The Process of Capital Project Planning

In this chapter the reader is asked to visualise the current U.K. financial environment, then to superimpose upon it one significant change. Suppose that the Government were to institute a savings scheme to which loans of any size could be made by individuals or corporations, repayable on demand. These loans would carry no interest, but their principal would be linked to the Retail Price Index. Thus £100 lent when the Index stood at 100 would lead to a repayment of £150 if during the life of this loan the Index were to rise 50%. Returns of principal would not be subject to tax, and there would be no transactions costs. A lender of money on these terms would be vulnerable neither to unexpectedly rapid inflation 1 nor to any risk of default, and could consequently be described as holding a real risk-free asset. The issue of such a real risk-free asset in the form of gilt-edged stock seems likely in the near future, as part of a Government strategy aimed at reducing the Exchequer cash outlay on interest, which would in turn help to restrain the public sector borrowing requirement. In a sense, the idea of a real risk-free asset is not novel — all it involves is the removal of restrictions from the index-linked savings certificates and SAYE schemes which already exist.