
Because we believe that it does. And as a result of money becoming untethered from anything real, the amount of it has exploded. So because money is created when loans are made, the amount of debt has gone way up, which means there is now loads of money, loads of debt. And it’s kind of got to a point where it’s not sustainable. And so this era of money will have to come to an end and it will be replaced by something else. And historically, what we’ve seen is when that kind of system blows up, you then go back to a more kind of hard-money system where it’s backed by something. It will happen, but when it will happen, we have no idea. That doesn’t sound positive but my message in the book is don’t worry about it too much because there’s nothing you can do about it and you have no idea when it’s going to happen. So what you can do is you’ve gotta control what you can control, and what you can control is saving, investing or being sensible with your money and everything else. And if you take control of what you can control, you will end up in a vastly better position than you otherwise would have done. So I think you’ve just got to focus on that and understand everything else, but not worry about it too much.

Claer Barrett
Well, Rob, I’m glad that you’re not worried. It’s been wonderful gathering through all of the ideas that you’ve got in your book, The Price of Money: How to Prosper in a Financial World that’s Rigged Against You. Hopefully we’ll all have a bit more time to prosper from it. Your ideas are really, really interesting. Thanks for coming on the show.

Rob Dix
Thank you so much.

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Claer Barrett
That’s it for Money Clinic with me, Claer Barrett, this week. And we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues. And if you’re interested in being part of a future episode and are looking for some expert money advice, then email us, money@ft.com. Take a peek at our website FT.com/Money. Grab a copy of the weekend newspaper or follow me on Instagram. I’m @ClaerB. 

Money Clinic was produced in London by Persis Love. Our sound engineer is Jake Fielding and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music. And finally, our usual disclaimer. The Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s the small print for now. See you back here next week. Goodbye.