31 Dec 2011, 5:56pm
reflections:
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  • Goodbye 2011, Hello 2012…

    So we bid goodbye to 2011, a difficult year for many people, ermines included. A certain degree of mayhem on the stock market, but also a degree of mayhem for the lives of many Britons. Unemployment is rising and inflation is taking a toll on many people’s household incomes. Often already precarious in the good times, lubricated with the torrent of cheap debt, the going has been tough for a lot of people as the friction of everyday financial existence increases. Hopefully not too many gorged on the Christmas sales and our guardianistas and impecunious Daily Mail journalists learned to say no to their materialistic children from last year.

    What did we learn in 2011 – well, the drumbeat of bad news continued, we learned the Euro was pretty much shot to bits and heading in the wrong directions. We learned we are poorer than we thought we were, we learned in August that shares could go down as well as go up, as if we’d forgotten from 2008… We observed some creative solutions to the problems of inflation in the summer, unfortunately somewhat at odds with the law.

    We learned an awful lot of people in Arab states were mightily pissed off with their lot, we learned that we could bump off dictators like Gaddafi but as usual we weren’t so good at putting something better in its place (cf Afghanistan, Iraq). The trouble is the West is too economically and imperially weak to invade and hold and transform a situation, some of us (well, the US of A to be honest) can project force, but we hate the messy part that comes afterwards. Iran seems to be the next place for an oil war, and those North Korean dudes seem to be genuinely barmy despite no doubt being useful to their northern sponsors, but at least they haven’t discovered the elixir of eternal youth yet.

    So what of next year? We seem to be coming up against a bifurcation. Established economics would have it that 2012 will be a pretty rough year but that it should be a turning point. On the other hand it could also be a different kind of turning point, where we discover that capitalism is beginning to eat itself as Karl Marx foretold all those years ago, as it continues to destroy the jobs and livelihoods of the people that it needs as consumers. Like so many things, some is good, more is not always better. Or it could be time to consider surrendering to the forces of peak oil and perhaps engineer an economic system that doesn’t demand we consume more and more consumer tat and make up for the empty feeling inside with Prozac, there has to be a better way.

    This is becoming apparent as the shocking youth unemployment and rising joblessness. It is hard to say where that is going, it is a bad combination with an education system that has been debased and which seems to take as its most important job bolstering its customers’ self esteem. Sometimes it is better to know that you are stuffed than to just feel good about yourself, as knowledge leads to effective action. We have been here before, it was pretty rotten to look for a job in Thatcher’s first recession, and the 1990s one was no fun for jobseekers either.

    For me, 2012 is the year that, after three years of frugality wins me the second goal of financial independence, assuming, of course, that there is still a financial system to be independent in :) The first was reached nine months ago, when I could survive on the stored capital. This New year feels like the last leg of the journey started in February 2008, when I listened to a twerp of a line manager try to pressure me, and I decided that I needed options in future, in particular the option to call punks like that out and tell him that while he may be desperate for the money, not all of us buy our middle class lifestyle on a tower of debt, and I think my own way and dream my own dreams.

    So now I am on the final approach, and it does feel like I am gradually surrendering the potential energy of a dynamically unstable job for the lower energy but more stable position of my final aim, to be independent of working for a living.

    My hopes for 2012 are personally, to be able to stay the course until the third quarter of the year. Two and a half years ago I took a chance, to carry on and risk crashing and burning, and so far it has worked out, and a lot of luck has favoured my journey. The road is getting harder all round, however. One of the pieces of luck was to get on a London 2012 project, which will be a great swansong for my engineering career.

    More generally it is that we find out whether this financial crisis is a financial crisis or something more serious, in that the assumptions behind an industrial economy are starting to break down.

    Finally, what we desperately need is for enlightened leadership to rise to the surface. Not ‘strong l’eaders, but a political leadership that can see the wider picture and is not so craven as to endlessly tell the people what they want to hear. There are some serious challenges coming in the years and decades to come. We would all like things to carry on as they were, but sometimes we need to recognise that isn’t possible, and then to take decisive and effective action to adapt and select one of the better alternatives.

    I did this in 2008, realising that working for another 12 years until retirement would come at a significant cost to my well-being. I had the advantage of being just one person. As nations, there are a lot of areas where effective leadership is needed, In Europe, the people of the Eurozone need to decide whether they have sufficient common cause politically to make a political union that reflects the economic union. It would be good if the politicians, particularly Merkel and Sarkozy, were slapped around the face with a wet fish often enough that they got to understand that it would be really good if they asked people first, before implementing it. I am not sure that this process was done in the creation of the Euro, and repeating the undemocratic exercise makes me uneasy.

    If the people aren’t up for it, then it is time to back away and unravel the Euro, carefully. Because it seems pretty clear that without political union monetary union with always fail Europe in times of financial stress.

    Closer to home, we need to decide how we want to earn our living in the UK. We can probably rebuild the banking edifice, though we could do well to diversify. I am not sure that the time is right for us to go down the line of making things again – time and time again it disturbs me how many of the principles of logical thought and basic engineering seem to have been lost from professional life in the UK.

    If there is one things I’d like us to achieve in the year ahead, it is to find a way for our economy to give decent jobs for most people to do as Obama called out in his state of the Union speech earlier this year. At the moment we are racing headlong into a winner-takes-all world of work, where most people will end up unemployed and a few will reap most of the rewards. Though chaotic and unstructured, there are sounds of dissent as the ‘99%’ feel this without understanding. We need to apply understanding. It may be possible that having most people unemployed is the only way an efficient modern economy can work. It’s not necessarily a bad thing – the 1970’s dream of a life of leisure I was sold at school and that Keynes foresaw  doesn’t sound that bad, and heck, this is what I have been striving for this last three years. Work just isn’t all that. However, we must then change a lot of the incentives and designs of society – Martin Ford has given this a lot of thought, n particular how we deal with a world where most people are not capable of being employed usefully  in his scenario where the majority of jobs have been automated away.

    It takes brilliance to see the possibilities when all around seems lost, just as JM Keynes, standing at the depths of the Great Depression when all semed lost in 1930, wrote Economic Possibilities for our Grandchildren.

    But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.

    I look forward, therefore, in days not so very remote, to the greatest change which has ever occurred in the material environment of life for human beings in the aggregate. But, of course, it will all happen gradually, not as a catastrophe. Indeed, it has already begun. The course of affairs will simply be that there will be ever larger and larger classes and groups of people from whom problems of economic necessity have been practically removed. The critical difference will be realised when this condition has become so general that the nature of one’s duty to one’s neighbour is changed. For it will remain reasonable to be economically purposive for others after it has ceased to be reasonable for oneself.

    The pace at which we can reach our destination of economic bliss will be governed by four things-our power to control population, our determination to avoid wars and civil dissensions, our willingness to entrust to science the direction of those matters which are properly the concern of science, and the rate of accumulation as fixed by the margin between our production and our consumption; of which the last will easily look after itself, given the first three.

    It’s hard to see how this could transpire, looking back over 8 decades, and decades in which we have very definitely failed to control the human population, or eschew wars. I hope his vison was clearer than mine, and he simply called his solution to the economic problem in a bit early :)

    Happy New Year, and may 2012 be good to you!

    28 Dec 2011, 11:51am
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  • How I Got Away With Not Saving For a Pension in my 20s

    The standard advice for anyone in connection with pensions is start early, young man, start early. Do it, and do it now – your early savings are what makes all the difference.

    I didn’t. I effectively started at 28, and even worse because I want to retire early I effectively started later in my working life. For a normal worker in my industry retiring at 60 I would have been saving for 32 years whereas I’ll be lucky to reach 25 years. I’m therefore like a normal worker starting at 35. Because my company pension is a final-salary one, the difference is less than it would be with a DC scheme. However, I’ve had to make changes in the last three years to try and make up for the difference.

    Because I own my house outright this has been easier for me, and it make me wonder if the standard advice is simplistic, and people should take a systems approach to their lifetime finances. In a later post, I will try and work out what proportion of income I did spend on the various key aspects of life (housing, hedonism, tax and pensions). The information isn’t precise for some of the early years, and yet I believe it shows that as long as you do save for some key asset classes in your 20s, it doesn’t have to be a pension in those earlier years.

    I’ve analysed  my working life, and mortgage, rescaling values to eliminate the scourge of inflation which makes it so hard to compare values over a thirty-year working life. Here, I have looked at various pension saving scenarios and how they would work out, as if I were saving into a defined contribution pension at 15%, about twice the rate of NEST’s 8%. Defined Benefit (final salary) pensions are better than NEST largely because more money goes into them, usually from the employer so it is not always visible to employees. However, a pension is deferred pay, so two employers both offering  the same salary but one offering more contribution to a pension are actually offering different salaries.

    First off, an extreme wealth warning. If you are in your 20s and looking for an excuse to live it up at the expense of saving this is not your ticket to ride. You have far more unknowns ahead of you that I have in describing this story, because I am in my early 50s and my career trajectory is known. If you’re young and you use this to justify not saving your 8% of income into a pension then you need to save 8% of your income into some other asset, and assets do not include most of the things you might want to buy ;)

    I got into deserved hot water over here for the assertion that you can make up for a lack of saving in your 20s, and that compound interest will not necessarily ride to the rescue. Not because I didn’t get away with it, but because

    @ermine — Thanks for the follow-up. I’m going to argue strongly against what you’re saying, for the sake especially of young readers reading, as I think it’s dangerously misleading.

    [...] I don’t want Monevator to help put people on the exactly the opposite path that I set out to postulate, and that we post on every day – i.e. at a minimum, realistically aiming to achieve financial security within their lifetime, or better yet some financial freedom.

    Consider yourself warned young person, Monevator is right in that you can’t know until you are 50 that you won’t take some important hits I didn’t. I am looking back over my working life and I know what happened. Young reader, you are looking forward over an unknown career arc. You may have less luck that me. In particular, if you are a woman in your 20s do not follow my path. I will explain why later, but you are exposed to more serious risks statistically that men at the same age. It’s not feminist, it’s not fair, but it seems to be what happens, and you should protect yourself against the world as it is, not as it should be.

    Having said all that, I consider this pretty clear proof that the magic of compound interest is not all that it is cracked up to be, and that is is perfectly possible for someone who has a career path similar to mine to catch up for the lack of early pension savings in ther 20s. Observe that I did not accumulate any debts in my 20s, and my savings went towards putting down part of a 20% deposit on a house I stupidly bought at the height of the Lawson boom. For all the good those savings did me I could have drunk it all in the Television Centre bar and had twice yearly holidays in the sun, but I stuck with just reasonably excessive drinking and one holiday most years.

    The community that can take inspiration from this analysis is the one of the greybeards who didn’t follow the recommended route, and delayed saving till their thirties or even forties. As long as they didn’t screw up with debt, and as long as they paid their mortgage down at the recommended rate, they can recover without working till they drop, through the application of ERE’s methods, but perhaps calling it Earlyish Retirement Extreme

    Setting the scene – how I simulated different saving approaches

    To try and make sense of the last three decades, I have taken my salary and normalised it to 1 for my first proper job with the BBC in 1984. I am British, and unlike our American friends I just don’t like talking about how much I earn. Regular readers have probably roughed it out by now, but you ought to have to work for it.

    I’ve then rebased everything by scaling for inflation using the RPI index, setting that first BBC job to a nominal value of 10000 pounds. In the RPI adjusted world I have created, that 10000 pounds holds its value across the three succeeding decades, because I deflate prices and my salary by RPI inflation.

    an ermine's inflation-adjusted income and mortgage stupidity

    You can see that over the years I improved my income in real terms by over two times. The dip in 1987 was when I took an MSc with a Manpower Services Commission grant. You can also see that the ermine is taking a hit from the stinginess of my employer and the rampant inflation of late towards the end. The actual high-water-mark of my real income was in 2008.

    I’ve also represented my mortgage on that. Look at that awesome income multiple of what, 5 times? Millennials and the Priced Out generation take note, I had to stump up a deposit of about 10% to bring that multiple down to within spec so my debt was lower. I then had to borrow another 10% interest-free on a credit card advance to avoid taking the shaft from high loan to value insurance, which I paid down in the first year. Whenever it looks like a good idea to pay more than 4*salary for a starter house, STOP. You are either earning too little or paying too much, just like me :) What isn’t shown here was I had an endowment mortgage which I only managed to conclude a mis-selling case on in 2004. Friends Provident sold a single ermine with no dependents a life insurance product, FFS. Fundamentally I shouldn’t have been so stupid, but at least I did get the situation restored to what a repayment mortage would have been (the endowment had fallen behind by 1/3). That payment from the endowment is why it looks like I robbed a bank in 2003/4…

    Although I was a feckless young ermine, taking my BBC final salary pension as a cash lump sum on moving to my current company, I am lucky enough to have been in a final salary pension scheme since then for the rest of my working life. Taking a leaf from SG, I have simulated that pension with a steady pension saving rate of 15% from my rebased and inflation-free income, compounding at 5% which seems a reasonable estimate for the long run stock market total investment return after inflation. Mind you, someone who has been saving using an index tracker over the last decade may take a dim view of that 5% assertion! I’ve then modelled how various different variants of me would have done with different pension savings strategies.

    Meet the Cast of Characters

    Steady Eddie

    First we have Steady Eddie. He starts work, saves his 15% gross into a pension scheme from 1983 until he retires at the end of 2010, 27 years later. He is the benchmark for how you should save into a pension. In all these graphs, the magenta bars are the parts contributed by the magic of compound interest. Note that most of this is Eddie’s own saving, though I do agree it would be churlish to deny the value of compound interest, as it makes up 48% of his pension capital.

    Steady Eddie. Take it slow, Eddie, this is how pension saving should be done

    He has experienced the same career progression in real terms as I did, so he earns just over twice as much as a greybeard as when he got his first real job. I normalised his wages to £10000 in 1984. I don’t count my very first job as that was a poorly paid technician post; I started looking for work in 1982, into the teeth of Margaret Thatcher’s first serious recession, so I took the first vaguely relevant job I could get. Eddie is sitting pretty with a pension of 6554 pounds in my normalised universe with a pension capital of £131000. That’s slightly under 40% of his average salary and 28% of his final salary. I am lucky; if I left and drew my pension now I would get a higher percentage of my final salary, and I am duly grateful for my good fortune in that I have had a stable job that has been interesting and rewarding for the vast majority of my time there, regardless of things that may have gone wrong in the recent past.

     Sensible Susan

    The only lady in the bunch, Sensible Susan follows the same path as Steady Eddie for 11 years. Ball-breaking feminists are going to hate this, but she then quits work to have children.

    What can I say? I’ve observed it happen that way often enough, and even if Susan returns to the workplace the missing years are critical to one’s career deveopment. Though my pay didn’t go anywhere in real terms in my 30s the projects I worked on built the platform on which I got the next decade’s rises. However, since she was sensible, Susan has built the classic early starter ‘magic of compound interest’ example of saving for ten years and stopping. Except I’ve had her save for eleven years, because I took time out to to an MSc in 1987 and it seems a bit tough on the Sensible Susan version of me to KO 10% of her earnings as well as well as have her stop work early. Articles like thisthis and this lead us to believe that the magic of compound interest will save her pension, but a casual inspection of her savings graphs relative to some of the later more feckless versions of me will show that just isn’t true. I have kept the vertical axes the same scale.

    Sensible Susan - the magic of compound interest (magenta bars) works for her but it doesn't make up for the serious lack of contributions

    Sensible Susan is on less than half of Steady Eddie. Compound interest makes up more than half her pension capital (66% of a total of £53000). She’s going to feel the pinch with less than half the pension of Eddie. On the other hand, she’s contributed less than a third of Eddie’s contributions. That she is closer to half than a third of his pension speaks something for the magic of compound interest but no way as much as you’re led to believe.

    Feckless Freddie

    He’s a lazy B’stard, our Freddie. He spends far too much time in the BBC Television Centre bar eyeing up the beautiful people of the luvvie set, who are far prettier, and, er, of the right sex, than the hairy-arsed engineers in the bowels of TVC where he works. As a result, he doesn’t realise till too late that London prices appear to be getting away from him. One day he ends up in the Broadcasting House bar (a classier lot in those days, the Radio types than Freddie’s Television Centre chums) and listens to yet another gorgeous sylph-like Rebecca and her pretty-boy BF talking about how much the price of their house has gone up and “oh gawd, Tarquin, ahhhrn’t we rich, dahlink”. On the radio Freddie hears Elvis Presley singing “We can’t go on like this”.

    and thinks to himself that yes, London, we can’t go on living like this, I am caught in a trap. As Freddie pulls his head from yet another pint of E.S.B. he looks up and gets his coat. Freddie figures he needs to go up the value chain a bit from being a studio engineer, and get away from the city that won’t let him live in it without paying exorbitant rent. After a Tube journey he gets on his bike to cycle up the Western Avenue from TVC to Hanger Lane, and thinks about a research job with more pay and a chance to buy a house. But first he needs to fix his ropey Batchelor’s degree. When he gets home he notes the beginnings of a gleaming white pelt starting to show.

    Yup, Feckless Freddie was me. I did the MSc, returned to London for a year then moved up to Suffolk. House prices were still sky rocketing, and I had to get on the ladder before it became out of reach. Oh dear…

    I did investigate whether my BBC pension could be transferred to my current employer, but it didn’t work out. If I had those three/four years they’d be useful but I’ve been here long enough it isn’t a huge amount. As a deferred pension it would be diddly squat, as it is referred to my final salary on leaving the BBC, so even if it didn’t lose over the years to inflation it would be referred to as final salary less than half of the one I retire on. So I used the £700 surrender value to a good purpose towards the deposit on the house. Oops…

    So how does my alter ego Feckless Freddie get on?

    Feckless Freddie and his Frantic Antics at the end

    The three yellow bars are the savings I have managed over the last two and a bit years, effectively twice my gross annual salary. If we ignore these, we still see that Feckless Freddie has an accumulated pension capital of £78000, less than Steady Eddie but still a lot more than Sensible Susan. Why is this? It is because twenty years of compound interest doesn’t make up for Susan’s shortage of contributions, and this is made a lot worse by her lack of the boost provided by career progression.

    It is the weakness of compound interest at realistic rates of real return, combined with the fact early pension contributors are contributing from a low earnings base that means all those stories about early starters staying ahead are just wrong. Feckless is obviously feckless, because he is about half short of Steady Eddie. However, he’s paid off his mortgage by the end, so he can now hit the tax-advantaged pension savings hard. His risk of the government shafting his plans is reduced as he is within a few years of drawing his funds, and the tax-free-pension-commencement lump sum could be just the ticket to make up for his fecklessness earlier. Feckless Freddie ends up with £129k, compared with Steady Eddie’s £131k. After three years of austerity, Freddie can sign up for his pipe, slippers and cruise brochures too.

    The fact that Freddie ends up with the same as Eddie isn’t totally coincidental. I targeted making up for the lack of pension contributiuons due to my missing years as well as compensating for retiring early. I can’t compensate for both unless I work another two or three years, but I can eliminate one. The bar was set by what my own pension would be if I stayed to 60. My assumed real rate of return was 5%, and though I can realise that as dividends I don’t believe I will get a total return of that much even though I have bought mostly since the crash, and a lot at the early 2008 low. I think my share capital value will fall behind inflation in the years to come, but this will hopefully happen slowly so if won’t kill me off in the period between leaving work and actually drawing my pension. If my share capital and dividend income starts to get nuked, well, that’s why I have about the same amount as my shares ISA in cash savings, because there is the mother of all economic shitstorms coming our way. I won’t be a forced seller in that intervening period unless the value of that cash is destroyed because this sort of thing happens.

    Looking at Sensible Susan’s holdings, note that what early saving and compound interest have bought her is insurance. She is unlikely to be totally unable to work again, and if she returns to the workforce then some of the same techniques used by Freddie are open to her. She is likely to reach a lower maximum salary in real terms than if she hadn’t taken time out of the workplace because other workers will have been honing their skills and schmoozing their way up the greasy pole in the gap, but there’s nothing stopping her making up some of the difference. Had he not done something drastic, Feckless Freddie would be closer to her pension than to Steady Eddie’s.

    Finally, let’s meet

    Stupid Steve

    Steve couldn’t see the point of all this saving for retirement malarkey, life was for the living here and now. He’s been a bit stupid, really, our Steve, and only started saving for retirement for the last ten years of his working life. He’s almost like Sensible Susan in the number of contributions, but what makes him stupid and her sensible is he did it the wrong way round. Everybody tells you you have to save early on, right? So what happens to Steve, he’s going to get slaughtered, right?

    Stupid Steve loses out, but not as much as people would think, since his contributions are twice as high as Susan's

    He’s had the same career progression as I did, so his pension contributions are made at the peak of his earning power. He’s on a pension capital of 43,000 compared to Susan’s 53,000. But he’s still got one ace to play that she doesn’t necessarily have. He’s still working, so if he manages to sock away twice his gross salary towards the end, getting himself up to 94,000.

    Now there are some things about Stupid Steve that make you think perhaps he may not be the most financially savvy cookie. But there may be mitigating factors. Say Steve is self employed, and he’s been building up his business all his life. When you or I leave work, we have nothing to show for it expect a few beers down the pub, a gold watch and of course the pension. When Steve leaves work and retires, maybe he has a viable business he can either get someone to run and it pays a dividend, or he can sell the company as a going concern and recover the capital he built up over his working life. Suddenly Stupid Steve isn’t so Stupid at all, perhaps he is Smart Steve. He’s only doing the pension saving at the end because it’s rude to say no to a 40% tax break with five years or less to run.

    Conclusion

    The advantages of compound interest are vastly overrated as they apply to real-world pension saving. Real people

    1. don’t have enough time
    2. can’t get enough real investment return
    3. haven’t advanced enough in their careers

    for the much vaunted example of Sensible Susan ending up with more pension capital than Feckless Freddie, even if he starts 10 years later. They’d have to achieve an investment return of > 8.5% in real terms for that to be true, and it just ain’t going to happen.

    The main thing you buy by saving into a pension early is insurance – against long spells of job loss, unpaid sabbaticals or incapacity.

    Earlyish Retirement Extreme

    The message to greybeards who have spent too little time saving in their youth – there is hope! You can do it. Austerity is a lot less painful for a 50-year old with their house owned mortgage-free than it would be for a 25-year old. Most of the things that are wrong in my life are to do with the fact I am working, the environment is enervating and it consumes a lot of my time. Very few of the things wrong in my life can I solve by spending more money!

    The Archdruid identified the key issue in this post.

    What most Americans do not know, and have no interest in learning, is that it’s possible to be poor in relative comfort.

    I found the transition, from a normal average consuming lifestyle to one of consuming less, very hard. I was far more motivated to go through it because I was under the impression I would become unable to work or ejected from work in months. I wouldn’t have been able to complete the transition otherwise, but after six months of consumerism detox I was off it.

    Above all else, if you’re doing Late Retirement Extreme saving as opposed to Early Retirement Extreme saving, you are probably saving at the peak of your earning power.  To save in real terms what I saved in the last nearly three years would have taken me nearly seven years of saving at the BBC – I didn’t work there that long! Plus my outgoings were a higher proportion of my pay than they are now; what would I have done about paying the rent? Not only that, the money I saved would be locked away for three decades for governments to try and get their sweaty mitts on it, and I would have saved less tax.

    As for seven years staying in my sleazy bedsit as opposed to three years reduced outgoings at home with the lovely company of DW, well, I dunno. Getting on isn’t all bad :)

    the young person’s dilemma

    Even for young people, and subject to this dire warning I’m just not so sure that locking your savings in a pension for 40 years (by the time you are 30 the retirement age is probably going to be 70+) is the best thing to do with any cash you may be able to save between 20 and 30. There’s lots of contrary opinion, like this and this to the effect that I am wrong here, so you have to make this call yourself. The primary risks that mitigate against later saving are if you expect to take significant time out of the workplace to pursue lifestyle choices or you expect career progression to be lower than mine. Taking time out tends to lower career progression, switching jobs between and within organisations more than me tends to increase it.

    Look at those charts, and they are for a relatively short working life of thirty years, compared to 40 or 50 years that are implied by State retirement ages of nearly 70. As long as you start by the time you are 30, giving you 40 years to save before retirement, I’d say there may be other more pressing calls on your saveable cash. After all, though I was a dipstick for using my BBC pension funds towards a house, the financial strategy was right – put this into a capital asset. You recognise an asset because it either saves you more money in its lifetime than it costs you, or it pays you an income.

    A house is a capital asset if it saves you rent, and the many reasons for not buying a house don’t outweigh the many reasons for buying a house. Machinery, services and supplies for a business are an asset if the business can turn a better profit than the cost of those assets properly depreciated would return on the stock market on in a bank. Your van is an asset if it lets you get more work than it costs, your Ferrari, designer suits and your Sky subs are not assets.

    So as long as you understand assets, and as long as you save into assets or RPI index-linked cash the amount you would save into a pension (at least the equivalent of 8% pre-tax), I would say a young person might do well to take a strategic view that saving to a house or saving to buy assets for a business or saving cash is more relevant to their financial lifestream. Pensions advice is so one-dimensional. Do it. Do it now. How about no, let’s work out that this makes sense?

    Assets can help you save in a pension later on. My house contributes £9800 p.a. to my pension saving – it would cost me £7k to rent it but I don’t pay myself rent or a mortgage and I’d have to pay 41% tax and NI on that, which I save going into a pension. That’s not a bad ROI, it’s actually over 10% p.a. on the RPI adjusted price I paid for it.

    There’s a time and a place for pension savings. As long as you heed the dire warning and understand it, I’m not so sure between your 20s and 30s are that time. Just save that 8% of income somewhere accessible and tax-sheltered if in financial assets. Yes, you’ll lose the tax break now, but heck, you’ll probably pay basic rate tax on it on the way out so don’t sweat it. Who knows what tax will be in 40 years’ time! It is possible to make up for lost time. The amount I have in pension AVCs alone is enough, at a real return of 5%, to compensate for the six years of contributions I am short.

    The Magic of Compound Interest is Vastly Overrated

    Albert Einstein is reckoned to have thought it the most powerful force in the universe. It’s often used to exhort young pups to stop blowing their first paycheques on sex, drugs and rock’n’roll. A Google search for “the magic of compound interest” throws up no end of sites telling you that compound interest will make the job of saving for retirement easy, if only you have the intestinal fortitude to do without when you are young. The regular meme trotted out is that Sensible Susan who saves in her pension for 10 years from 25-35 retires on more than Feckless Freddy who lives it up for 10 years before starting to save at the same percentage of salary as Susan, but from 35 to 65. The magic of compound interest is supposed to mean that Feckless Freddy will never catch up.

    Wealth Warning – if you’re younger than 40 and looking to use my POV as a reason to redirect your pension contributions into beer and high living you ought to first read this eloquent description of the contrary view ;) It is far more widely held. I didn’t have this experience, but then perhaps something is anomalous about my lifestream. Note also that I will have a working life of about 30 years, and of those years I have only experienced unemployment for the first 6 months. Your risks of spells of unemployment are probably higher, so although compound interest isn’t necessarily a reason to start young IMO, those periods of involuntary unemployment stopping you saving enough in total is.

    The magic of compound interest is bull, in my opinion, and in my experience. The reason it is bull isn’t that compound interest doesn’t work. The reason is that the examples used to show the young pup that he should forego his hedonistic lifestyle and save into a pension as soon as he gets his first paycheque all assume high compounding rates.

    That’s not to say you shouldn’t start early, but realistically, your early savings will pale in comparison with your later ones, and compound interest isn’t some magic fairy dust that will make up the difference. If you don’t start by the time you’re 30 it’s probably no big deal. If you don’t start by the time you’re 40 it probably is a big deal, because you’ve reduced your savings window to half your working life.

    Let’s take three guys, all leaving university at 25. Let us also take the view that these guys don’t have any career progression, something that favours the compound interest advocates. They all get the average wage of £25k. Let us assume an approximate inflation adjusted return of 5% p.a. which is better than the 3% of the FTSE100 on a total return basis for the last 10 years. The FTAS isn’t much better over the same time frame. Let’s assume annuity rates are about the same at 5%, or these guys target a safe withdrawal rate of 5%.

    Lucky Luke is a born idler whose Dad put £2k into a junior ISA when he was born and left it to accumulate. Presumably his family is old money that knows you never spend capital, so he resisted blowing it on a car when he was 21. Because  he lives a life of luxury and never had to work so he never added to it.

    Steady Eddie starts work and works for 40 years straight through, paying into his NEST pension at the recommended rate of 8%. He retires on a pension of about half his salary at £12,600, which is fine as he’s paid his house off. Along with his pipe and slippers he gets a bunch of cruise line brochures.

    Burnout Brian starts as a runner at Goldman Sachs, but can’t hack it after 10 years and drifts off to a life on the dole, so he only pays into his pension for 10 years and stops. Articles like thisthis and this lead us to believe that Burnout Brian will retire on more than –

    Feckless Freddy who also starts at GS but spends his first ten years there binging on booze, birds and cars. When he’s 35, however, he meets his true love and settles down. They have The Money Talk and Lovely Lucinda gets Feckless Freddy to start paying into his NEST pension at 8% of salary.

    The articles are wrong. Brian retires on 5,700 and Feckless is on 7,400, nearly 30% more! What went wrong? A spreadsheet showing how our three fellows do over 40 years can be seen here.

    For Burnout Brian to get the same pension as Feckless, everybody has to achieve a real investment return of 6.8% in real terms, year on year throughout their investment careers. Now Warren Buffett can hit that. Over 40 years to 2006 he delivered a 22% year on year return. Over the same 40 years, US inflation has increased prices by 520% so you have to scale his performance down to a still very creditable 13% p.a. in real terms.

    You aren’t going to do as well as Buffett. You have to be very optimistic indeed to anticipate an investment return of nearly 7% in real terms year on year for 40 years.

    We all want to believe in magic, but the magic of compound interest is just not that strong in the real world, over a normal human lifetime. Where it comes into its own is for multigenerational wealth accumulation. If you’re an Ivy League endowment fund, sure, compound interest working over hundreds of years can work for you. If you have multiple lifetimes for your money to work over, particularly if you can hibernate for one of those, you’ve got it made. Vampires may have the edge here – long lived, long periods in the coffin keeping spending down, what’s not to like apart from the bad press and difficulty finding a dentist?

    become a long-lived vampire to get compound interest really working for you

    Compound interest is very dangerous to the economy in the hands of dead people with ambitions beyond a single human lifespan, it is so dangerous that laws like the Perpetuities Act have been enacted to prohibit testators projecting huge economic force centuries into the future.

    If you’re Lucky Luke or Burnout Brian, then a large majority of your pension fund comes from the magic of compound interest. The downside of that is your fund just ain’t that big. Burnout Brian is on a quarter of the average wage, and he probably didn’t have enough time to pay off his mortgage before his burnout, so his costs include rent and are higher than Feckless Freddy, who owns his house outright.

    Something else that this simplistic treatment doesn’t allow for is that Feckless Freddy may have been feckless but he may have got some career progression. As a result the 8% he is putting into NEST may be 8% of a higher salary. Look at my career progression. A lot happens after those first ten years. It would only take a thirty-percent bump up in Feckless’s starting point or a sudden heft like the 20-25 year mark of my career to have Feckless Freddy on twice as much pension as Burnout Brian. Say Feckless Freddy pays his mortgage off a little bit early. All of a sudden he doesn’t need to pay the mortgage. He can save that into a pension, tax free. He might even be able to get the money out without paying tax by using the 1/4 pension commencement lump sum tax free allowance.

    I’ve got it in for boosters of the magic of compound interest, because I was Feckless Freddy. When I stopped working for the BBC in London I took the accumulated money from the three or four years’ worth of BBC final salary pension I had accrued as a taxed lump sum of £700 (worth about twice that now, according to the Bank of England’s inflation calculator). I did investigate at the time whether it could be transferred into my current employer’s final salary scheme, but for some reason it didn’t work out.  So my pension fund is about £2k less. Big deal. I started pension saving effectively in my very late 20s. In the last three years I’ve made up the difference and then some.

    Look at Feckless Freddie and Burnout Brian. The reason Feckless’s pension pot is bigger even though he started ten years after Burnout is because Feckless stayed at work and continued saving for twice as long as Burnout. He’s put in 100% more than Burnout, and compound interest just can’t compensate for that with realistic rates of investment performance.

    Therein lies the message. It isn’t fairy tales like the magic of compound interest that does the heavy lifting. It is steady saving of 8% of your gross salary for more than 20 years that does the grunt work, and then compound interest helps you out by up to 60% if and only if you can achieve a 5% return in real terms. If you’re into FTAS index tracking your returns over the last 5 or 10 years have been about 5%p.a. or about 3% post inflation so your compound interest is definitely lacking in magic compared to the 5% I assumed. Some of you have just had ten years of this, and the bad news is that there is the mother of all incoming financial shitstorms looming on the horizon…

    In the case of a defined contribution pension scheme it becomes more and more attractive to hit pension savings as hard as you can late on in your career. You’re more likely to be paying 40% tax which you can save. You’re more likely to have paid off your mortgage, so able to save more of your income. You’re less exposed to government skullduggery in changing the taxation of your pension when you’re within five years of drawing them compared to if you are thirty-five years away. My pension isn’t DC, however there is a DC component in the additional voluntary contributions section of mine. So I hit that hard. You just can’t say no to a 40% saving going into a fund you can use tax-free in five years’ time; that’s an investment return on the tax saving alone of 8% p.a. and rising to 40% in the last year (less inflation, of course). That’s a very different proposition from saving 40% going into a fund you have to wait more than 10 years to get hold of, even if it does grow at 5% p.a.

    The job of achieving financial independence isn’t easy. Saving small amounts early in your career and expecting the magic of compound interest to let you kick back after ten years just won’t work, and the reason it won’t work is that you must look at investment returns in real terms, which just aren’t big enough. Look at the investment return values used by Morningstar - a return of 12% is only 1% shy of the returns of the greatest investor that has ever lived. Del Boy and Rodney just ain’t going to manage it. If anything there’s been a marked long term decline in stock market total returns over the years. Returns are broadly correlated to GDP growth and where are we going to get more of that from in future?

    Compound interest may perhaps add about 60-70% to typical pension returns over a working lifetime. Not to be sneezed at, but the biggest determinant of how well you live after stopping work is how much of your income you saved. Upping this ratio does you two favours. One is it by definition increases the amount you save. The other is it stops you inflating your lifestyle with all those consumer fads they try and sell you on the telly, and stops you buying too much house for your needs. Much of the key to financial independence is cost control. Spend less rather than earn more, particularly if you want to retire early.

    I feel strongly about taming the meme of the magic of compound interest and the futility of saving in the second half of your working life because when it became apparent to me two and a bit years ago that I would probably not manage to carry on working to 60 I heard the compound interest message and figured there was nothing I could do to shorten my working life. I was Feckless Freddie, I was missing those vital early years that I could never get back again.

    It wasn’t true, but at the time my world-view was distorted (okay, more distorted than it is now :) ) and I did not have the energy to analyse this myself, until I came across this post by ERE which showed that there was a way to beat the tyrant of compound interest that is supposed to save everybody else’s bacon. And that way could work, even if applied at the eleventh hour.

    Extreme saving is not an easy way. I find it hard to fill my ISA each year because I am saving more than that into my pension, and about the same amount into cash savings to carry me across a few years of finishing work so that I can defer drawing my pension. In three years I have saved twice my gross salary, spread across pre-tax pension savings as post-tax ISA and cash savings. That’s the equivalent of four or five years of my inflation-adjusted gross salary in the first decade of my working life, the Sensible Susan years. I don’t care how sensible Susan is, she’s just not going to save half her gross salary in her sensible start-young saving decade. Even if compound interest magically doubles her savings over the ensuing thirty years, she’s not saving 25% of her salary which would match in real terms what I’ve done in the last almost three years :) .

    Now you don’t save that much by skipping lattes and using quidco. You do that by going into across the board lockdown mode, you do it by investing for income, and you do it by having the brass nuts to throw more than half your salary into the stock market from April 2008 onwards. I was doomed anyway, but I still had enough intellectual capacity to understand the logic of this sort of thing.

    In those three years I will have enough capital to make up half the value of my pension if I drew it early. Compound interest be damned. There are other ways, if you are desperate enough or want it enough. To achieve extraordinary goals you have to do extraordinary things.

    I may not draw my pension early – I may choose to live from my cash savings and investment income, or convert more of my cash savings to investments to get more investment income. As the ad said, a man with savings can choose his way in life. I didn’t get that freedom of choice from compound interest. I got it from extreme saving and the peak of my earning power. At current rates of investment returns, Feckless Freddies can beat the legendary Sensible Susans/Burnout Brians. They just have to apply themselves to the task in hand with extreme prejudice. If he pays down his debts, Freddie can save a lot more than Brian’s 8%, and from a higher income base too. Don’t underestimate the capacity of an doomed and angry greybeard on the final approach at the height of his financial power, compared to the puny financial capacity of the young pup in his first decade of working life :)

    Oh yes, and if you are the young pup looking to get out of paying into your pension, well, you have been warned. You have to get the career progression to be that greybeard before you can wield that power. This is not a foregone conclusion in a world where the power is shifting from labour to capital.

    13 Dec 2011, 12:11am
    living intentionally simple living
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  • Financial freedom is having options, not just having money to spend

    I remember times when I didn’t have enough money to buy the stuff I wanted. Still plugged into the world of consumerism and advertising to some extent, the stuff I couldn’t afford bugged me.

    What I discovered was not that it bothered me because I really needed the stuff and it would give me lasting improvement of quality of life. What bugged me was that I didn’t have the option of having it. I couldn’t afford it, and because I wasn’t brought up to buy consumer goods on credit I couldn’t have it.

    It took a bad experience at work to show me that there was something a lot worse than not being able to afford consumer tat. It was not having options to walk away from bad situations.

    Our American friends, with their delicious lack of irony, can get away with saying things that would just sound hokey and ridiculous from me. In this old newspaper clipping, which is a 1963 ad for a savings and loan company.

    The Pleasure of Walking Tall (cringe)

    It highlights the advantages of financial freedom –

    A man with­out sav­ings is always run­ning. He  must.… He must take the first job offered, or nearly so. He sits ner­vously on chairs because any small emer­gency throws him into the hands of others.

    Two-and-a-half years ago I sat in an annual appraisement, when The Firm had had a general annus horribilis due to incentivising the salesforce to sell products without evaluating whether they were profitable first. And I listened as a little twerp of a line manager told me he was going to slaughter my appraisement because the project I had been on had been cancelled and my skills didn’t fit in his area. He did it because he needed to score a decent number of negative hits. I was in a weak position, had had some upheaval in my personal life, and had no options. I didn’t have savings, so I had to sit nervously on the chair. Nowadays I would read him the riot act and launch a grievance (you aren’t actually meant to drop someone down three grades without giving them some warning in the preceding quarter, so I could have nailed him for not giving me a heads up first).

    He can take a level stare from the eyes of any man.…..friend, stranger or enemy. It shapes his per­son­al­ity and his character.

    The ermine is a noble and proud creature, and chose to take action so that this would never happen again. That means independence of working for a living. Getting another job is not the answer. There’ll be another jumped up twat who has just had a child, has no savings, and is desperate to achieve his objectives at my expense so he can continue to afford to pay interest on the debt buying his nice middle-class lifestyle.

    Having savings, and therefore options, makes it easier to resist the blandishments of consumerism. Now, I can walk into a store and look at the stuff they have, all gaudily pushed for the weak of will. I can look at it, and think to myself “yes, that would be nice. I can easily afford it. But I’ll pass, because I don’t have a need for this stuff, and I know the want leads only to fleeting satisfaction for a few days”. After a certain point, it is the people in your life that matter, and what you do with them, not what is in your life.

    Somehow, having to option of buying the stuff, without particularly breaking a sweat, makes it easier to say no. You can ignore all the 10% off, SALE, everything must GO signs. I’m old enough to have seen it all before, and rich enough and ornery enough to be perfectly happy to pass up on the offer if it means I can take the time to consider the purchase at my leisure. If the damn thing costs 50% more, so what? I don’t buy consumer goods often enough and they are such a small part of my budget that I can afford the luxury of consideration. And many of these offers are cyclical.

    I don’t understand the fuss made on Martin Lewis’s moneysavingexpert site about topcashback and quidco etc. Obviously if you are going to spend a shedload of cash on some consumer goods then for sure, try and spend less using these sites. However, the truly radical money saving tip is don’t buy the stuff in the first place, guys.

    Ivan Illich, seemed prophetic in the 1970s when he wrote in Tools for Conviviality

    Elite professional groups . . . have come to exert a ‘radical monopoly’ on such basic human activities as health, agriculture, home-building, and learning, leading to a ‘war on subsistence’ that robs peasant societies of their vital skills and know-how. The result of much economic development is very often not human flourishing but ‘modernized poverty,’ dependency, and an out-of-control system in which the humans become worn-down mechanical parts.” Illich proposed that we should “invert the present deep structure of tools” in order to “give people tools that guarantee their right to work with independent efficiency.”

    Look at so many of the products people will buy for Christmas, they are a lock-in to a complex system of more payments. For example, an Xbox, a mobile phone, Sky TV, a gym subscription, a motor car, a twin-blade razor, contact lenses. So many ways to engineer extra costs into your life, and you tend to do that once you have sunk some costs into it. It was such a relief when I sold my Sky Plus PVR to a friend at work – it had suckered me into an extra £10 a month!

    There are also deliberate attempts to change time-honoured ways of doing things into things that require continuous locked-in purchases of overpriced consumables. Take a Nespresso machine, for example. What a daft way to overpay for coffee. Any product that has a club on the website should ring out ripoff alert in big letters. With a bog-standard filter coffee machine I can get my coffee from anywhere, in any quantity I want. From Tesco to some hideously overpriced London coffee emporium selling me Java Blue Mountain air-freighted fresh that morning, no doubt.

    I have the choice of how strong and how much I want, by varying the grind and the ratio of water to coffee. If I am lazy, I can use a coffee machine – this is in fact how an Ermine rouses himself, by loading a coffee machine in the evening, and using a wireless remote control to start this in the kitchen from the bedroom :)

    If I am not lazy I can use a filter cone, a French Press or a stove top espresso maker. With the exception of the filter cone, zero waste bar the bag of coffee beans, and even in the case of the cone, the waste is compostable paper.

    With a Nespresso machine, my choice of coffees and choice of suppliers is narrowed massively, to the 16 of the Nespresso range and to one supplier. I’d waste an aluminium capsule each go, so wasteful that Nestle have to come up with a whole greenwash site to assuage the eco-consciences of their customers.

    It’s absolutely and staggeringly bizarre. Nestle have designed a complex system to wastefully lock-in their customers by replacing a perfectly serviceable and simple range of historic methods of extracting coffee from ground coffee, purely so they could make more money. And people will willingly buy this. Illich would despair of us.

    Savings. Yes, there’s a lot to be said for them. Most people save in order to buy something. That’s good, particularly is the alternative is to use credit. Though the most common reason for saving, it isn’t the only one.

    I save to buy power and freedom – the freedom to walk tall in the 1963 ad. The ad looks really odd to 21st century eyes – modern ads for savings accounts emphasise saving up for something like a house, or the advantageous interest rate. I have never seen a modern ad advocating saving to buy yourself independence of thought and action. Wage slavery is too ingrained in our culture, and we have surrendered to Illich’s modernized poverty.

    10 Dec 2011, 9:59am
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  • Britain ejected from the EU – exit ramp engaged

    I voted for continued membership of the EEC in 1975, not sure how I got to vote there as I was well under age. That was for a common market, and it’s something that has generally served Europe well over the intervening three decades.

    However, there’s always been a religious element to the EU, the dream of a pan-European super state, a United States of Europe. These dreams tend to go to the head of political leaders, and as a result the original dream of a Common market, with harmonised technical and regulatory framework facilitating free movement of goods and services has been corrupted by the vision of a USE.

    That vision was evident in the hubris of the creation of the Eurozone. It wasn’t apparent at the time, and much of the intent behind the Eurozone was good-intentioned. There isn’t a free lunch, however, and it seems that we created a way for Germany to bankroll increasing debt in other European states. National populations enjoyed increasing living standards as their previously inflation-prone currencies were stabilised and increased in value by the industry of other national populations. The Eurozone had monetary union but not cultural and productivity union, and these forces acted exceedingly slowly but with great force.

    All this became apparent in the credit crunch, and now the search for a solution. In the end the people with the money are going to define the boundary conditions of the solution, and in the Eurozone this is Germany. Unfortunately what works for Germany is somewhat against the national character of many of the other countries, particularly Club Med. Some countries had bad luck – the Irish and the Spanish seem to be victims of bad luck as well as irrational exuberance.

    Sarko, you are part of the problem if you blame the eurozone problem on the wrong causes...

    And like anything that goes titsup, there’s a search to apportion blame. And our dapper little Frenchman with his lovely wife seems to be keen on one interpretation, that financial deregulation started a shitstorm that is tearing the Euro apart. What better way to fix the problem and improve his re-election chances than by ejecting the obnoxious troublemakers who have built their shaky economy on financial wheeler dealing?

    The trouble with trying to fix something that is broken is that you need to tread carefully, reflection and analysis are the keys to success here. The main questions you need to ask, be the faulty component a eurozone or a piece of equipment are

    1. Is this faulty are are we using it wrong?
    2. if it is faulty, did it ever work correctly for the purpose it is used for?
    3. can we identify what is wrong with it?
    4. does our diagnosis stand up to scrutiny and testing?
    5. is it economically viable to fix this?

    only when we have reasonable clarity can we decide whether to fix or write off and start again.

    The assumption being made about the Eurozone is that it is fundamentally sound, does what the component nations want of it and needs fixing. A further assumption is being made that the credit crunch was the source of its current problems.

    I’m not so sure. I think it is the inherent differences in lifestyles and attitudes to work across the Eurozone that is giving rise to the problems. I observe that the fire has started in the nations that are less productive, and who have had a history of currency depreciation relative to other Eurozone nations.

    performance of various currencies against the erstwhile Deutsche Mark in the decade to 1996

    I pinched this from here because I didn’t do the analysis myself. A cursory inspections shows that the Italian Lira, Portuguese escudo and Spanish peseta were on a very different track to the other currencies.

    I think the seeds of the current crisis were set from the off, ie the design was wrong. We should have first asked the good people of Greece, Spain, Italy and perhaps Ireland this question on joining the Euro.

    You can have a more stable currency more akin to the German Deutsche Mark. That’s the good news. The bad news is that you are going to have to raise productivity or be paid less. How do you feel about that?

    Politicians fluffed this question, and borrowed money over the years to cover up the difference in productivity. And this is the money the bond markets want back, and if they’re not going to get it back, they would like to see a way to get the money they lend in future back from the Eurozone. They made the error of assuming all Eurozone debt is equal, they have been disabused of that notion, and they are now raising Cain and demanding that the Eurozone as a whole stands behind any money lent in future. To all intents and purposes that means Germany stands guarantor for the rest, because they’re the only ones with any money left at the moment.

    Our little man Sarko, and indeed others, would like to blame it all on financial deregulation. They’re wrong. Deregulation was a different fault, and it was used ably to take up the slack of these inherent contradictions in the Eurozone that would have been apparent earlier, perpetrating property bubbles in Spain and Ireland, losing Greek debt at German rates etc. It allowed things to get worse, and blew up first.

    It’s a very bad thing to confuse the symptoms with the cause in any diagnostic job. There is going to be hell to pay. The contradictions of the Eurozone run deep, and would be hard to address in the good times. They are virtually impossible to address in the hard times, and particularly if the symptoms are being tackled without adddressing the causes.

    As for Britain, well, if the EU means a United States of Europe then I go along with David Cameron. We are Das Inselreich, an Island Kingdom, we are in Europe but in some ways not of Europe. In the end, if the other countries of the EU desire a more dirigiste economy, then that is not compatible with Britain’s economy and probably not of its national character. We will pay a heavy price for taking a different fork in the road. As the Indy headline said, this is not Britain leaving the EU. It is the EU leaving Britain, taking a path that is not our way.

    The price will be heavy. But not as heavy, I fear, as the price that will be paid in unemployment, misery and Depression-era pain as the rest of Europe, particularly Club Med, is economically crash-locked to German standards. It may work. I don’t think it will. The Euro will change from something that was designed to bring Europe to an ever-closer union to one that sets the nations apart, as they are forced into a single economic mould via austerity and deflation. It doesn’t just scare me. It even scares the US Army, which has probably got more cojones than me ;)

    It ain’t going to be fun. But if it was the choice of austerity/deflation or nothing, I’m happy with the nothing. We have very, very, serious problems in the UK, that may be hard to solve as it is. That’ll be rough as hell, but probably not as rough as the enforced austerity the Eurozone is going to go through. Good luck to them, and the best of British to y’all. I hope the eurozone has captains clever enough and economies strong enough to come through the storm. That which does not kill you makes you stronger…

    PS Damn – the Economist has this “Lessons of the 1930s” prognosis which is a better argued prognosis of the way ahead for the Euorozone. It’s not inevitable, but it ain’t good.

     

    2 Dec 2011, 11:59am
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  • Merv presses the Panic button – incoming fire observed from all points

    It’s not often you hear the early warning sirens go off in finance. They just did, when Mervyn King  said this

    The crisis in the euro area is one of solvency and not liquidity. And the interconnectedness of major banks means that banking systems, and hence economies, around the world are all
    affected. Only the governments directly involved can find a way out of the crisis. But here in the UK, we must try to bolster the resilience of our financial system, better to withstand the
    storms that may come in our direction.

    What he said was there is little Britain can do to avert this shitstorm. It’s not just banks that need to take actions – for families around Britain the message is equally clear. Get out of debt, acquire no more, and for God’s sake live within your means. If that means beans on toast for the next couple of years then do it. And cancel Christmas if it means going into debt. No spending tastes as good as as debt-free feels when the wolves are howling at the door.

    The world doesn’t owe you a living. It isn’t fair that other people get away with things you can’t, but that’s not a reason to give up the fight. A hostile world looks after people that look after themselves. Entitlements can be taken away and debt means someone owns you because they have a claim on your future work…

    There may be opportunities for people prepared to fly into the economic storm, but these opportunities will come with stupendous risk. Many will lose their fortunes in it. I may well be one of them, perhaps left only with non-financial investments after the rubble stops falling.

    I plan to invest into this shitstorm, because since I have only started investing post-credit-crunch, I do not have much to lose, and the potential gains if I survive the storm and reach the sunlit uplands are high. At no time in the last decade have valuations generally been this good, and they will probably get better when the Euro finally blows. In that time it will be people who hold an internal reference point that can hold their heads, because the storm will mask any external references.The falcon will no longer hear the falconer amidst the noise, and there is no riskless asset class any more that you can measure things against.

    One of the obvious questions we could ask ourselves are how did we get here? The clumsy but talented Robert Peston will presumably ask this in his upcoming TV programme How the West Went Bust. He favours one possible explanation.

    The overspending hypothesis

    We overspent – basically the west got its credit card out and spent like drunken sailors, inflating an illusory increase in living standards without creating the extra wealth to underpin such an increase in living standards.

    That is one possible explanation, however, there are other, more troubling possibilities.

    The Limits to Growth/Peak Oil hypothesis

    One of those was flagged up in a previous crisis nearly four decades ago, in particular in the 1972 report Limits to Growth by the Club of Rome which was one in the eye for the endless boosters who claim that the solution to all economic problems are ‘human ingenuity’. Yes, Warren Buffet, I’m talking about you too :)

    Basically it postulated that human society needs a certain amount of resources from the world, and that the rich world was using these at a rate higher than could be sustained or renewed. For instance until 1950 human agriculture was generally renewable, whereas now one of our basic requirements, food, is produced by a process that makes a lot more output per worker. However, it does that at the cost of severe degradation of the soil, which used to be in balance with the crops, it uses water unsustainably. Two egregious examples of that are mining groundwater faster than it is renewed in the United States Ogalalla Aquifer and in India in the Punjab where the water table is falling at about a metre a year.

    If the components of the limits to growth scenario are significant or increasing, then the prognosis for industrial economics are very bad indeed. Some elements of modern economics are predicated on continual growth. We could probably change these, after all human societies up to the Industrial Revolution managed economically in what was a fairly steady-state and sustainable balance with their environments. However, the experience of many people was certainly not the same as that which most Western democracies feel they are entitled to. Some of the credit card problem could in fact be the attempt by politicians to maintain the entitlements in the face of Limits to Growth problems.

    I am going to take a chance on the issues being more a credit card problem, and take note of Jacob no longer ERE that empires fall over longer time-spans than in the movies. However, I have hedged some of my bets there with non-financial investments, because it’s not as clear-cut for me as it is for others.

    It’s going to be a rough ride. People are already running for the exit, and I will be pushing past them into the maelstrom. I will lose a lot of money buying into the storm, but I hope to gain even more as it passes in the long years to come. There are no guarantees, however – I could be tossing cash into the fire. However, if the endgame is nigh for industrial economies, then even cash will lose its value. Germans know this already, which is why they aren’t rushing for a second bite of the cherry…

    Another question we should really ask ourselves is how come we have become such a greedy bunch of SOBs as to always want the amount of Stuff we can buy to increase? Take a butcher’s hook at this article, telling us breathlessly

    Families face ‘lost decade’ as spending power suffers biggest fall since 1950s

    That sounds pretty rough, no? Okay, better than that flesh-eating zombies are coming out of Britan’s cemeteries at night and eating our children, but still pretty bad news. Until we read later on

    Real average household incomes will be no higher in 2015-16 than in 2002-03, meaning middle-income families will have worked for more than a decade without any increase in living standards.

    What exactly do they have against 2002? I mean if they said families living standards were no higher than 1962, when Britain heated its homes with coal fires and rationing had only just ended, then maybe. But 2002? I don’t remember 2002 was that terrible. People, particularly of a religious persuasion, sometimes used to take time out to give thanks for what they had. We should perhaps learn from that and stop being so damned greedy. 2002 was just fine. You may not have had a Kindle or an iPhone then, but if you measure the quality of your life against a yardstick of consumer goods them maybe you need to take a look in the mirror one morning and ask yourself if you’re on the right track.

     
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