#21 Fear of the future

“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.

8 thoughts on “#21 Fear of the future

  1. Good points again. One of the problems of having a service based economy is, as you point out, more people are involved making real objects appear more valuable, I am not interested having my real house go up in value, I am interested in having a bigger house, preferably at lower cost, just like computers cost less and less for the same performance. Now obviously land is limited so that will not happen to the same extent but I want more real houses so price competition makes them affordable. A place where people cannot afford houses or have to pay a significant portion of their income for a significant portion of their lives is not a rich country, its a poor one and that is what Britain has become. Britain needs more people making houses, working on infrastructure, energy conservation etc, all things that provide real wealth and less on money shuffling and money creation which does not.

    • Agree entirely. A mystery to me is why, since the number of households in Britain has increased, and housing waiting-lists exceed 1 million, why on earth are we not building huge numbers of council houses? It seems such a a no-brainer……

  2. Thanks for another interesting post Dr Morgan.
    Your observation that money IS energy makes our management of North sea oil and gas reserves look all the more foolish. I suspect that the majority of the easily recoverable oil and gas has been sold of when oil was trading at less than $25 a barrel.
    John Major also ‘dashed for gas’ just before production in the North sea slumped.
    How mad is it that we now have to import oil trading at $140+ dollars when we could have been self sufficient.

    • Our energy policy has been a disaster. Labour failed to order new nuclear capacity, and even flogged off Westinghouse Electric!

      Further back, Britain enjoyed a huge North Sea windfall in the 1980s and 1990s. We should have used that to modernise British industry, spending North Sea money on creating an economy as modern and productive as Germany’s. Or, like Norway, we could at least have invested it for the future.

      But no – we spent it on tax cuts and unemployment. That was staggeringly short-sighted. I don’t blame the government of the day, because I think consuming all our North Sea windfall immediately was what the electorate wanted – more fool us.

    • Allister is right, of course. What he doesn’t really do, though, is take it to its logical conclusion.

      The sharp deterioration in the current account is something I’ve written about before. It means that trade creditors are funding a significant chunk of our consumption.

      There are three ways a household, say, can get by;

      1. Earn (export) enough to meet our needs (we’ve not done that for a long time)

      2. Live on income from investments (as a country, we were doing quite well at that until recently, but not any longer)

      3. Sell off the family silver (what we’re doing now).

      What Allister doesn’t add, though, is that, whilst you can go on doing 1 or 2 indefinitely, 3 is finite – what do you do when everything has been sold?

      Unless we re-address 1 or 2, the future is time-limited to the quantity of assets left in the cupboard. There are other issues, too, such as American annoyance at the way we are welcoming – I quote – “dirty money” from Russia and elsewhere. Last week, Ben Judah wrote about this in the New York Times.

      Finally, consider investment and interest rates. Real rates are negative, taking away the incentive to invest. Investment is inadequate, so we’re consuming (as I put it, “cannibalising”) our asset base.

      So, selling off the family silver as an expedient in order to make ends meet, whilst also consuming our broader asset base. What do we do when all the silver’s been sold?

  3. You have commented on Japan & the US but there are a number of ‘developed’ economy’s – excluding possibly Norway which is an oil state and Switzerland that runs on ‘funny money’ that seem to have a future – Sweden, Finland & Germany seem the obvious examples.

    Please could you pass some comments on those economy’s you think have a future and why? More importantly what we can learn from them and the ideas we should adopt from them

    • In my analysis, Japan is toast. So, barring radical change, is the UK. Decline in the US economy is much more gradual. Neither Germany nor France looks particularly good. China can continue to grow, but only very slowly.

      At the other extreme, the outlook for the oil producers looks strong. The power shift is already evident in the Middle East states’ attraction of high-profile sports and other events, and in their huge international investments. The strong outlook also applies to Norway.

      The outlook for Switzerland and Sweden is good, likewise Denmark. The future looks very good for Australia, and pretty neutral for Canada.

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