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Is ‘sound money’ making a comeback?

By Jessica Penny
3 minute read

The past decade has been “the exception, not the norm”, according to an investment manager.

A return to “sound money” the persistence of positive real interest rates has been heralded by Vanguard for over a year.

According to the fund manager’s latest research, sound money provides a solid foundation for long-term risk-adjusted returns. As such, and in contrast to the last decade, the firm projects “more balanced” return outcomes for diversified investors.

The Swiss National Bank defines money as sound when its value is stable and it is thus able to perform its functions as a medium of exchange, a unit of account and a store of value.


“Sound money creates security and trust, which in turn promotes social harmony and cohesion.”

Vanguard explained that in the coming decade, higher interest rates, persisting even as policy rates ease from cyclical peaks, signal a shift towards sound money, marking a departure from the post-2008 global financial crisis era and carrying profound implications for the global economy and financial markets.

“Borrowing and savings behaviour will reset, capital will be allocated more judiciously, and asset class return expectations will be recalibrated,” the fund manager said.

“Vanguard believes that a higher interest rate environment will serve investors well in achieving their long-term financial goals, but the transition may be bumpy,” it cautioned.

Commenting on the research, Vanguard Australia’s senior economist, Alexis Gray, said: “Vanguard has heralded the return to ‘sound money’ for a while now.”

“But investors should expect heightened volatility in the financial markets over the near term as the financial markets continue to adjust to this new reality,” Ms Gray continued.

Referring to the return as “the single most important financial development since the 2008 global financial crisis”, Vanguard’s research highlighted that while investors are set to benefit from sound money, it will have “profound implications” for households, businesses and governments.

For households, higher interest rates will make saving more appealing, encouraging prudent consumption choices and reducing the prevalence of speculative, higher-risk retail investments like cryptocurrency. For businesses, higher borrowing costs will ensure that capital is allocated more judiciously to the most productive and profitable projects, while for governments, higher rates will force a reassessment of fiscal policy.

“While near-term volatility in the markets will no doubt worry investors, we believe this structural shift is a reason for optimism and will benefit investors and financial markets in the longer term,” Ms Gray assured.

Earlier this month, Vanguard’s global chief economist, Joe Davis, echoed this same sentiment.

“Sound money is when we have interest rates that are above the rate of inflation. That’s been the average historically, hasn’t been the case for the past 15 years … which is why the return to sound money is, I would argue, the single best financial market development over the past two decades,” Mr Davis said in December’s market outlook.

“We’ve not only been here before, we’ve been in this sort of environment more times than not over the past three centuries of market history. And so, I think history will show, and our view has been, that the past 10 years were the exception, not the norm.”

Is ‘sound money’ making a comeback?

The past decade has been “the exception, not the norm”, according to an investment manager.

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