SAVING, PENSIONS AND THE ECONOMY
“A week”, as Harold Wilson famously remarked, “is a long time in politics”. It’s can be a long time in economics, too, when it embraces a revolution in pension provision, an enquiry into energy supply and the major geopolitical challenge posed by Russia’s latest bid for “lebensraum” in eastern Europe.
Where matters of saving, pension provision and energy are concerned, those of us who recognise that money IS energy start with an in-built advantage, because we already recognise the connections between these issues.
What I’m going to do here is to examine, in a holistic way, the fundamentals behind the savings and pensions question.
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Where saving and pensions are concerned, the single most important point is that the British economy has stagnated – indeed, has gone backwards – for more than a decade. Even in the supposedly “good” years between 2000 and 2008, each £1 of “growth” was purchased at a cost of more than £9 of incremental borrowing, and the fundamentals have weakened even further since the 2008 financial crisis.
Severe indebtedness is compounded by a glaring current account imbalance, because the financial services industry is no longer able to earn enough foreign exchange to pay for our escalating energy imports and our long-standing deficiency in food supply.
It is sometimes said that the coalition government inherited a “weak” economy in 2010. This is incorrect, because the reality is that the economy handed over by Labour wasn’t simply “weak”. Rather, it was a basket-case, an economy addicted to the Ponzi model of using an artificially-inflated housing market to channel ever greater quantities of debt into consumption.
For an economy, as for an individual or a family, the ability to save is determined by the difference between income and consumption. Where pension provision is concerned, we can point at the vast sums lost to pension schemes through Gordon Brown’s notorious 1997 tax “raid”, or at the similarly huge amounts filched from savers by negative real interest rates and QE since 2009. But to concentrate on these issues is to miss the fundamental point, which is that Britain is no longer affluent enough to save for its future.
This is what negative (below-inflation) interest rates really mean, the clear economic signal being that we need every penny (and more) of our income just to keep ourselves ticking over.
The equally nasty flip-side of this, of course, is that a country which cannot afford to save for its future cannot afford to invest either.
So, in order to keep the consumption gravy-train on the rails, we have resorted both to cannibalising our asset base (through a lack of replacement investment) and to burdening the young people of today and tomorrow with ever greater amounts of debt.
In this sense, George Osborne’s reform of pension provision is nothing more than a recognition of reality. Forced conversion into annuities doesn’t provide adequately for the future because interest rates are too low, and interest rates are too low because Britain is simply too poor to live with rates high enough to incentivise saving and encourage investment.
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Here’s the situation in a nutshell.
In times past, if you saw a large house with smart cars parked in the drive, you could conclude that the occupiers were wealthy. Now, the same house and the same cars are much likelier to indicate that the occupiers, far from being wealthy, are up to their ears debt. That, in microcosm, is what has happened to the British economy.
In the short term, critics may be right to fear that the abolition of compulsory annuity purchase may further inflate the housing market by encouraging more “investment” in buy-to-let (BTL) properties. In anything other than the short term, however, all that this will do is to amplify the property-and-debt crash when it comes.
At the heart of the problem is a fundamental national misunderstanding of the property sector. Regarding property as “an investment” is profoundly mistaken. Since the only people to whom we can sell our houses are ourselves, the “value” supposedly incorporated in the national housing stock is mythical. House prices are a simple function of the stock of mortgage finance divided by the number of properties available. So, if we borrow more money, property prices rise, but all that this really means is that we’re deeper in debt.
What it also means, of course, is that capital that could have been used for investment has been diverted into a wasteful and dangerous “capital sink” instead.
After reading this, you might fear for the future. Well, so do I.