15 Aug 2014, 6:30pm
debt economy
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  • What will the power shift from labour to capital make things look like?

    As we wander around the many lovely historical relics that Britain has, usually in the care of the National Trust these days, we think we are looking at the past. Wander around the many rooms, and marvel at the effort it would have taken to keep these clean in a world without fossil fuels or vacuum cleaners.

    Stately pile in Leicestershire

    Stately pile in Leicestershire

    Now everybody in the personal finance world is trying to build capital, to make income. It’s the Holy Grail of pension planning, the vanishing point at the distant horizon, the Ermine sitting in his back garden drinking iced coffee while other people toil to fix the sewers and bring water and power and ideas to him. We don’t do this in the up-close and personal way that the Downton Abbey set do 1. We use machines and energy to do it, and if you see people power substituting for capital you know that someone’s thrown the big red switch and the projection reels are rolling – in reverse, and that the aristocracy will be in the ascendant again.

    Financial Independence is the non plus ultra  – the destination for which we PF types forego all the gratuitous consumerism of our fellow men, living like celibate monks in a brothel. It’s quite a new concept in human societies. Those grand buildings in the care of the NT were serviced by an army of grunts, basically working for The Man. Over a working lifetime, they didn’t get to save enough money to retire, because they didn’t earn enough money over and above their living requirements. Although we often associate this retirement with the welfare state, trades unions and friendly societies were in this space in the early years of the 20th century.

    One of the mantras of the PF world is you can earn a 4-5% real return on capital in a suitably diversified portfolio of assets. This isn’t bad – be grateful you’re living now rather than earlier in the 20th century ;) In even earlier times, however, the return on capital was better, presumably because the servants never earned enough spare over their needs to retire! On the downside if you were the Man you had to be the first-born son of The Previous Man – capital was inherited, passed down the line by the doctrine of primogeniture. It was a drag if you were the second son, and you were SOL if you were female.

    shamelessly pinched from Krugman who pinched it from piketty

    shamelessly pinched from Krugman who pinched it from Piketty

    I got this from Krugman’s Why We’re in a New Gilded Age but I think he got it from Thomas Piketty. There are a few interesting things here. One is that this is the return on capital after taxes – it can of course be varied using taxes. You’ll note there was a low in the period that had the two World Wars – I guess taxation was high and the destruction of capital too. Another thing that is interesting is that the high-water mark of world GDP growth encompasses my working lifetime – I finished work at the end of it. I guess there’s some kind of limits To Growth forecasting in there, or maybe Piketty’s been reading Life After Growth. Either way we’re seriously into unknown unknowns there.

    It is, therefore, possible, that my story is a blip on the thread of financial planning – the thought that an average grunt who left school owning a kettle and the shirt on his back could command enough resources to retire 34 years later. For that piece of luck I am duly grateful.

    What do we learn from this? One is that the rate of return on capital assumed by a lot of PF thinking isn’t that unusual, from a historical perspective. It is, however, a bit unusual compared to recent historical perspective. We really could do without any more bloody wars in Europe, and the associated high taxation. OTOH there did seem a big stimulus to growth, although on such a coarse scale it’s hard to say that this wasn’t due to progress in agricultural yields or due to electrification. One of the valid questions would be does growth inherently reduce the return on capital, or is this correlation with something else?

    An ermine looking back 30 years, about to enter university. Or not.

    One thing does seem clear, however. We are headed towards a world where capital is getting a larger slice of the pie. We see that in wage stagnation, and also in a fall in growth. One fo the hypotheses for the fall in growth is the increasing cost of energy. So what does the future look like?

    Much more stratified and class-bound, I would hazard. If I were collecting my A levels today, and if there were and older Ermine-head on the shoulders 2, I would question some of the shibboleths and assumptions of the consumer lifestyle and image.

    I would note that the modern world offers three doors for the A level student. One is the route of university and £30,000 worth of debt. Now in the world I have worked through, £30,000 of debt would probably have been worth the candle, but in the world I see before me, I don’t feel that way at all – I have much sympathy for this viewpoint that university is an unaffordable luxury. There are two reasons why this is different today from 30 years ago:

    • 30 years ago, the exams were much harder 3 I think it was 7% when I entered and 11% when I left in 1982 of school leavers went to university at all. The exams screened strongly for academic ability, in ways you aren’t even allowed to think about today because it hurts the feelings of those that don’t make it. As a result of this, there were far fewer graduates in the workforce, the graduate premium was stronger.
    • Poorer students got grants and I believe everyone had their course fees paid for by the LEA, whereas now we have the loans situation, which means a student is indebted by £30,000 as well as the opportunity cost of losing the money they might have earned in the first 8-10% of their working life. Although it’s not exactly the same as going to Mastercard and taking out a loan for £30,000 as Martin Lewis is at pains to explain, the trouble is that with a 50% entry target, university is by definition targets at those of average academic ability and up. As a result the graduate premium is much lower, for the simple reason that the product is a lot more common. It’s true that in there are the same 11% of old, but the problem now is employers have to find them, assuming academic ability correlates with better ability at what they want. One of the biggest problems has been that heft in student numbers – it meant that the taxpayer couldn’t afford to support five times 4 as many so the cost of the opportunity has gone up for the students at the same time as the value of the product has been dropped because the market has been flooded.

    All round this seems to be a policy failure. We haven’t asked the fundamental questions, which are

    what is university for?

    • if it is to provide better work cannon-fodder, is this what companies and the available work want?
    • is it better if companies train their staff themselves – vocational training used to be a lot better – the Ermine was trained in how to use a lathe and other gear by companies, not schools, even though it was a peripheral part of what I would be doing, I have never used a lathe directly in my line of work but needed to know what could be done with one.
    • Is is right to normalise debt to our young adults so early in life – a student debt is more money than I have ever borrowed in my life other than as a mortgage

    At the same time I note that there are other routes

    • England is an expensive place to go to university, particularly if you are English – European universities where under EU rules you have equivalent access to courses and support may be a cheaper option (and often taught in English!)
    • The modern world offers the entrepreneurial and talented more opportunities to get to market and a much more efficient business operation than was possible in the past. You don’t need a university degree if you don’t have to convince an employer to employ you – code an app needs knowledge, not a degree and you can learn an awful lot of things online nowadays. Against that the odds against the successful entrepreneur are bad. Many are called but few are chosen to succeed.

    The good thing is you have far more options. The bad thing is that the value of the default option has been mullered – price up and value down. I personally wouldn’t go to university in England if I were 18 now, though I would consider Europe 5.

    Minimize debt in a slow-growth world

    One of the macro reasons is that in a low-growth world, debt is a very-dangerous thing indeed, because it’s hard to outrun with wage inflation. Debt also means mortgages. Part of the romance Britain has with house price inflation is because one generation did well out of that (it was my Dad’s generation, not mine – I got slaughtered by housing in the UK). The oil shocks of the 1970s caused high inflation and labour had the whip hand – enough power to drive up wages. They didn’t get any richer, because productivity didn’t go up, but inflation did and their wages kept pace with inflation, reducing the value of the debt in real terms.

    Labour will be much, much weaker in the coming thirty years 6. Globalisation and increasing automation will see to that. We may get inflation, but wages need to keep up with it for house price inflation to be A Good Thing. Otherwise we get what we have now – the real value of houses rising and fewer people being able to afford them, and that is not a Good Thing – for anybody 7

    In a low-growth world, even those student loans are going to be more onerous. So beware the debt, or at least investigate getting it down, first by asking whether university is necessary and a good match to your skills and aspirations 8, and if so considering the foreign option while it’s still open to you. Hopefully Cameron’s plans for an EU referendum won’t bugger that up.

    Logan's Run

    Logan’s Run, I suppose there are some compensations for the YOLO set

    Student debt is an obvious one to minimise, but lifestyle costs are one way that the young do get through money 9. You do need some conspicuous consumption to wine and dine and play the mating game, but a little bit of excess goes a long way, as long as it’s the right sort of excess. There’s a limit to how long it’s wise to take the YOLO mantra, unless you plan on taking a Logan’s Run approach to extreme early retirement. I avoided debt in my twenties by being exceedingly tight with housing 10- I shared houses and targeted the lower, more tatty end of the market. I regularly pass one rental in town aimed at students that has a rate of £56pw – that’s probably the end I was running at. And debt due to consumerism is bad, again particularly so where labour is weak. The normalisation of consumer debt and student debt are the most toxic features arising since 1980 for personal finances. If you can’t pay for your consumer goods in  cash, you’re not worth it. End of.

    If we zoom out even further, that power shift from labour to capital is harming productivity in the UK – it means it’s cheaper to hire people to do some jobs that capital. Take the humble car wash. In Britain garages used to get great big furry roller things that you’d drive into and put a coin in and it would wash your car for you while you were inside, not a human in sight.

    The Ermine knows the meaning of the plastic bottle on the Downton promo shot

    The Ermine knows the meaning of the plastic bottle on the Downton promo shot

    Nowadays you see a lot of these car washes broken, but you see loads of signs for hand car wash in supermarket parking lots and btis of waste ground – people with a few buckets, chamois leathers and a pressure washer are cheap, It’s cheaper to pay people to do this now than invest in the machines. That is not a good sign – not a good sign at all. The Ermine knows the symbolic meaning of the plastic water bottle on the Downton Abbey promotion picture. The plot of Downton’s Abbey is running backwards, and the power of inherited wealth and aristocracy is rising again ;)

    Look at the retired colonels of The Telegraph fulminating about death taxes. These parents know in their hearts that the best way for their children to get ahead is for them to inherit wealth, because they will probably not be able to earn it. It’s the most natural thing in the world for parents to want to featherbed their kids, over and above others. And parents realise in other ways that they try and buy privilege for their offspring – the whole independent school fees is also to try and build in advantage. Pass on capital – be it financial or social web capital, because the chance to earn your way ahead is thinning out. The aristocracy will be back. Not necessarily land, this time, financial capital will do, perhaps. Some of George Osborne’s DC pension changes play into this too – now the 55% tax rate on pensions going into an estate is removed.

    So take care about the things you assume about the world ahead. What worked in the past won’t necessarily work that well in future – and loadsadebt and easy money are a particular hazard to getting ahead. Labour is going to be poorer than capital relative to the last 50 years. On the upside, the talented, the crafty and the well-connected will make bank like gangbusters, it’s the average to the modestly bright that will take the shaft – many of those that will be considering that £30,000 debt.

    Wealth warning – this is the scribblings of a jaded fiftysomething that grew tired of the the way the modern world of work is. If you are a twentysomething you have the energy of youth, you have fire in your belly and I wish you all the best of British luck. I don’t think I have said anything that’s explicitly wrong, but the glass is half empty, and one of the specific advantages of youth is that your glass should always be viewed as half full.

    From a personal finance point of view I do believe you should think about taking on a £30k claim on your future earnings very carefully and know why you’re doing it rather than just drift into it because it’s the done thing, and have a clear vision of how doing this will help you earn more than 30k in real terms across your lifetime  and compensate you for three years of not earning. Or if you are rich enough, whether a damn good time and one of the few rites of passage we have in the West is worth it as a consumer experience regardless…

    Zooming even further out, what will that society look like? Staid and sclerotic – who you are will matter much more than what you know or even what you can do. Maybe Downton Abbey with more mod cons and better contraception. Don’t think we’ll be going to the moon. Or Mars. It’s where we are going if Life After Growth is true. But it isn’t predestined, maybe the other side of Wilkins Micawber will show, the one that isn’t normally cited in PF circles

    Something will turn up

    Notes:

    1. I’m inferring this from press reports about the programme, I’ve never watched it personally
    2. because in reality I was much more susceptible to peer-pressure and going along with established norms in my 20s
    3. the exams were norm-referenced (ie a fixed percentage of entrants got As) 
    4. one of the things that pisses me off is the mantra oh my generation pulled up the drawbridge. We didn’t do it deliberately, but did it by being so weak-willed that we couldn’t face telling the less able of our blessed children they weren’t smart enough to benefit from university. This was lily-livered incompetence, not malice as far as I can tell. It is bad, but without knowing how we got ourselves into the shit we can’t formulate a way out of it. Paying fees and maintenance to five times as many people wouldn’t help. We either need to make more jobs that are matched to the lower levels of ability, or eliminate enough undergraduate places to get the proportion to match the jobs we do have. It was right 30 years ago, maybe the proportions want to be higher now because we have a different employment scene and people might be a bit smarter but an increase of FIVE times in 30 years? You don’t need a degree to work a call centre. And society should be honest enough about your ability not to encourage you to spend £30k chasing an empty dream. Which would you rather have – not getting your grades or a place in clearing or picking up a £30,000 debt and lose three years of potential working life to end up in the same position but with a fancy piece of paper? I do accept that the adult world is not serving its offspring at all well here but the answer isn’t pay five times as many people through university as we did three decades ago. Two times, maybe, and there I am all for student grants and fees being paid from general taxation – HMRC will get it back in higher tax receipts later
    5. studying abroad also makes you look more enterprising and go-getting, which everybody likes, and at ease with other cultures which some employers seem to like. But I’m no expert, so DYOR
    6. I mean labour in aggregate. At the moment a lot of capital is being appropriated by the 1% and particularly the 0.1% as income, and technically this is also labour
    7. I guess it is a good thing for buy to letters but that’s it. It isn’t a good thing for owners unless they downsize, as they still need somewhere to live, and it tempts twits like Shona Sibary to live above their means.
    8. this in itself is a beastly tough thing to ask when you’ve just started out – how the bloody hell are you supposed to know?
    9. I am staggered at what the kids of my ex-colleagues buy, though I am pleased to see one old trick is still active – if you want Dad to help you buy a car say to Mum you’re thinking of getting a moped or a motorbike :)
    10. only to throw the win away when I did buy a house – you can survive some big mistakes, just not too many
    23 Jul 2014, 11:20am
    economy frugality
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  • The real way to make money using old pallets is to be Blake Lively

    Wow. I was wasting my time recycling pallets into kindling or log-stores. Here’s the way to do it

     

    Upcycled pallets - way to go, Blake!

    Upcycled pallets – way to go, Blake!

    Not only do you get to touch the hemline of Blake Lively thus acquiring a sprinkling of her faeriedust that will make you younger, more beautiful and generally transform your otherwise pedestrian life of quiet desperation into celebrity heaven, but you also get to read cock like this

    The bones of old New York get a new lease on life in these Dutch-style bicycle crates. Built to last a lifetime from reclaimed local wood sealed with natural tung oil, each beautiful Brooklyn-made piece is imbued with its own unique character. Caboose it onto your bike to carry the day’s produce, impromptu flowers for your sweetheart, or whatever you need to transport in a stylish manner—emission-free!

    Ninety-Five flippin’ dollars – that’s fifty-six of your Earth Pounds. For something with massive great slats that will spew your designer shit out all over the highway if you actually did stick it on a bike, which is why people in Amsterdam use bike baskets made of mesh so all their crap doesn’t fall out, particularly when they ride over the cobbles. Not only that but bitter experience has taught me that you stick your flippin’ uprights on the inside of the slats so you can get enough screw into the damn things else you’ll have a kit of parts again in no time at all. Years ago I made some VHS tape holders along these lines inspired by the ones in Sex Lies and Videotape where I forgot this, or else got to learn it for the first time ;)

    1407_blake

    It’s time to throw in the towel on the you can become free through not spending all your wages buying shit meme. The opposition forces are too strong when people bankroll this sort of cobblers. Decadence has set in too deeply. The economy is shattered, fewer and fewer people will earn enough to fulfil their modest aims in life, and yet the froth rises  and spreads over the surface to cover the roiling darkness. The fight is futile, the bad guys won, the battle is lost. The centre cannot hold; the falcon can no longer hear the falconer. All hail to the God of Shopping, our new overlords.

    Won’t someone send out the search party to find and scoop up all the brains that have fallen out all over New York City  so at least they can be given a decent burial rather than feeding the dogs? And please, please, let Preserve go bust quickly to restore my erstwhile belief that I don’t share a planet with too many fools ready to be parted from their money…

    10 Jun 2014, 7:18pm
    economy:
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  • families on the financial brink – this isn’t going to get easier

    The National debtline tells us that household bills are pushing people into debt. There’s a big picture here, and it’s ugly.

    source: Changing Household Budgets, National debtline https://www.nationaldebtline.org/EW/Documents/Changing%20household%20budgets.pdf

    source: Changing Household Budgets, National Debtline

    People are losing the fight with inflation

    “How did you go bankrupt?” Bill asked.

    “Two ways,” Mike said. “Gradually and then suddenly.”

    Hemingway, The Sun also Rises

    The reason for that is that people are short the cumulative difference between the yellow line and the dark one – they are losing the fight about 1% a year. That adds up.

    Up until 2007 it seems a lot of debt trouble was due to basically stupid spending on Stuff. It’s possible to fight that – buy less consumer shit and learn to say No to your kids in the way that these folk don’t.

    1406_shopaholic

    That sort of spending tends to show up in the form of revolving credit card debt and personal loans. While there are serious problems with that sort of spending, it is tractable, because nobody actually needs a new pair of heels, iPad or new mobile phone.

    The personal finance blogosphere has many sterling examples of people who have overcome the Beast of consumer spending. So much pre-2007 debt was basically a lack of self-control. That concept is terribly old-fashioned and of course it’s so unfair when you can’t afford the stuff that you’re entitled to, but even for one of these pampered princesses it’s not a matter of life and death. Because consumer spending is about wants, not needs.

    I haven’t seen the programme and I’m not sure I’d want to give it too much headspace. However, from the summary I have some sympathy for the children, who are growing up in a value-free desert without map or compass and being ill-prepared for the time when they will have to make their own money choices. By people who lack the self-awareness to know when to stop. It’s bad enough to do that to yourself, but to do that to a child’s plastic mind is a dreadful injustice.

    While I’m happy to say that I have managed to avoid stupid consumer spending with money I didn’t have, I managed enough stupid consumer spending with money I did have. That’s not so bad – I give the credit to competent parenting, introducing me to the Micawber doctrine.

    If you ain’t got it, don’t spend it, son

    Not that hard, eh? Unfortunately there were three exceptions to that rule 1, so I saved my stupid spending with money I didn’t have for the most toxic asset class Britain has to offer – housing. And got away with it – just.

    It’s always about families, 2 and the way the economy is going, an increasing number of people can’t afford to have children. Not because they won’t be able to afford to keep them in designer labels and smartphones. But because they can’t afford to keep them to a minimum standard of Maslow’s lower levels – warm enough and with enough to eat.

    The wants are a pain but it’s the needs that are a bastard, things like water and power. You can actually live in a bedsit without power – I’ve done so for the odd week as a student when I didn’t have any money for the meter or it wasn’t in 50ps and it’s no big deal. But there’s a story behind the trend

    More households are vulnerable to problem debt and are not benefiting from the economic upturn, research shows

    Debtline carries on

    “The gradual erosion of some families’ surplus income in the face of rising prices has led to a new generation of debt problems – one to which more people are vulnerable, one which is harder to resolve and one which has no definitive solution,”

    This shouldn’t come as too much of a surprise. We are designing an economy with

    A secular move towards winner-takes-all

    There are structural changes in the employment market that we never anticipated 3. The increasing mobility and virtual value-add of work is concentrating power towards smaller sectors of the workforce and towards capital. Because you can move information at a much lower cost than in the past, and a lot of added value to goods and services is in the form of Mind rather than Stuff, capital is responding. It makes sense where you need human input to pay rockstar wages to a smaller part of the workforce at the highest skill level, and try and automate everything else. Apple and Google take the #1 and #2 world slots by market capitalisation – and most of their product is Mind. Just how unusual this is can be seen by the fact that the massive oil firm ExxonMobil is beaten into third place – the first company that has Real People™ doing Real Stuff™.

    ExxonMobil - Real Men doing Real Stuff

    ExxonMobil – Real Men doing Real Stuff

    That money talks, and it’s paying more and more to a smaller part of the workforce. That’s because they can afford to chase up the high skill tail of the talent bell-curve, because the output of Mind is much more scalable than Stuff. If a skill is normally distributed then the really skilled 0.1% of individuals above the 3 sigma mark may well be worth paying 1000 times more than someone of average ability, if you end up selling more than 1000 times as many units because of the value they add. Real stuff doesn’t scale that well – if you’re mining coal then even a really, really skilled miner is probably not so Stakhanovite that they can get 1000 times the output of an average miner. Physical limitations on throughput often place extra bottlenecks with Real Stuff.

    If we look at pre-oil societies, each market town would have, say, their own blacksmith and carpenter, that meant even the moderately skilled could hold their own. Even if there were a 3σ artisan 100 miles away shifting all your horseshoes and wardrobes from him to you would jack up the cost. We have gradually eroded these transport and transmission costs. Even in real stuff Britain outsources a lot of ‘carpentry’ to Ikea – because we can shift goods cheaper, although I’m not sure that Ikea is a 3σ talent! We use robots to make our mechanically propelled horses these days so the blacksmith is neither here nor there. If we want tools we order ‘em up on the intertubes, the ‘smith is probably in China.

    London shows us where this is going – the south east is where the work is in the UK, particularly in the dematerialised area of finance and other industries requiring Mind like media. So pay goes up, and the price of accommodation goes up. It’s therefore not that surprising that poor families are being moved out of the city, because rents are being jacked up. A young Ermine saw the writing on the wall 25 years ago, came to the conclusion that despite the great lifestyle he was too poor to live in London where he grew up and went to university. So he moved out. Eventually London will become a city-state like Singapore. It will generate lots of GDP – even now in it’s non-city-state form it’s 22% of the UK GDP, with it’s 8.3 million people being only 13% of the UK population. I found it surprising that the South East including London generates 45% of the UK’s GDP. Those poor families can’t fight that. The edge the young Ermine had was I saw it coming and was prepared to take elective action to jump before I was pushed.

    that concentration is bad news for most people

    because there are more below the skills threshold than above it, and the line is drifting up. It’s great news if you’re on the talented side. Though beware the gradual shift to the right of that bell curve.

    Of work suitable for less stellar talents, much is being outsourced to lower-cost regions. This eroding of families income relative to the cost of essentials will continue, because they aren’t adding as much value as they were before. They may be able to afford the iPad, but not the roof containing it as the years go by. The Telegraph opined that London is becoming a workhouse for the young. Although they said it’s no place for old men, it’s no place for families either.

    They need to start consuming less. These problems were clear for the middle classes a couple of years ago. This seems to be a secular trend – Stuff is getting cheaper while services get dearer. Services that affect families are accommodation, power and childcare. Accommodation is already a dreadful mess in Britain, we seem to have a whole bunch of perverse incentives that started with Thatcher destroying social housing. Apologists for her policy say if a council tenant buys under Right to Buy they don’t take any accommodation out of service – they’re still living in the house they occupied as a council tenant. That is true, but, when you look at what has happened to housebuilding in the UK Thatcher pole-axed it because councils don’t build much any more and housing associations failed to take up the slack.

    post-war housebuilding

    post-war housebuilding

    So the price goes up. Energy is going up because there’s more competition for the finite resource, and in a peculiar twist of fate it is being loaded to pay for insulating the houses of the poor. Well, those that have houses, of course.

    Childcare is a service, so it is not very scalable, and regulation seems to be upping the cost. For many families there will come a point where the amount the lower-earning adult earns is going to be less than the amount paid out in childcare. On the upside the child gets to see more of its parents. On the downside I’ve it sets the adult back in their career. Life is full of choices I guess. If there is only one adult in the family then I guess they’re SOL unless they have a valuable skill and the gift of the gab. Every which way this is not easy, and it’s not going to get easier.

    For more ambitious families, child-related services include university, and private schooling. It’s all going up faster than inflation, because they need skilled labour, and there’s competition from  mobile aspirational third culture consumers. However, these guys are probably not the ones struggling to pay the ‘leccy bill.

    There’s serious incoming trouble on its way

    Interest rates are at historic lows, and may need to rise. Unless associated with remarkable house price falls, the only way to picture that is severe hurt. The British housing market is now a gun that fires on both ends. What is probably in the national interest is for massive falls in the real value of house prices, so that we don’t tie up so much of our national wealth in our homes. But that would shaft no end of people who have already massively overpaid for their homes – making my antics in ’89 look like driving a hard bargain.

    People are gonna get hurt, and all of this is against the background of those secular changes. It’s all very well for IDS to charge around saying work is the answer, but I’m not sure it’s as simple as that. At the moment all his designs, if he ever gets them to work, are either telling the unemployed how crap they are for not being up to getting one of the bountiful jobs that there are in the UK, or pushing them into poorly paying jobs. Maybe we need a change in the unemployment figures, from people in work to man-hours worked, and some way of tracking the median household takehome.

    I don’t think this is a moan for the good old days

    When I was at school I watched the punk Arthur Scargill tell us how hellish mining was, as he held the nation to ransom with his flying pickets and secondary action in the 1970s. They fought like hell to keep those jobs in the next decade, and yet Art was right. You only have to see the toll in China to see that this isn’t a safe place of work.

    That sort of revisionism is critiqued on the right by the likes of Tim Worstall and a little more gently in  in Why does Joe Public love sweatshops. I’ve tried to avoid that problem – if the New Economy produced work across the ability spectrum there wouldn’t be so much of a problem. My observation is more general, of the winner-takes-all and the trend towards capital and the exceptionally able. It is possible that we are going through a future shock – after all the 5 day work week wasn’t written in stone and previous generations had different patterns determined by the demands and structures of their economies – the trend has been downward. It’s possible the John Maynard Keynes’ Economic Possibilities for our Grandchildren may come to pass. But at the moment work is polarising, and we are telling a lot of people of average ability that they are worthless, while the likes of Duncan-Smith pretends that if only they get off their asses there would be loads of work for them. Perhaps the resurgent economy will fix this, but if it is fixing it, Natonal Debtline seem to be pointing to a deeper malaise.

    We need more honesty in this debate. On the one hand we could stay as we are. Old money will become more important as will high ability – either will give you enough to handle the system and become part of the 1%, both will give you an express ticket. There’s a cost to that, which will eventually look like razor wire, armed guards and watchtowers to keep the disaffected and disenfrachised 99% from doing some DIY redistribution. There is the alternative of Martin Ford’s The Lights in the Tunnel and the citizen’s wage. There are no doubt other alternatives. But it isn’t the 1950s and 1960s any more. There may be plenty of unfilled jobs and plenty of unemployed. It’s not necessarily true that the shape of the pegs match the shape of the holes.

    How did you go bankrupt?

    Slowly at first, then all of a sudden

    How I first heard Hemingway quoted

    postscript

    Bloomin’ heck, apparently the Ermine has company in Oxfam, which is charged with pumping out agitprop :)

    the Oxfam version of this

    the Oxfam version of this

    Seems a bit hard to be charged with being a commie bastard for making the observation that shit’s going down. Okay so I’m not necessarily with Oxfam on the benefit cuts and I view zero-hour contracts as part of un(der)employment.

     

    Notes:

    1. housing, which most people can’t do without borrowing and is not normally a wasting asset, investing in productive assets in a business context and education if it would make me richer or happier. These are particularly hard risk assessments to do for a twenty-something
    2. I am using family in the way the press use it, which is to imply one or more adults and one or more dependent children
    3. These are secular in the economic sense, as opposed to being irreligious
    3 May 2014, 9:22am
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  • There is trouble burning underground in Britain

    The Times They Are a-Changin

    Bob Dylan, 1964

    We have a problem in Britain. There are a lot of people who are pissed off with the way things are working. One of the good things is that there is some recognition now that the shift of power from labour to capital is causing grief for an increasing number of people. I’m not claiming to know what the answers are, but the one thing that I hope is that the way we humans try and work things out will stick with jaw-jaw rather than the sort of thing we had in the long hot summer of 2011 when people were rioting. And using Blackberry phones – it seems so long ago ;)

    One of the problems is the increasing polarisation of the workforce. I earned a decent wage at The Firm, but I never got anywhere near paying 45%/50% (in those days) tax, though I paid plenty of 40% tax until I wised up. I never got anywhere near six figures. That doesn’t bother me particularly 1  – if people want to push themselves hard enough have at it. Part of the secret to happiness seems to be to value  the riches that you do have 2It doesn’t particularly please me when CEOs pay themselves shitloads of money, but that’s because I don’t think they are worth it, this is a cartel in action and they are stealing money from the shareholders. I’d rather they actually got the money they want but actually did more to make the firms work better, rather than go for the willy-waving of loads of mergers and buying other firms up. Their yachts don’t really trouble me, and while I despise the louche taste so often displayed by the über rich that’s more because it’s a crime against culture and aesthetics than its effect on my world.

     

    That is one tasteless ugly piece of kit, non? And this is the attractive side. Apparently something to do with Philippe Starck, he of the elegant lemon squeezer. Where’s a Viking longboat or Jonny Ive when you need ‘em eh?

    That polarisation is starting a fight. The Torygraph highlights that higher rate taxpayers pay more than two-thirds of the income tax burden in the UK, which is supported by the excellent infographic by Mona Chalabi of the Guardian. That obviously hacks people off. It hacked me off – at the time I hadn’t jumped to the obvious incentive/conclusion, although instinctively I found an answer in the form of employee share incentive schemes, AVCs and retiring early.

    And yet I equally despise bollocks like Help To Work, which Suzanne Moore rightly called punishment for the undeserving poor. I’ve never been anywhere near a Jobcentre ever since it was called the DHSS in the early 1980s. I also don’t have a problem with calling some sectors the undeserving poor, if people want me to work because they can’t be arsed then it does make me wonder why. However, there is a deep problem in Britain today.

    There are no jobs that match the talents and living costs of an increasing part of the potential workforce. They are either not up to it, or the costs of living the way they would like to is not commensurate with the pay they can get. The whole endless hurt that is house prices in Britain is associated with that. The high house prices are where the work is. We can shovel our old gits out to the seaside as much as we want and large swathes of the North are acceptably priced, but that’s not where a lot of the jobs are. Help to Work should honestly be called workfare. And it should ideally do something useful for society, not just make people who have been out of work for three years go to a Jobcentre every flippin’ day. What the hell is the point of that? Unfortunately it’s structural, it’s not a Depression era New Deal building the interstate highways. It’s just employing a bunch of civil servants to get the long term unemployed out of bed every day. The civil servants/PFI firms are just as unemployed as the unemployed, but they get their benefits in a different way.

    We need new thinking here. Despite the ermine probably being on the right of centre, I don’t have a deep issue against the idea of a citizen’s wage, though I do feel uncomfortable being on the same side of the road as George Monbiot, never mind the Greens who couldn’t punch their way out of a paper bag IMO. At least I am also in there with the Swiss, with their vote on a Grundeinkommen who aren’t usually noted for being raving Communists. Unlike the first two, it’s also not about the ethics , it’s the interest of self-preservation. Obviously as wages polarise the highly paid will pay more in tax, for the simple reason that in the immortal words of Al Capone, that’s where the money is. No other bugger has any. With the citizen’s wage, however, I would like to see a whole load of other social  fiddling stopped.

    All the explicit subs going to families for a start – the citizen’s wage ought to be enough for two adults to put enough on their own and two kids plates, and actually get to enjoy their company. If you want three, or you want to send Tarquin to Eton, or you want to run a car, well go out to work or do without. We run a perfectly workable state school system, indeed if we could break the stranglehold of chuntering out economic units we might well run a better one from an all-round education point of view. And let’s rack back on the crazy expansion of the university system. University is about research and advancing the sum total of human knowledge. The average punter isn’t bright enough to do that, and a 50% university entrance target is basically aiming at the average and up. And the way we’ve rigged the system means that it won’t get you a better job often and the graduate premium is dropping anyway, presumably because of all the dim bulbs but also because, fundamentally, machines are getting smarter and the equalisation with China and India still has a way to go.

    There’s just less and less work to go round, and what there is demands more cognitive function, or it’s relatively mindless and low rent. The exams either need to get harder and university more elitist so the taxpayer can support people properly, or people need to lose the idea that you can pre-retire for three years at the beginning of your working life. And if you are going to pre-retire, then for God’s sake keep costs down – the fanciness of student accommodation is presumably a large part of the living costs now. It’s better than anything I was living in until I was in my late thirties!

    Luxury and student living don't go together. As a rule, avoid luxury when you're financing it with debt...

    Luxury and student living don’t go together. As a rule, avoid luxury when you’re financing it with debt…

    Pretending that power shift isn’t happening and calling workfare  Help to Work isn’t the way to fix it. Let’s have the discussions in the political arena about what might work in the future. It isn’t like Britain is creating no value, but fewer and fewer people are doing the creating, and paying a larger share of the tax burden in doing so. What the hell does success look like? Obviously everybody earning loads of money or with capital wants to hang on to it, but OTOH starving hordes of people running through the streets isn’t that much of a laugh for anyone. Somewhere in between lies the maximized quality of life for the most people. You don’t wanna be killed by the not-haves, but you don’t wanna be bled dry for the 40inch TVs either, as Jamie Oliver called out.

    I read The Spirit Level a while ago, and though I didn’t agree with the rationale or the interpretation I’m not so stupid that I’ll let prejudice stand in the way of data.  At least it opened up the debate. There’s more of this lefty stuff in Thomas Piketty’s Capital in the 21st century. I note that Piketty has a very good handle on capital, inasmuch as it costs £18 to buy an ephemeral copy as Kindle format. The Ermine generally tries to avoid buying what I can’t touch so I’m happy to wait for the library or the secondhand market to fix this for me. However, the Guardian is pretty much serialising it in a lot of articles.

    The Guardian has been getting themselves into a wet mess about Piketty’s book, so I turned to The Economist for a bit of balance. They were pleasantly even-handed to his ideas in this article, although whoever drafted the x-axis in the return on capital chart demands a lot of his readers. However, I will pinch the summary from one of the Guardian’s less breathless articles to summarise Piketty’s thesis

    Piketty deploys 200 years of data to prove them wrong. Capital, he argues, is blind. Once its returns – investing in anything from buy-to-let property to a new car factory – exceed the real growth of wages and output, as historically they always have done (excepting a few periods such as 1910 to 1950), then inevitably the stock of capital will rise disproportionately faster within the overall pattern of output. Wealth inequality rises exponentially.

    The process is made worse by inheritance and, in the US and UK, by the rise of extravagantly paid “super managers”. High executive pay has nothing to do with real merit, writes Piketty – it is much lower, for example, in mainland Europe and Japan. Rather, it has become an Anglo-Saxon social norm permitted by the ideology of “meritocratic extremism”, in essence, self-serving greed to keep up with the other rich. This is an important element in Piketty’s thinking: rising inequality of wealth is not immutable. Societies can indulge it or they can challenge it.

    I remember challenging somebody at work to a bet since he flatly refused to believe that he was in the upper 10% by income 3. I am nowhere near the top 10% by wealth – conveniently it appears you need to be a sterling millionaire according to the ONS to be in the top decile. But it is at least all my own accumulated wealth from when I started work. It is interesting what Piketty says about the toxicity of inheritance to the distribution of accumulated wealth. As an example, take a look around you. Two thirds of the land in England is owned by 0.6% of the population, and it was largely the same families who owned it 200 years ago. 50% of land in Britain is unregistered – by definition it hasn’t changed hands in modern times, but is part of ancestral wealth.

    Some might say that inheritance tax is there to address that, but it is only the little people who pay that. The aristocracy struck a deal with the post-war governments who were were keen to shift the balance, mindful of the efforts of the people in the wars. The deal was this “UK.gov, you wouldn’t want people driven off their farms because when Dad hands it on to Son, Son would have to pay 50% IHT, would you?” So there is no inheritance tax on agricultural land in the UK, so it becomes the ancestral wealth store of first resort for old money. The land has to be farmed, but now that’s hived out to contract farmers. These are good enough to rapaciously farm the land using the soil as blotting paper for chemical fertilisers, so we have increased runoff which floods some of our towns and cities, given that our forebears built their habitations around rivers that historically weren’t flash-flooded by industrial agriculture.

    This way there’s an income from the wealth and it can be kept inside the family IHT-free though it has nothing to do with farming. The little people obviously get to pay IHT, which hopefully slows down a little bit of the rampant rise in house prices compared to what it would otherwise be, but old money has nailed that IHT problem that seems to exercise the old buffers at the Torygraph ;)

    In general we seem to have designed a society in which we live materially richer than kings in recent times – and that includes people sucked into Help To Work. But we are hammering people’s emotional needs. We encourage rapacious advertising to make them always want more, we collectively mentally torture people who are unable to find work in the rapidly shrinking pool by dishonesty telling them that it is all their fault that they can’t find work to match their aptitudes that gives enough return to live in the way the advertising tells them. We make it difficult for people to raise children which is a pretty common aim of human animals, oddly enough. We glorify paid work and despise the unpaid graft that goes into making a human community. In fact generally we despise service to people and glorify service to stuff.

    Taylor Schilling in Atlas Shrugged. Apparently the movie stank. The novel has over 1000 pages so it's a big ask ;)

    Taylor Schilling in one of the movies of Atlas Shrugged. Apparently the movie stank. The novel has over 1000 pages so it’s a big ask ;)

    Before readers think the Ermine has been taken over by space aliens and become a raving Communist I don’t agree with Piketty, or the Guardian, that the answer is to steal the money from one group of people to give it all to another. Reading Ayn Rand’s Atlas Shrugged did not cause me to spill my beer. Niall Ferguson’s The Great Degeneration sums up a lot of the problems. What I’d like is for us to apply some mind and intellect to establish where we are, what we want of an economy – the hint is probably to make human life more enjoyable, rather than to worship metrics 4  and digits on a screen, and then to have a decent debate on the big picture. I’m with Scott Fitzgerald that

    The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.

    Politics now is all to much micromanagement of detail and polarised crap. I fell into that damned trap myself – I kept on earning even when the process of earning money was beginning to seriously piss me off, but never opened my mind to what am I trying to do with life, until I encountered a sudden stop. And then realised that I could stop and should stop bashing my head on a brick wall, but it would demand changes in how I did things.

    Let’s avoid that sudden stop and inquire on how to do things differently. As I wander through the neighbourhood I spot loads of UKIP posters. It reminds me of the 1970s when the National Front was marching through Lewisham High Street. UKIP seem racist in a different way – less about colour, but let’s not forget that Europe has known a terrible amount of human misery perpetrated between groups that one would be troubled to spot a difference between by sight 5. The troubled history of the Balkans and the dreadful conflict that started 100 years ago shows where that sort of thing goes. One of the delightful collective qualities of the English are that they are generally a tolerant and easy going bunch of people in comparison.

    Hopefully we will think our way out of the problems rather than fight our way out of it. But the language of some of the election literature I am receiving troubles me. I don’t normally bother with European elections for the simple reason that the European Parliament has no executive power, I of the same opinion as both Piketty and UKIP that there is a serious democratic deficit in the EU, and it would be remedied with a Parliament that was elected in proportion to population and had the power to make the running. The EU was historically a trade body set up by technocrats, and that is fine. For a trade body.  The expansion of the mandate needs different structures. But smashing it all up in a fit of pique doesn’t strike me as the smartest option either. And what I really, really, want is to lean against a UKIP victory. The East of England is already a redoubt for that party, and these guys scare me, because when you start to hear that the end justifies the means it’s not usually a sign of good times coming.

    And we need to stop lying to the people that the economy is disenfranchising.

    There’s nothing we can do for you, you’re on your own

    would be a far more honest response to the long-term unemployed than bullshit like ‘Help to Work’ and oxymoronic compulsory volunteering. I’m not smart enough to know what the answer there is, but I am smart enough to know that collectively lying to ourselves isn’t the answer. We have to deal with the world as it is, not how it was. And right now the pool of work for the averagely endowed is dropping, the returns on that work is falling, and there seems to be an increasing amount of hurt as a result. There are also a fair few own goals – one of the things I am deeply grateful to Gordon Brown for is keeping Britain out of the Euro. The Island Kingdom is essentially different when it comes to handling money, it is perhaps a shame for other members of the Europe that Britain is not the only exceptionalism.

    There’s a lot of slow-burning crap at the moment. To be fair there’s probably always a lot of slow-burning crap at any time through modern history, and every time somebody declares that the slow burning crap has been nailed it turns out that he’s standing right on top of it, like Francis Fukuyama’s The End of History and the Last Man. It’s not just human development where declaring victory is unwise, Lord Kelvin thought physics was done and largely dusted in 1900 bar improving accuracy. But it probably does to engage with the slow burn rather than pretend it isn’t there and end up like Centralia.

    Notes:

    1. a lot of people get worked up about the unfairness of some people earning shitloads of money. As a citizen of a First World country in the 21st century, many Britons are  probably doing pretty well, on a global scale…
    2. That’s maybe easier for old gits who have known outside bogs, no central heating and draughty windows. Clean water, which in fairness to Britain I have always known, being warm enough and having decent food knocks having the right iFads and consumer goods into a cocked hat. Try doing without any of them for a couple of days in February.
    3. He declined, because he had already lost £5 to me because he didn’t believe that Mustela erminea has a baculum some time before
    4. The most common metric of economic growth, GDP, has serious deficiencies as described by the OECD
    5. I’m really trying to avoid Godwin’s law here, particularly this year
    6 Apr 2014, 10:40pm
    economy housing personal finance:
    by

    52 comments

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  • The Ghost of Negative Equity will stalk the land again – a cautionary mortgage tale from 25 years ago

    What was the dumbest thing an Ermine has ever done in personal finance?

    I bought a house in 1989. With an endowment mortgage, a 20% deposit and a 10% interest-free loan from a credit card, which I paid back. The how isn’t the mistake, though it had errors. It’s the when. 1989, and early in my working life.

    You can’t go wrong with property. everybody needs somewhere to live. Safe as houses

    Bollocks, says the Ermine, with feeling

    This is a story from a distant front line for first-time buyers in the first half of their working lives. No prediction about house prices is made or implied, because the market can stay irrational for longer than you can stay solvent.  Most of us will only get three quarter-centuries in our lifetimes, and the first 25 years is wasted on learning how to drive the world, from the mewling and puking stage to young adult, ‘cos humans are slow learners with grand ambitions.

    Of all the financial asset classes out there, residential property is exceptionally evil, because we buy the asset class in the first half of our working lives, with borrowed money. For the simple reason that we want the byproduct – it gives us somewhere to live.

    If you’re over 35 and think Buy To Let when you hear “house” don’t bother reading this. You are much better capitalised than a FTB, you have more experience, you can make your own risk assessment, and quite frankly if it all goes titsup you have only yourself to blame.

    The Ermine is the Ancient Mariner

    The Rime of the Ancient Mariner

    In Coleridge’s The Rime of the Ancient Mariner the Wedding Guest hears, but does not understand. I was once that Wedding-Guest, in 1989 – people did suggest to me that it might be an unwise time to buy, what with all the frenzy of MIRAS 1. But that’s the trouble with housing, you WANT IT, WANT IT, WANT IT so bad. RENT IS THROWING MONEY AWAY, MUST MUST MUST get on the HOUSING LADDER. So you lose your mind. If this tale is a warning for you, you will not heed it, such is the way. But like the Ancient Mariner, I’ll tell it anyway.

    1404_hamsterwheel

    what the housing ladder seems to look like

    I’ve told it before in February when my original 25 year mortgage would have been due, but this one has added analysis to show just how badly it could have gone wrong. Imagine, for a moment, some starry-eyed young pup in the pub talking to his mates

    I’m going to borrow a shitload of money – five times my gross salary, if you please, and I am going to stick it on the stock market, in a FTSE100 tracker.

    Hopefully they’d wrestle him to the ground, or at least ask “are you crazy, man?

    Same pub, same bunch of mates, and he goes “I’m going to borrow five times my salary, and I’m going to buy a house

    And everybody around the table goes “hey that’s fantastic, congratulations you’re getting on the housing ladder, woot” and high fives him.

    Jenn Ashworth

    Jenn Ashworth

    The Grauniad’s personable Jenn Ashworth tells us that by 31 she’s had 14 addresses. And she’s sick of it. Sorry, dahlink, it’s not that unusual. For an ermine that was

    1. parents (SE london)
    2. Southside (Sth Kensington halls of residence, now demolished)
    3. Earl’s Court shared room three storeys up, gas appliances defective – you lit the oven throwing lighted matches into it
    4. Knightsbridge bedsit sublet from someone who did a runner with three month’s rent. The ermine learns that people steal money
    5. Different and crummier part of Earl’s Court
    6. short stay with parents – 1 hour commute to work, then when I moved to the BBC a 3 hour commute to work. enough to get me out ASAP into
    7. Acton Town house shared with four other guys, deposit stolen by landlord, shower powered off lighting circuit so I had to isolate before getting killed/burnt down.
    8. Southampton student accommodation (I took time out to do an MSc)
    9. Alperton shared with 2
    10. Ealing 2 bedsit infested with black slugs. One month’s rent stolen by landlord
    11. Ipswich digs 1
    12. Ipswich digs 2
    13. first Ipswich house this article is about. This is only the second time I had my own toilet and bathroom ;)

    I was in my late 20s then. Having lots of addresses goes with the patch of being young ;)

    How did buying a house all go wrong for me?

    Thatcher and Nigel Lawson

    Thatcher and Nigel Lawson

    Let’s cast our mind back to what the world looked like in 1989. Nigel Lawson hadn’t discovered climate change or that money was to be had in denying it but he had discovered money, he was Chancellor. There had been a boom going on ever since the end of Thatcher’s first recession (1980-82), the young Ermine had switched jobs a few times as you do in your twenties and discovered that while London was a fantastic place to be young in I was never going to be able to buy a house unless I got a better job than design engineer for the BBC.

    So I left to come to Suffolk and work for The Firm, at the time a premier research facility for a FTSE100 company. Fantastic place to work, the pay was better and houses were cheaper less expensive than in London.

    Young ermine to world – what is this Boom and Bust you speak of? I have no experience of that, so it doesn’t happen…

    You know how kids are absolutely convinced you can’t see them if they can’t see you? Well, that sort of thought error doesn’t always stop at 11. I graduated in 1982 into Thatcher’s first recession. All I had seen over my working life was an improving economy. I started in the pits of six months of unemployment as the economy slowly crawled from the wreckage, then getting the first real job, all around the gradual upswing was the backdrop of what I expected of the economy. So I rock up in 1989, and house prices are rising, the economy is booming, everybody is feeling chipper.

    25 years of high living has taken its toll on our Nige. presumably the Domestic Goddess got her looks from her mother :)

    25 years of high living has taken its toll on our Nige. Presumably the Domestic Goddess got her looks from her mother :)

    That Lawson bloke says he’s going to stop couples getting mortgage interest relief at source. At the time the Ermine was not wise in the ways of the world, so I didn’t join up the fact that this would give everyone Torschlußpanik thus increasing demand for a short time, leading to a ramp in price 2.

    That sounds incredibly dumb, now. In fairness to my new colleagues, several of them did even highlight that possibly there might be distorting effects due to this policy which might be something to think about. However, in one’s late 20s you’re so flushed with the grand victory of having spent your first 25 years successfully getting a handle on how the world works. And you haven’t had the stuffing knocked out of you by discovering that your map of how the world works has holes, and by itself doesn’t track changes in the world. So you are smarter that everyone else and invincible. The good news for me was I made that class of mistake at the wheel of personal finance, rather than at the wheel of a car…

    So I bought that house. With an endowment mortgage, if you please. Single man, no dependants, so the life insurance aspect of the endowment was worth sod all to me, and The Firm’s pension offered death lump sum anyway. A dead young Ermine would have been worth a lot of money to someone.

    My parents, bless ‘em, had done their bit for my financial enlightenment – although it seems that these days parents don’t bother to share the hows and whys of personal finance mine did.  I knew how mortgages worked and what the difference between and endowment mortgage and a repayment mortgage was. Hell, I even knew what the NAV of an investment trust was and how it could be at a premium or a discount, though I wasn’t to use that knowledge for 20 years. And had been educated in no uncertain terms that an endowment mortgage was a dipstick sort of move. But hey, the LAUTRO saleswoman had pretty green eyes and how can you turn down the promise of a 3x lift on the expected endowment outcome 3? It sounded good to me! That’s the trouble, you can know something but not understand it. You can teach knowledge, but you can’t teach wisdom, because wisdom is integrated knowledge. I had always seen things getting better throughout my working life, so I knew that house prices were always going to be rising relative to wages, and I feared getting left out.

    1404_2ITNow some of that knowledge was correct, but not for the reasons I understood. House prices were rising relative to wages because of the increasing entry of women into the workforce since the 1980s. Prior to that, a household typically used the man’s wages to pay the mortgage from, but all of a sudden households had more resources available to them, with two incomes coming into the household. What they did with that is throw it down the toilet of inflating house prices, so houses got dearer relative to wages, and everybody moans how hard it is to have children and afford a house these days, because more of the combined household capacity to do work is focused on paid work outside the home. Don’t shoot the messenger – Elizabeth Warren’s book first highlighted to me exactly why I struggled so hard to raise the cash to buy a house. I was a single man, at a decent job, with a 20% deposit and in interest-free loan of 10%. I was fighting couples with two incomes, and that’s not a fair fight, hence the difficulty.

    So I purchased the house, settled in, had all the usual shocking costs you have when you buy your first house because you have no furniture (I bought mine secondhand), you have no tools, you have precious little physical capital. I was paying 6.5% on the low start (ARM) loan 4, and paid back my interest free credit card loan in one year, as required. What I didn’t pick up was that there was a shitstorm. Incoming. Take a look at this

    the total costs and savings associated with buying a house. £ on the lHS, % on the RHS

    the total costs and savings associated with buying a house. 2012 rebased £ on the LHS, % on the RHS. It also explains why the greybeards have all the money…

     

    It covers a period of a little over twenty years, and shows the inflation-adjusted to 2012 prices equity, payments and imputed rent of an ermine’s first house 5

    Now every bugger tells you you can’t lose on houses. Take a look at the equity blue line, which shows the difference between the house price tracking the index for that year and what the purchase cost was. For ten long years that line is negative. You can’t lose on houses. Until you do, and then you lose big-time.

    In negative equity you cannot move, must not lose your job, and must keep paying the mortgage

    Because if you don’t, you get evicted from ‘your’ home, and to add insult to injury, they flog it at a knockdown price, and unlike in the States, they still come after you for the difference. It happened to my neighbours and a few other places in the street. The mortgage company comes along, sticks a notice on your window that this property will be foreclosed on such and such a date, and you’re out on your ear. Oh yeah, and you still have a mahoosive debt that follows you around like a lost dog.

    What do all those coloured bars mean?

    Although everybody talks about houses as if they were a financial investment and part of your free cash flow, only BTL landlords buy houses as a straight financial investment. The rest of us buy them to avoid paying rent, and give us a place to put all our stuff, watch TV, make love, raise children, all that sort of thing. You can do all that in a rented place too, but since you ‘own’ a house you don’t have to pay rent on the house. Instead you get to pay rent on the money you bought it with. So instead of throwing it away paying it to a landlord you throw it away paying it to a bank.

    The red bars represent all the cumulative money I saved through not paying rent to some shyster landlord, estimated at about 4% of the Nationwide adjusted house price and then scaled to 2012 prices by inflation. It is possible these should be adjusted to interest rates, in which case I understate the cumulative benefit of the rent I didn’t pay.

    The blue bars represent the cumulative excess that I paid over and above the cumulative amount I would have paid in rent to a landlord 6, because I am paying it in rent to a bank. This is also adjusted to 2012 pounds, like the rent. I am buying a great big wodge of Stuff, so obviously it’s gonna cost me more than if I just rented the usage of it for 25 years. You can see that even after 24 years I’ve actually still paid out more than I would have done if I just rented. This conundrum is basically why you rent when you are poor. It’s cheaper, and that was particularly the case at a time of very high interest rates, of which more later.

    The lime green bars are the equity in the house, the same as the blue line, but tossed on the debit or credit side of the ledger as appropriate.  The value of the rent is the value delivered by the asset, and looking at the blue lines which are the excess paid over the value gotten as rent I would estimate break-even in about 25 years. However, since this is an asset that increases in value and is bought with borrowed money I actually broke even in 2001, when the increasing value of the house added to the accumulated rent I hadn’t paid beat out all the money I had paid to the mortgage company. Note in 2001 I don’t own the house as of yet, it’s just that I could theoretically sell up and breathe a sigh of relief that I hadn’t paid more than if I had rented.

    Why was that such a big mistake?

    I stayed put for 10 years. Now imagine all the shit that can go on in a life.

    • You can lose your job. There was a hell of a recession on in the early 1990s. Look at what would have happened in 1993 – I would have been foreclosed, would have lost £20,000 in 2012 money, would be bankrupt and without a roof over my head. No fun at all.
    • If you buy the house in your early 30s the pitter-patter of tiny feet tends to happen in the next decade. Tragically unromantic, but the years after the first child are high risk years for relationship breakdown. If your house is in negative equity you’re going to take a big hit at a rough time
    • You have to move for work. Now you get to rent your house out and rent another. There are parasitic costs and voids associated with renting a house out

    I was single when I bought that house so I avoided 2 but the other two scared me. For a long time. This graph simplifies things so I assume I have a 100% mortgage. I was dumb, but not that dumb. I had a deposit and an interest-free loan from MBNA, to the tune of 30%, but even so I was in negative equity till about 1995. Negative equity kills you fast and kills you good, because of the leveraged way we buy houses.

    Was it just an ermine that got this wrong? No, apparently a million other dumbasses had such an awful sense of timing as I did – but this newspaper article is from 1992, so still in radio silence on the Internet, because the WWW started in 1994.

    With roughly ten million mortgage holders, that means that more than one in ten people with mortgages are trapped by debt. They are unable to sell till prices go up. They can’t sell and are stuck. [UBS Phillips & Drew]research analyses house price falls and the number of first time buyers, the group most likely to be in trouble because at least 50% of them took out mortgages of more than 95% of the value of their home.

    Rachel Kelly,  “A million first-time buyers caught in mortgage debt trap.” Times 24 Apr. 1992: 4. The Times Digital Archive

    I had a 30% deposit (ie a 70% LTV). That wouldn’t have helped me in the suckout, though it did shorten the period of negative equity relative to that shown on the chart, by shifting the line up a bit.

    So how does that affect Mr Wannabe 2014 house buyer? Houses always go up. Everybody says my house is my pension.

    To be honest, I don’t know why everybody says my house is my pension, though RIT has a good take on that subject. It would scare me shitless if I had housing as a large part of a pension, because you need several houses in different areas to get sector diversity, the baby boomers are going to die off in the next 20 years so their houses will be sold and it’s hardly like I’ve seen property as a great wealth store. Everybody else has it as a religion and who am I to criticise other Britons’ religion as long as they leave me be. Fill your boots guys.

    If they’d bought a house worth of the FTSE100 on the same leveraged basis and paid their rent with the dividends they would probably be saying the FTSE100 is my pension. It’s buying a long term appreciating asset with leverage and not trading the bugger come what may and not getting marked to market in suckouts that makes houses a good investment – if you stay the course and don’t take those hits in the early days. Look at that chart and note that buying on a high meant I was exposed to the risk of having to sell up and having the house marked to market at a loss for a third of my working life. Safe as houses, guv, safe as houses.

    The cyclical rises and falls of the house prices are slower than those of the stock market. Just because it’s a quarter of a century from the last turn of the cycle doesn’t mean it’s all different now, like the mills of God this one grinds exceedingly fine and exceedingly slow… 25 years ago jobs were more stable for the average employee, waiting to pass through the meshing gears of the mill until they turned you out the other side was a realistic option. But look at that 10 year suckout. It’s one of those questions you gotta ask yourself, really…

     

    So what is different this time? It’s not about price, it’s about affordability!

    Monevator observes that the house price to earnings ratio is creeping up. Some of the ideas about increasing ratio of two-earner households resonate with Elizabeth Warren’s book about the US situation. So obviously the whole price to earnings metric is hard to make fit these days. The new in word around town is affordability. Don’t worry about the amount of money you are borrowing, that’s just a number, it doesn’t mean anything. Can you afford to pay the mortgage okay?

    Now if someone waltzed into a shop selling LED TVs with a credit card and said that, it would be viewed as a personal finance faux pas. Do that for a purchase three orders of magnitude bigger and suddenly we all go hey, that’s cool, don’t look at the price, can you make the repayments?

    There is a case that the 3 x single, 2.5 x double income multiples that were the maximum lenders would advance in the past are too conservative now. 25 years ago we were coming off long runs of double-digit interest rates from ’78 onwards. That sort of thing limits the amount of mortgage you can pay off in a 30 or 40 year working life; 1991 was the last time interest rates were in double figures, so for 20 years they have been lower. But the average is closer to 5% than the 0.5% they are now.

    I kind of feel the need for Clint again. Take a look at the yellow line, interest rates. Now just like the young ermine didn’t catch on with this whole boom-bust kerfuffle, because he hadn’t seen it, there are no doubt people who are thinking

    what are these double-digit interest rates you speak of? I know nothing of such fiscal brutality

    Look at the chart. Most of the time it spent at the long-run value of British interest rates of 5 or 6 %. That has a direct bearing on your affordability. The young ermine, though foolish in many ways, had the sense to ask of the mortgage company what would repayments be if interest rates doubles. It’s actually quite easy with an interest-only mortgage which is running alongside an endowment. If the interest rates double, you pay twice as much per month ;) I figured I could managed that, just. I didn’t expect to be doing that, the very next year. I froze in that place. I didn’t go out much. Then the high interest rates started to depress house prices, and it began to dawn on me that I had made the most stupendous personal finance mistake of my whole life.

    It dwarfs the second biggest PF cockup I made, which was a rash two years of major momentum-chasing and trading muppetry in the dotcom boom and bust. I only used ISAs and wasn’t rich enough to fill the first one. I probably destroyed about £7000 worshipping at the altar of Buying High and Selling Low, with a side order of Excessive Churn. I blew about £10,000 in 2012 pounds, but I got something of value in return. Education – it made me ready to learn how to go about things better. There was no bias or scamming in the training course that Mr Market dished out, and more to the point I threw away the money as I earned it. I didn’t borrow it from a mortgage company, and once it was gone it was gone, but I didn’t owe it to anyone.

    The stock market has been a lot kinder to me than the housing market, and in a much shorter time, too. True, it delivers a jolly good kicking every so often, there aren’t the slow languorous cycles of the housing market. Perhaps the background radiation of this epic fail remains in my personal finances, because unlike the case for most Britons in my age and ex-income group, my house is not the dominant part of my net-worth, excluding pensions, if I were irrational enough to compute it as part of my financial assets ;)

    Interest rates are at historic lows, that’s a good thing, surely?

    On interest rates we’re a little off the right-hand side, but interest rates haven’t budged since then. They’re at historic lows. They can’t go any lower, because otherwise the Bank of England would be paying us to borrow money from it. So when you are making the switch from price to earnings (3 x single or 2.5 * double ISTR) you are making a nasty little pact with Mephistopheles.

    you shouldn't be strinking deals with this bad boy. He tends to turn up and the most inopportune times

    you shouldn’t be striking deals with this bad boy. He tends to turn up and the most inopportune times to call in his dues

    You are making a bet that things really are different this time, and that for reasons you can’t explain, unlike over the last 25 years interest rates are going to remain at historic lows of a tenth of their long run average for at least the first 3/4 of your mortgage (19 years of a 25-year mortgage). You can afford for ‘em to let rip a bit after that, because inflation will have reduced the value of your debt by about half then anyway, plus in an ideal world you’d have paid off some of the capital too.

    You’re also making some other assumptions. That your pay will keep up with inflation, which given the power shift from labour to capital may be unwise. That nothing untoward will befall your employment, or if so, then you will be able to find another job at similar or better pay without moving. Unless you live in London, that may also be unwise. If you do live in London you can’t afford to buy a house if you are a prole, or even one of the 99%. Then there’s the risk of the more personal crap that can get in the way of things – divorce, children dropping the second salary for a while and upping your costs. But hey, it’s affordable…for now

    You can see what an interest rate hike did for me. Obviously the heave-ho from 7.5 to 14% raised the payment, but it also made the aggregate payments much higher for a while. Look how fast the cumulative overpayments relative to renting ramped up (the blue bars). They only start to yield to the cumulative imputed rent in 2000 over half-way through my working life, and it is probably only about now that the total amount paid in mortgage costs is less than the total amount I would have paid if I had rented. Of course, I now have a fully paid-up house that has a future income stream associated with it – the rent I don’t have to pay.

    The risk of being hit by negative equity is highest at the beginning, when you are young, for the simple reason that you haven’t paid off any of the house yet. The amount of total money sucked out relative to renting is highest in one’s 40s. It’s not a personal finance trajectory that is for the poor, and not one that fits well with the costs of having children in one’s 30s.

    I can’t yet work out whether this cost peak is an artifact of having eaten that fall in house prices and the high interest rates early on. The fall in house prices is not reflected in the running cumulative costs, however, except as an effect on imputed rent 7

    what do interest rates do to house prices?

    George Soros - this bad boy did for the Ermine in '92

    George Soros – this bad boy did for the Ermine in ’92 by ejecting the UK from the ERM. Lamont skyrocketed interest rates to try and stay in

    They make them fall in real terms or at least reduce the rate of increase relative to inflation. Particularly in the Brave New World of gauging how much you will pay according to affordability, rather than a price/earning ratio. Affordability is inversely proportional to interest rates, so as interest rates go up, prices have to fall to stay affordable. You can see that in the negative equity that I suffered at the start, though this may be correlation with the long drawn out 1990s recession. The interest rate spike was cause by Britain being ejected from the ERM – interest rates were raised to try and stop the pound falling, but the Bank of England lost the fight. That is the trouble with economic variables – they are hard to separate and qualify individually.

    Why do governments push home-ownership so hard?

    Not all governments do. Not even all British governments did until 1980. When I was at school it was perfectly normal for middle managers to live in a council house. Then Thatcher got in, and it’s been a world of hurt from 1980 onwards. When I look at this I can’t help feeling that it is a rum way to run an economy and seems to do a lot of hurt to a lot of people trying to catch up with the shibboleth that you must own your own home. The huge exposure to risk when you are young, the massive suckout of money in one’s 40s to buy the house compared to the rental option. Is this really worth all the pain? At the moment it is because the rental option is really horrible – there is no useful security of tenure in the UK and the army of amateur landlords seem to be patchers and bodgers when it comes to maintenance. It seems the solution to complaints about the state of the place is to get a less discriminating tenant – it is a landlord’s market.

    If the government were interested in the maximum quality of life for the most people, it would stop fiddling about in the housing market and fix the alternative, renting. Most of the house-building in the post-war period was done by councils building council housing

    post-war housebuilding

    post-war housebuilding (BBC)

    and this carried on at a notable rate until it was shut down by Thatcher’s Right To Buy – there was no point in building houses with ratepayers money to flog them off cheap to somebody who was in the right place at the right time. Private enterprise clearly hasn’t picked up the slack, because presumably there is a profit incentive to maximise house prices for new-builds by controlling supply ;) Or some other reason, but it’s clearly not happening.

    Renting in the private sector is miserable. If you favour the tenants too much you get misery for the landlords and then misery for the tenants who don’t have a place, though joy for those who do. If you favour the landlords, as is the general case now, you get misery for the tenants, and drive people towards owner-occupation who perhaps aren’t ready for the financial hit. Owner occupation is much more expensive for the first ten or fifteen years. Calculators like this make me laugh because they are simplistic, assuming a constant interest rate, and constant house price inflation and they also take the equity in the house on the plus side. The only time you get to see the increasing equity in your house is if you downsize. The next time is when your kids sell the house after they’ve come back from the crematorium. Even after 25 years I’m not sure I’m up on the deal yet as far as money spent on buying relative to what I’d have spent on renting is. I do have an expensive asset and I’m done paying rent and mortgage for the foreseeable future, so I’m better off overall. But it was an expensive ride and I took outrageous shedloads of risk. After all, nobody sat me down when quoting for a mortgage and went

    Now Mr Ermine, how do you feel about the possibility of losing 33% of the value of this house should you be SOL and lose your job in the first ten years?

    Saying yes to that sort of risk that puts you into Highly Adventurous nutcase levels with shares, and yet people become gibbering wrecks if it’s intimated to them that the stock market can do that to you :) Safe as houses, they say, safe as houses… What the hell did the stock market do to get all the bad rap? A financial adviser won’t let you sit down and open your mouth without you taking an attitude to risk test, and yet you can blithely sign up for a mortgage and the only warning you get is

    Your home may be repossessed if you do not keep up repayments on your mortgage.

    No shit, Sherlock. No mention of the risk, eh?

    You are about to take the sort of risk that put a million buyers at risk in within living memory – the Bank of England interest rate is at historic lows and could increase tenfold without drifting out of the long run average. Have you thought about what that would do to your repayments, and have you had a word with Clint about it?

    Nary a word that this might happen

    Lindsay Cook Money Editor. "Coming to grips with negative equity." Times  24 Oct. 1992: 25

    Lindsay Cook Money Editor. “Coming to grips with negative equity.” Times 24 Oct. 1992: 25

    Housing is, however, not just about money. The excess cost of buying is probably worth it to get rid of AST tenancies, horrible landlords, one month eviction periods, shitty house maintenance and all the other hurt that often comes with amateur BTL landlords. Fixing the rental market probably means building decent social housing, enough to compete down rental prices and set standards, and relieve the pressure on the owner-occupier market. Owner-occupation is much less suitable for a world of shorter-duration or less secure jobs. I don’t know if Thatcher was right in her time but that world is long gone now.

    Of timescale-blindness

    We are scale-blind to extremely short timescales. That much is clear when you try and swat a fly, or watch a sparrow land on a blackthorn bush without impaling itself, as it makes micro-adjustments to its flight path to avoid the might spines. Listen to this whitethroat at normal speed – it sounds pretty scratchy and nasty to me

    Now listen to what that presumably sounds like to a real whitethroat, which can hear finer temporal detail than us. All I have done is slowed it by 8 times

    That’s still coarse on the sort of timescale that high-frequency trading works. You can’t stay on top of that. The effect happens at long time scales too, we just don’t see things that change over decades as much as we see them if they change day to day, which means that we become increasingly blind to groundswells in finance that have a longer period than a working life. Hence this article, it is a distant report from a receding event horizon. It happened, and it’ll happen again. What makes this worse is that the WWW started in 1994, so for the Internet generation this history is not accessible. I used my local Library’s newspaper search facility to research some of this, and it is uncanny how the themes from 1988/9 seem to be repeating themselves now, and how certain pathologies associated with mortgages seems to be evergreen. Such as stupid berks taking money out of their home equity in the good times to pump up their lifestyle only to come over all surprised when it all goes titsup in crashes. Life has rainy days in it. Save up for them.

    Should I not buy then?

    Markets can remain irrational longer than you can remain solvent

    John Maynard Keynes

    Search me guv. London, for a start, is a different place. I’m not in that league. I left London 25 years ago because I was too poor to live there. You’re competing against foreign money treating London real estate as a reserve currency, and there’s a lot more of the rest of the world’s 1% than there are Londoners. It’s not a fair fight. I could earn enough as a single man to fight the DINKY couples but the 1% are way out there, sometimes you gotta know when to hold ‘em and know when to fold ‘em. For most people London falls into the latter category.

    Elsewhere, you buy a specific house in a specific part of the UK, subject to local conditions. I personally wouldn’t buy right now, but then I haven’t lived with AST tenacies and scummy BTL landlords 8 for a long time. I can see how that makes people prepared to pay over the odds. Maybe it really is different this time.

    I learned something writing this and analysing the costs – in particular that when you buy a house with a mortgage you commit to ongoing higher outgoings for over twenty years – that’s real money you have to earn and pay out. It’s true that the break-even point was 10 years in my case, but my spending was still higher than it would have been renting to 20 years. The break-even point is brought forward by the nominal value of the house, which is only realised when you die or partially on downsizing.

    I didn’t have any idea when I started down the mortgage track that this was the case. I earned enough and was lucky enough to dodge the negative equity bullet to get away with it, but it could easily have gone a different way, and then the ermine would not have been retired. Safe as houses – think of those million people in negative equity in the early 1990s. I was started down this track of thinking by Paul Claireaux’s blog post on House Prices Now – he has some other charts of interest there, and a far better grounding in the financial technicalities, where I’ve just lived it. His summary?

    What I conclude – is that  (in broad terms) UK house prices have gone into outer space!

    There is a general message that when buying investments one should take valuation into account. That is doubly the case if you are going to buy it leveraged – and a house is one of the few assets Joe Public buys on margin. Negative Equity is what happens when you get that wrong, and being foreclosed, going bankrupt and having the debt chase you is what happens when you get that wrong and lose the ability to pay the mortgage. Only you can say if getting away from those crappy landlords is worth the risk.

    Notes:

    1. MIRAS is a historical piece of Government fiddling in the housing market being changed where they didn’t tax you on the interest paid on a mortgage. Interest rates and tax rates were much higher in the 1980s than they are now
    2. short-term Government interference leading to a pulse in demand just before an election. Any connection with Help to Buy is of course specious scuttlebutt and should be ignored. Of course.
    3. in those days money halved in value every ten years. So that 3 x lift was pretty much breakeven after 25 years with free investment risk chucked in, but optimism and being a smartass is one of the privilege of the youthful, eh. Boy was I taken for a ride ;)
    4. I used the low start loan so I’d have a chance to pay back that interest free credit card. It was the correct use fo an ARM loan – the young ermine got the details right, it was the big picture that I made a hash of
    5. To track the house value I used the Nationwide house price index for old properties, East Anglia section. The house was a two-up two-down built in 1840, the Nationwide are pretty accurate because scaling the price I bought at forward to 2012 gives pretty much the value Zoopla gives for a similar joint in a similar area. To track inflation I used the January of the year figures from this Guardian spreadsheet. For the Bank rate I took figures from the Bank of England and did the manual calculation to get the yearly interest rates, and assumed a mortgage was 1% more. I estimated rental prices as 4% of the yearly house price, which would fit for now. I moved around the middle of the period, so the second half of this is a simulation.
    6. I had to subtract what was already indicated otherwise the overall picture would be wrong. When the blue bars disappear, it will have finally been cheaper in terms of money paid out to have bought, not rented
    7. Update 22 April – a house just like mine has gone up for rent across the way, so I looked up how much it would cost to rent. The imputed rent assumption is pretty damn close, it’s nice to get a real-life confirmation of the cost-modelling.
    8. I’m sure there are some decent landlords. It’s just that I never ran into them and from what I hear most tenants don’t either. OTOH I’ve heard from some landlords about some seriously chavvy tenants. Shame that so much money changes hands and both parties seem to be pissed off with the deal
    2 Mar 2014, 4:15pm
    economy personal finance
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  • Archives

  • Doom and Death Spiral Deliberations

    I used that title a while back, in that curious Summer of Rage in 2011 when the stock market was taking a hammering and the yoof were rioting on the streets of London for the right to the correct sort of trainers and bigger flat panel TVs. Feels odd to exhume the title for a time when stock market valuations are running high and animal spirits seem to be on a bender of irrational exuberance. We’re three years on from then. People are being boring in pubs about house prices, though we don’t so far have much retail buzz about the stock market. Presumably because Joe Public is taking such a pasting in the cost of living crisis, and even the relatively well-heeled Lucy Mangans of this world grizzle about downward mobility.

    The engine of consumer spending is spluttering and dying

    I enjoyed Lucy’s piece for it’s internal contradictions. F’rinstance

    Our lives may be becoming more precarious than our parents’ or grandparents’ but we have tasted the good life and we want to keep it for ourselves and our children. And we still have the time and energy left for a fight. We may even discover in ourselves a greater empathy for the poor and the beginning of an understanding that impoverishment is not always the choice or result of personal bad decisions we vaguely – and our politicians fervidly – believe it is.

    Lucy Mangan – downward mobility

    Lucy Mangan of the Torygraph. "Going down" as the operator used to say in the Harrods lifts when I lived near there (in a crummy student dive)

    Lucy Mangan of the Torygraph. “Going down” as the operator used to say in the Harrods lifts when I lived near there in a crummy student dive.

    I’d agree with Lucy’s assessment that the ‘middle classes (as defined by the torygraph)’ lives are becoming more precarious. But a lot of that is due to taking on stupid and mahoosive levels of debt – the travails of Shona Sibary with the ridiculous flipping of houses to extract home equity in times of plenty has something to do with it, along with the general living larger than life on somebody else’s dime. There is a shift of power going on from labour to capital, and some of that debt is going in keeping up the pretension of being richer than they really are. That sort of impoverishment is the result of bad personal decisions and her parents and grandparents wouldn’t have tolerated it – or even found it possible in a time of credit controls.If you want to be middle class, you need to have middle class values, and living within your means used to go with the territory of being middle class.

    I don’t have as much income as I did when working. I could borrow money on credit cards to do the stuff I spent money on while I was working. But guess what – I try and live within my means, and that means doing things cheaper or doing without. The whole credit card thing would be a seriously bad personal decision. It doesn’t mean don’t use credit cards – but it does mean pay the blighters off in full each month. Just like the middle classes used to do in the late 1970s!

    I was tickled by

    We need to use our remaining capital – both social and financial – to demand change from governments, to avoid tax-evading and semi-monopolistic companies and shop at smaller, more local shops who still use humans rather than automata, and to set up local educational and financial institutions that better suit our needs. Set up a new game, with new rules. But in the meantime, while we work out what they are and where best to place our pieces, I shall be shopping at my local Lidl rather than at Waitrose,

    That’s the trouble with the middle class these days, they have no values. Lucy moved within two sentences from realising that the social contract includes using smaller shops that employ her neighbours to shopping at Lidl, which saves her money but doesn’t even share the profits with some faceless shareholders never mind some of the employees :) You really ought to at least finish the paragraph before you undiscover “one for all, and all for one”.

    The middle class are hosed. It take unique and rare skills to pull out of a vicious circle, and to do it, the middle classes will have to jettison a lot of things that are dear to them. I just don’t think they have the integrity and moral fibre to take the hit – after all Lucy’s moved from corner shops to Aldi without realising the irony. With consistenty and integrity like that you don’t deserve to win. The problem in the future will not be keeping up with the Joneses, Lucy. It is going to be keeping out of debt slavery. Know your enemy….

    Values matter

    I’m personally of the view that having values matters a lot more in personal finance than absolute income. I’d say this is behind a lot of the struggle the middle classes are having – they have embraced consumerism and lost their way a bit. Middle class people were much poorer overall in the London I grew up in than they are now, but they seemed to have a stronger set of values, in particular debt other than mortgage debt was frowned on. Credit cards had an uphill struggle when first launched in Britain and had to emphasise the flexibility of rolling a  month’s worth of payments into one payment in those days of handwritten cheques. Hence  “Access your flexible friend helping out Money” rather than the way they advertise now, which is full of offers to buy now  pay nothing for a year etc. The rot soon set in with “Access takes the waiting out of wanting” – fast forward thirty years of this and we have Lucy Mangan grousing about downwards mobility. Once upon a time the middle classes knew that you only borrow money  to purchase assets or increased productive equipment and not for consumer spending, but it’s been a long, long time since that attitude prevailed.

    The Ermine is fearful

    I was looking at my TD account, which currently looks great, and spent a little bit of time trying to imagine the sea of red and the bottom line about half of where it stands today, and really picture what that looks like. You need to do that every so often to remember that a lot of the value in a portfolio is illusory. Over the long term it does tend to reflect the value that the asset is creating, but over the short term it reflects fickle human opinion. As the GDP chart shows, there’s no earthly good reason why valuations should be so high now. Granted, there was no good reason they were as low as they were in 2009 so only about half the difference is probably real, which is lucky – I thought I was doing okay before 2013 and didn’t buy anything new of note that year.

    Of note is that the yield from the HYP will probably rise 1 – dividend payments tend to fall less than the market value. Now being mindful that the bearish argument always sounds smarter I came across an interesting chart of GDP growth over time – hat tip to Flip Chart Fairy Tales

    GDP growth

    GDP growth

    So you then take a look the recent US and UK stock market performance

    Vanguard US and UK, rebased to GBP

    Vanguard US and UK, rebased to GBP. Obviously the timescale is only the very end of the GDP one.

    And you go obviously, ho-hum, the rise of the stock market is obviously a leading indicator of…the pole-axeing of GDP? Clearly the good people driving the price up 2 are smoking something powerful. The usual explanation is the shocking devaluation of the currency and everybody running to equities because all the QE, money-printing, what have you is debasing the value of money to inflate away the debt so people are trying to buy anything halfway real to dodge that.

    It’s hard to know what to do with this sort of doom and death spiral deliberations. The correct response to the last one was to go out and buy with both hands. The correct response to this one is to try and get used to what that 50% suckout looks like. And then go and buy – but what? I am looking a diversifying away from the dev world and that seems a reasonable way to get a long term edge from this current point. The dev world has served me well so far, but the imbalance stinks. Fortunately now isn’t a bad time to buy some geographical diversity, with the pound being less of a basket-case and creeping up. But stock markets are more correlated than ever nowadays, a bear market in the dev world is a bear market in AsiaPac. Something (globalisation?) seems to be phase-locking markets world-wide, giving a we’re all in it together aspect. There’s obviously the barbarous relic, gold, it may make sense to aim for a longer-term holding of about 5%, but its shocking medium-term volatility makes it a tough call. It’s not a bad time to buy, nowadays. RIT is the man to go to for a level-headed assessment of the details and how to do it. Unlike RIT I’ll wing it tax-unwrapped, since gold doesn’t pay an income :) Its role is a swing producer of ISA funding should the doom and death spiral come to pass.

    1403_shark-fin

     Nathan’s right. There be fins in the water IMO.

     

    Notes:

    1. the yield will rise because the stock prices tank – I’m not saying the dividends will rise
    2. yes, I know, that’s you and me, though in my defence I don’t expect it to be up here, certainly don’t want to buy at this price and couldn’t find anything worth buying last ISA year
    28 Feb 2014, 12:37pm
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  • A cautionary housing tale from a quarter of a century ago

    It’s the last day of February 2014- a notable date for me, because twenty-five years ago I read this date on a form I signed to take out a 25-year mortgage as  I perpetrated the biggest personal finance error in my entire life. Of course my twenty-something self didn’t know that. It dwarfs any stock market losses I took in the dotcom bust, and it hit me earlier in my working life. I bought a house – a two-up-two down, at a four and a bit income multiple, with a 20% deposit, half of which was an interest-free loan from a credit card 1.

    Ten years later I ate nearly a 50% loss on that house. Some of it was poor house maintenance, but most of it was buying at the wrong time, in the Lawson boom of 1989. And that 50% loss is slightly offset by the rent I would have otherwise paid. So when Millennials hear that the older generation had it easy on housing etc etc – well, not all of us did. It’s a cautionary tale

    The UK housing market can be irrational for longer than you can stay solvent

    three years after I bought, paying a standard variable interest rate of 6.5%, I was paying a mortgage interest rate of 14%. I froze in that place in winter because I didn’t dare run the inefficient gas fires longer than I had to, and made friends with Sainsbury’s packets of mixed beans for cheap eating. However, I didn’t stop going out with pals drinking beers, so maybe hold on the violins ;)

    Colleagues at The Firm did highlight the macro picture, that Lawson was going to axe MIRAS for couples and that this was pushing up demand. But I was already running from high house prices in London, leaving the city of my birth and where I had grown up and started work. The crux point was when I was in the Broadcasting House bar, slowly drinking Fuller’s E.S.B. until the pain went away from all the people taking about how much their houses had gone up in value and all the yuppie consumer shit they were going to buy with the proceeds. All I had to look forward to was to get on the tube back to Television Centre, and then get on my bike and cycle up the A40 Westway to Park Royal, to go back to my bedsit with the salt round the outside so the black slugs didn’t invade and to shovel 50p pieces into the meter to heat up something in the Baby Belling pie heater. And I thought to myself there has to be a better way, and that was the day I realised that I was too poor to live in London. So I left.

    In running from that experience I ran into trouble here. I was lucky, that I kept my job, I have never defaulted on the mortgage. The 25 years I had signed to looked like an endless amount of time – I had only been on this earth for a few years more, and economically active for a fraction of the time. The way we do housing is really horrible in the UK – the expectation that people have of buying a house in their 20s – when life is changing, careers and life stories are changing – it’s nasty, but the ramping upwards of house prices to earnings pushes people to get a foot on the ladder when they are not yet experienced enough to understand a financial market or have experienced that markets have cycles. I started at a peak, because of my inexperience, I extrapolated the upswing that was all I had known into the future.

    There are three messages from this cautionary tale. One is that the cycle time of the housing market is shorter than a typical mortgage period, so as long as you don’t suffer a calamity that makes you a forced seller without rebuying 2 it comes out in the wash.I sold in the late 1990s, but immediately bought the same sort of asset with the proceeds and a bit more. I benefited from the upswing since, that compensated for my losses, so integrated over 25 years I am probably a slight beneficiary of the housing market.

    For what it’s worth, shares have done me much better. My shareholding net-worth – even evaluated at the low-water mark of the 2009 of half the value now is more than my housing net-worth. That’s because though I suffered losses at the beginning, they weren’t leveraged losses like a mortgage is, so I could start again with the learning and get ahead. Whereas housing losses set you into negative equity – you soullessly pour half your salary into a money pit and have nothing to show for it. And you can’t move until you have backfilled that hole.

    The second is that rent is not wasted money – not if the alternative is negative equity. Now that is wasted money – you pay into a black hole that stops you moving.

    Lastly, there is some hope. Even after a rotten start I discharged my mortgage in 2008, after about 20 years. It felt good, and it was about 20% short of the original term of that first house. All starting from a 5 times single salary house price multiple and a market crash. It looked as horrible to me then as it does to many people now, though I do acknowledge that middling jobs were better then than now.

    It doesn’t necessarily turn out as bad as it looked at the start. But try not to buy a house at high valuations. I have no idea if houses are valued high at the moment – if there is an economic boom in Britain as we crawl from the twisted wreckage of the financial crisis then perhaps they are at fair value.

    On the side of the young is that the Baby Boomers will start to become decrepit and die off in the coming couple of decades; this should release some family homes back onto the market. Against that there is increasing polarisation and jobs flow to London.

    I think the London market is a lost cause for the young and impoverished – in the end London will probably have to become an independent city state. As a mark of what’s gone on there even now I would have to commit nearly all my capital resources other than pension to buy my mother’s house in London – the aggregate value of my career doesn’t match the capital value of what my dad managed to buy forty years ago on a single blue-collar salary. But that’s London for you. It’s a different country.

    I don’t know why Britons love the housing market so much and yet are so fearful of the stock market. In my experience the bite of the housing market is far worse, and it’s responsible for far more human misery than the stock market. The housing market hurts poor Britons in its rapacious rents and dead hands on the lifetime earnings of people even if they own, whereas the stock market tends to hurt mainly the well-off. And yet housing is much-loved, whereas the stock market is considered a fickle mistress. There’s n’owt as queer as folk, as they say up north.

    Would the young Ermine have recognised his future self, playing the role of the Ancient Mariner and the young Ermine as the Wedding-Guest? Probably not…

    Notes:

    1. MBNA got all their money back, on time, and didn’t charge me a bean
    2. if you sell into negative equity you will usually not be able to buy again because of an excessive loan to value of > 100%
    26 Feb 2014, 7:29pm
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  • Stockpickers and indexers alike – aren’t you a little bit fearful…?

    Think back to 1999 – World + dog was going to make a shedload of cash on the stock market. No idea was too barmy to fly. Videologic – to become Imagination tech. Rage software – to become nothing. In the US Webvan – the idea was good, the time was wrong ;)

    Martha Lane-Fox, founder of Lastminute.com and now in the House of Lords

    Martha Lane-Fox, founder of Lastminute.com and now in the House of Lords

    Boo.com and closer to home, Lastminute.com, in a last hurrah before the dotcom era imploded as the dream died. We were all going to be rich, you, me, and the taxi-drivers of Britain. We bought high, on the greater fool theory. Then somebody turned the lights on, and we were that greater fool.

    Go on, admit it - just a teeny bit fearful?

    Go on, admit it – just a teeny bit fearful?

    The party was great, but the hangover stank. Every stock market rally carries with it the seeds of its own decay. We had seven years of relative plenty since the year 2000, despite the lean years soaking that I and many dotcom investors had – the general public had a blast. remember the Goldilocks economy?

    As I have said before Mr deputy Speaker: No return to boom and bust

    UK Prime Minister Gordon Brown, 2006

    Since the seven fat years the Great British Public have had seven lean years, and we can survey the twisted wreckage of the 99%’s hopes of a middle class life. The feeling now is very different to that Millennium eve – there was hope and opportunity, Stuff was getting cheaper and we hadn’t yet opened our eyes to the driving forces, that were going to wash in and suck the middle-class jobs out of the developed world. Now we can see that power-shift from labour to capital written large across the economy. Allister Heath of City AM tells us we’ve never had it so good:

    OK, we have a cost of living crisis – but life is so much better now

    To most people, the UK’s 6pc or so national pay cut to date remains a price worth paying for having access to the convenience, goods, services and jobs delivered by the economy of 2014

    Hmm, Allister, exactly what part of cost-of-living crisis do you not get? Allow me to remind you of Maslow’s hierarchy of needs

    1402_Maslow's_Hierarchy_of_Needs.svg

    the clue is in security of body and employment – the cost of housing is being pushed up and some people seem to have trouble affording to buy food. Your consumer goods and iPads are up in the esteem section – you need a roof over your head and ideally a job before the convenience, goods, services and jobs delivered by the economy of 2014 become worth having. The sex and family part also seems hard in the first years of the century too, at any rate for those who want to have children, which seems to be increasingly out of kilter with the rest of life. That’s not to say I particularly want to pay over the odds for other people’s lifestyle choices, but I don’t think making such a common life aim harder than it has to be is a great step forward in the pursuit of human happiness. In a conclusion that rivals Marie Antoinette

    The digital revolution is creating a lot of free value that is accruing to consumers, making them better off, but that isn’t appearing anywhere in the official GDP, productivity or real wages statistics, despite the best efforts of our number crunchers. In fact, new technologies are often having the opposite impact: in some cases, they are actually reducing reported output and thus purporting to show that we have become poorer, even though almost everybody is in fact being made better off.

    The ‘let them eat cake’ approach of denying that shit is happening because you can now afford to pave your rented flat with cheap TVs seems flippant.

    Now you can make a good case that current valuations of the FTSE100 aren’t that high – after all, fourteen harsh years of inflation have rolled by, and the Bank of England tells me that 6933 (estimated) December high-water mark would be 10174 now. So we are a long way off the peak in real terms. But there’s the whole animal spirits thing that is going to hit a bump in the road here and in the US.

    When we look at the big picture from 1985 it’s clear that the engine of capitalism turned over and misfired twice- once in 2000 and again in 2007. And it has slowed, at least in its FTSE100 manifestation – look at the way all the action is in the 1985-2000 part. So the question is whether industrial capitalism is running into resource limits, be they natural, or simply that the power shift from labour to capital is now starving the engine of fuel – after all, somebody has to be buying all the value. I don’t know who that somebody is going to be in the years to come. That’s the bit that Allister is missing – it’s all very well producing all those iPods but they can’t all be bought on ever-extended credit. Where are the firm foundations to this – is the final dream of Reagonomics coming to pass? It appears that two thirds of the income tax revenue comes from about a third of the taxpayers in the UK. Perhaps the 33% has reached critical mass, and can keep the engines running while the 66% peck from the swarf that trickles down.

    Maybe this is how the 66% will realise Keynes' 1930s vision of Economic Possibilities for our Grandchildren

    Maybe this is how the 66% will realise Keynes’ 1930s vision of Economic Possibilities for our Grandchildren

    I got no idea of where to now. It wouldn’t surprise me to hear the resounding bang of yet another misfire as the engine demands more than it can be supplied with. there will be opportunities there. Or maybe there will be another party like it’s 1999 all over again. Or perhaps we are at a paradigm shift, when people will recognise what Enough looks like, and eschew consumerism in search of value.

    Once again I heard the Last Post sounded for Keynes Economic Possibilities for our Grandchildren – where increased automation would lead to a world where the four-hour work-week was a reality. The closest we seem to have got is the TV show Portlandia. (Hat tip to Mr Money Mustache – I’ve never seen the show. Or Portland itself)

    Whats’ actually wrong with young people going somewhere to retire? Previous generations had this as dropping out, or bohemian living. It doesn’t seem so easy now 1. Tim Worstall tells me I got it all wrong, that we live in that City-AM world where everything is hunky-dory and Keynes got his Economic Possibilities. We just can’t see it, like all that digital value that consumers got, at the price of decent jobs… And other stuff down the bottom end of the pyramid, like, er, food

    food banks

    food banks

    Our Tim has an fairly hard-line answer to that too. I think I might find a few people that may disagree with the ‘let them eat cake’ version of how it all panned out ;) Somewhere there’s the sound of the engine of capitalism running low and lean under the load. I suspect I hear the pinking that precedes another misfire – I’m a little bit fearful. But it’s just a number, and the high-water mark is a long way off in real terms. Maybe it is just the echo of the dot-com bust and the seven years of plenty and the seven lean years that ensued ;)

    Notes:

    1. Obviously I’ve done it. But a) I’m not young, with the peculiar fire of creativity and single-mindedness that burns brightly in one’s twenties. And b) I’ve done my time serving The Man for thirty years…
    24 Jan 2014, 3:33pm
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  • More Interesting times in the markets, oy vey…

    No sooner does Under the Money Tree comment to the effect of steady on – not so fast on my interest in Emerging Markets then he’s proved right and the Argies are in trouble (again) and there’s another bust-up in the markets. Is this Global Financial crisis part II or the backwash from GFC I. I’m sure Argentina has been here before in the late 1990s

    Looks like no end of, er, fun :( On the upside, looks like 2014 could be the year of emerging markets, for those with strong stomachs and intestinal fortitude. Not in the results department, but I have very little EM in my ISA, because I started it when emerging markets were going to be the saving of the world. Now that people have forgotten all that and really hate emerging markets it’s probably one for drip-feeding.

    I can take a breather until the next ISA year in April, then start to learn how drip feed investing works over with those people at Charles Stanley, as I have far too much with TD given the limited FSCS compensation limit. I don’t want to go into another financial crisis with shields down ;)

    So let’s take a look at what happened last time it all went titsup in Argentina.

    their economy went down but didn't stay down

    their economy went down but didn’t stay down

    Now there’s a case to be made that they had it easier then, as the world started to pull out of the post-dotcom recession, and the price of some of their key exports went up. Argentina has a bad rep already for defaulting. Nevertheless, it’s been damn tedious in the markets of late, and 2014 was a bad year for actually buying anything new because everything was up in the sky. I’m all for interesting times in the markets, and we seem to be heading for some of that now…

    11 Dec 2013, 9:24pm
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  • living standards are going down because of a power shift from labour to capital

    Imagine. You’re in a tunnel and it’s dark, then you hear a thunderous noise and see an approaching light. Wouldn’t the sensible thing to do be to accept that an oncoming train is happening and prepare for it? Hit the deck and you might survive it.

    When it comes to falling average wages in the West, however, the approach seems to be to ignore what is happening and yell out “living standards are going down! It’s unfair! How can we stop this!”. It’s a vote-winner maybe, but it isn’t effective. From an individual point of view – the response should be to try and get ahead of the curve. Consume less – and sign off the treadmill of Buying More Stuff Makes You Happy.

    This applies particularly to the so-called ‘middle class’ – you are the people that are in the line of fire. If you don’t believe me, look at what Blackrock has shown is happening in the US in a throwaway chart in its 2014 Investment Outlook -

    Capital is getting more of the pie than labour for years now (source - BlackRock)

    Capital is getting more of the pie than labour for years now (source – BlackRock)

    What happened after 2000, then? The Happy Investors title is questionable, after haven’t we heard often enough that the stock market has been trading sideways ever since the dotcom bust

    S&P500 - log Y axis

    S&P500 – log Y axis

    Well, it seems to have broken out of that now, and of course what isn’t shown on the chart is the dividend income. So what did happen after 2000 then?

    I would hazard a guess at improved communications from the Internet, improved data processing, and the arrival of a shed-load of keen young workers from what used to be called the third world. Although it’s been fashionable for the likes of the Resolution Foundation to pretend that government action can push back on this:

    The US experience also shows us that the fate of everyday workers in America is a product of economic and social policy choices, rather than the inevitable result of globalization, technological change and immigration.

    In other words, we too have a choice: it is possible to reverse the trends in living standards that are beginning to emerge here in the UK.

    I don’t think they’re right at all. For sure, government action may be able to ameliorate the effects of this via redistribution, but only up to a point. These improved communications and technology means that capital can flee taxation and regulation. Capital, labour and land/mineral resources are the factors of production, and it makes sense for capital to move towards where labour is cheaper.

    Others blame the damn baby boomers for it all, and the yell goes up that it’s all so unfair, Living standards are going down. I would actually challenge that statement -I think living standards are going up for humanity as a whole.

    Although not strictly about wealth, Hans Rosling’s time series shows improved living standards across the world in a pretty fundamental way. Seeing a lower proportion of of your kids die before 5 has got to be a step up in living standards!

    It’s part of why people don’t talk about the Third World any more. It wasn’t aid that helped them up – it was trade. That trade made our goods a lot cheaper and a lot more varied in the 2000s, but it also brought a hell of a lot of competition into the workplace. And while living standards for humanity as a whole are going up, the backdraft of that means that wages will fall in the West relative to what they were for any typical skill level, until they roughly equalise globally. Robert Peston had a program on Europe and Niall Ferguson on China – both of them called out some inconvenient truths about competition and living standards in the West. President Obama called it out in two years ago in a State of the Union address.

    “Many people watching tonight can probably remember a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn’t always need a degree, and your competition was pretty much limited to your neighbours. If you worked hard, chances are you’d have a job for life, with a decent paycheck, good benefits, and the occasional promotion. Maybe you’d even have the pride of seeing your kids work at the same company. That world has changed. And for many, the change has been painful.”

    That’s what globalisation does – it means you can buy a DVD player for £18 in Tesco 1. But the downside of that is your kids will struggle to get a job if they are of average ability, so all of a sudden cheap doesn’t look so cheap, really.

    Your wages will fall, compared to what you’re used to, if you have a middle class job.

    You will have less than your parents, if they were doing the same sort of job. They were competing against the rest of the West, you will be competing with half the world. Your gadgets will be far better and varied, and cheaper than theirs were. You will be healthier and live longer. But they had a more stable work environment, their employers were better because they had less choice. You will find it much easier, arguably too easy, to borrow money. Just because you can doesn’t mean you should.

    Maybe Baby? Maybe not

    You will find it much dearer to have children than your parents, because  consumer society is now set anticipating dual income households. The opportunity cost of children is more that it was for your parents. Having it all was never an option, though perhaps your grandchildren may get it if resource crunches or global warming don’t get humanity first. 2

    So for God’s sake do some forward planning. Think about the big things in life – who/if you marry/partner with. Think about where you are going to work, and live. Think about whether you can afford to have children before you have them. You are unlikely to be able to afford to have as many as your parents did, and if you do, your disposable income will be squeezed more than theirs was, all other things being equal.

    You cna own your house. You can have four chidlren. What you can't do, Shona, is do both, not on your money.

    You can own your house. You can have four children. What you can’t do, Shona, is both, not on your money.

    Think about how much house you buy, and remember that a bigger house needs more maintenance, heating and furnishing than a smaller one. That also impacts the children decision – having children is a responsibility, not a right. Consider Shona Sibary as a cautionary tale  – far too many children for her means is the fundamental problem there, though it’s compounded by a lack of strategic planning and general economic muppetry.

    Having children is a emotive subject, and there are some physical constraints. However, unlike some former generations, it is a choice nowadays. There has been a lot of focus on relative child poverty in the last administration, but one of the best ways of reducing child poverty is for people to have fewer children if resources are limited. Hans Rosling’s video shows that for what we may think of as poor countries, but Britain is becoming a poorer country for most people. The logic still applies even if the results of the poverty aren’t so stark. You incur a debt to the child as soon as you bring it into the word – the debt of nurturing and love – it isn’t simply a means of self-actualisation in creating a mini-me. It’s a responsibility, not a right that others have to help you with, despite what some people seem to think

    The UK housing nightmare

    Housing is a particular pathology in the UK, for several reasons. Thatcher’s sale of council housing to buy votes destabilised an effective system of social housing for those who couldn’t afford to buy, and the damage this did to the housing market, together with the rotten terms of the assured shorthold tenancies that prevail in UK renting gives owner-occupation a particularly privileged position. Owner occupation is a crap deal for tenancy for the owner, with huge fixed costs (moving, estate agent’s fees, Stamp Duty in some cases, redecoration/furnishing) and the risk of frozen capital if you have to move to chase work – all of which are more likely now as jobs are less secure and more mobile now than in Thatcher’s time. However, although it’s a crap deal, it’s a lot less crap than strings of assured threshold tenancies (AST) which is the alternative. Which is why people aspire to own rather than rent in the UK despite ownership being a very bad fit for modern working patterns.

    There don’t seem to be any good answers here. Other European countries seem to have made renting a lot more attractive, and people are happy in accommodation that is often a lot denser in cities. The British preference for  houses rather than flats means housing is much dearer, and distances to amenities end up longer. This seems to be where the crunch is happening at the moment with living standards – we simply tie far too much of our earnings up in bricks and mortar. If you buy a house at a 4-5 times income multiple, that will consume about 8 times your gross salary 3. You pay out about a third of your gross salary in tax, so you are agreeing to pour your entire earnings for about 10 years into that house. The situation is improved by inflation (you want lots, as long as your earnings track, which they aren’t likely to nowadays), and many people get some career progression. The arithmetic is ugly, and rents follow the cost of housing by substitution since everyone needs to live somewhere.

    Live intentionally – to live well

    The global  competition isn’t going away any time real soon, and that means the value of Western middle class labour is going to fall because it’s no longer the only game in town. This is a long-term secular trend, it isn’t particularly about the credit crunch or this particular financial crisis, but the crisis throws a harsh light on it – in the UK the welfare system was used to soften the blow, but that’s likely to be scaled back more and more. These trends will adversely affect the lower end and the middle, they will probably favour the top 10%. That means that essentials like housing, energy and food will cost more than they used to, relatively speaking, because more people with the means to pay will be competing for it globally.

    Gadgets and consumer frippery will probably cost less, because there will be more production and a far larger supply of skilled workers in the design and production side, as well as automation removing the need for medium-skilled workers, reducing costs. Looking more widely, the time will come in 5-20 years when a lot of the NHS will be so financially constrained that you will want to have options to go private for some elective treatments.  About £6,000 will get you most elective treatments. It isn’t a bad deal when you look at the fear and loathing that is the US system, but you will probably want to save towards that. Where the NHS scores is in acute and in chronic treatments, but I’m not banking on relying on it for elective medical intervention. It should be noted that saving to a medical emergency fund is not the only way of investing in health. As an early retiree who owns their own time, I choose to walk to places far more than when I was working. Keeping the machinery running is an indirect investment in health, and best of all it is free. Better than free, indeed – as it saves the bus fare/fuel for driving.

    Much of the unhappiness about living standards is from unfulfilled expectations – if you are aware of the trends and accept the results of your actions, you will have less of the pain, because you are living intentionally. Whereas if it comes as a surprise to you because you feel you are fundamentally entitled to a steady increase, then you will feel sore and angry. One of the enduring myths of the West was that things always got better.

    It’s not even true in living memory, it’s just been a while since the exceptions. Real incomes have fallen in the periods 1974-1977 and 1979-1982 4. Britain will still be a rich country even if living standards fall to the levels of the 1990s. Many Britons had a good time then. It really wasn’t so terrible. So if we plan for that, and suddenly some magic happens and the economy takes off and median wages get dragged up, well, we get to have more parties. Whereas if expectations are set to more parties and we end up with 1990s living standards a lot of people will be pissed off. It just seems wise to set expectations lower. Buy less crap, and avoid building too many fixed costs into your life  -

    the key to financial success is never taking financial responsibility for anything that eats

    Jonathan Pond

    As consumers, we are part of the problem

    How did the world end up in such a screwed up state? Well, as consumers, we are also part of the problem, because capitalism is values-blind. I went to town to get some replacement bulbs for some Christmas lights, and watched in amazement at people spending shitloads of money on crap. Mainly cheap crap – in 99p and pound shops, this was stuff that should never have been made, never mind shipped here and sold. I eventually bought a replacement set of lights for £2.50, because they deliberately change the lamp bases so spares are only available for a couple of years. There’s no good reason for that, it is designed obsolescence. 5

    We are part of the problem, because we want our stuff cheap. And getting stuff cheap means we buy from Amazon, supporting shit working conditions. We buy £2 chickens from Tesco, supporting shit animal welfare, and buying a load of overpriced water too. I saw a woman buy 20 boxes of Thornton’s chocolates in Wilkinson because they told her it was half-price, and £3, not £6. What they didn’t tell her was that these were non-standard boxes and the weight was lower ;) She was rewarding deceptive marketing practices.

    We fall for cynical marketing – an Apple iPhone is deliberately designed not to last a long time and have non-user replaceable parts, because you are renting an experience from Apple, with the rent levied on the capital cost of the gadget 6 – the rental period is defined by the average service life. Even if you look after it, as the operating system moves on, older hardware becomes unsupported, and since you use apps rather than open standards an unsupported device becomes unusable, and destined for landfill even if it works correctly as originally designed. Contrast this with a preamplifier I purchased when I started my first job 31 years ago for £1500, the equivalent of £4000 in today’s money. Financially it was a damn fool thing to have done at that point, though at least I bought it on interest-free credit and paid on time. It is still in service.

    The whole way we make electronics anything now is focused on new manufacture, planned obsolescence and no expectation of repair. I repaired a Maplin 150W inverter recently – it cost me a fiver to change two power transistors and a driver transistor. I could buy a new one for £20 – I repaired the old one because I just didn’t want to keep on adding needlessly to the mountains of e-waste when I could do otherwise. That worked for me because I had the skills – for most people this would be beyond economical repair once past the guarantee period.

    If we wonder why many jobs are so shit now compared to what they were, occasionally we have to be prepared to charge the face in the mirror. Capital cares only about the bottom line, and it is gaining power, because whenever somebody presents us with a bill for protecting labour, we don’t want to pay the levy. So it goes away and does what we tell it to do – cut costs – do whatever it takes. At the moment capitalism is probably serving humanity okay from a global perspective as it lifts billions out of poverty. It’s not serving many people in the UK that well, because of this, which I’ve swiped from the Resolution Foundation

    Median wages are tracing down, and that's what most people feel (from the Resolution Foundaton)

    Median wages are tracking down as a share of GDP, and that’s what most people feel (from the Resolution Foundation)

    Although I agree with their narrative, I don’t agree with their solution. In the end the fundamental problem is that middle-ability jobs are being leached from the economy. You can’t legislate for more GDP going to labour, because what will happen is that capital will scarper to places where it can produce GDP without being taxed for redistribution. Of course, we could renationalise the energy industry, which is where Ed Miliband is probably going in the end. In which case the question will change to “how would Sir like to pay for the increasing cost of energy? Higher bills or higher taxes, bit of both? It’s your call.”

    You can run, but you can’t hide…

    That global competition is coming your way. You can deal with is several ways. You can upskill, if you are bright enough, which will bring more in. You can hop from one leg to another and make a low keening noise that it isn’t fair, which won’t help your situation but will make you feel better for a while. You can downshift or not take on as many commitments – in the form of smaller housing, fewer children, fewer consumer purchases and knick-knacks or do what Jacob from ERE does. Or you can stick your fingers in your ears and go “la-lal-la-la-la”. Only two of those responses will help you avoid getting flattened by the oncoming train of falling average wages…

    Of course, one of the ways of avoiding this is to add income from capital to the mix. But the rub here is that you need about 20 times your annual income from capital as a capital stake, and it isn’t easy to save that much up over a 40-year working life while being a good little consumer and buying crap all the time. However, if you are prepared to live differently and dramatically below your means you can make this work for you – it is part of the RITERE and MMM way. These guys will be better insulated from falling wages – because their income is coming from capital as time goes by, rather than labour, and the 21st seems to be the Century of Capital where the 20th was the Century of Labour – in the West at least.

     

    Notes:

    1. That still sounds awesome to me because I remember buying my first VCR secondhand ex-rental for £150 – about £400 in today’s money
    2. If Hans Rosling is right, there may one day become a day when the fertility rate has fallen so low that governments may actively promote new citizens for economic reasons, and then you may have it all. At the moment it is far easier and cheaper to import them, and the world is not short of humans at the moment.
    3. at typical UK long-term interest rates of 4-6% you pay roughly double for your house over 25 years
    4. IFS
    5. You can, however, retain the old bases and pick out the lamps, so I made sure to match the voltage and power, so I will scavenge the old set for lamps to insert into the plastic bases of the new set as the bulbs fail. The price of replacement bulbs is usurous – you get three for £1 or 20 for £2.50 – in a new set ;)
    6. You may explicitly rent the device capital cost subsidized as part of a mobile phone contract