9 Jun 2011, 8:18am
rant:
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  • Debt as a Source of Young People’s Self Esteem – Dude, you are So Doomed

    I blame it on the fact that in the West we have no rite of passage from childhood to adulthood. It used to be setting up an independent household in digs in your early 20s, but that’s not as common as it used to be for a whole bunch of reasons. Doing that tended to enforce thrift, and the electricity/gas meters of the day were quaint old things that took real 50p pieces so credit wasn’t an option, it was cash or no power.

    However, the cathedrals of consumerism instigated by Edward Bernays have pushed the desirability of iFads and associated ephemeral tat so hard that the relationship between a lot of people and their Stuff is akin to that between and addict and his poison of choice. According to this study it seems that

    […] the more credit card and college loan debt held by young adults aged 18 to 27, the higher their self-esteem and the more they felt like they were in control of their lives.  The effect was strongest among those in the lowest economic class.

    Well, colour me a grizzled old fossil, but something has gone very badly wrong here. It doesn’t apply to all young adults in my observation, so either it’s really tough out there in the United States, but yes, I can see where these sociologists are coming from. And it ain’t gonna get better, because these young folk get to find out later on

    “By age 28, they may be realizing that they overestimated how much money they were going to earn in their jobs.  When they took out the loans, they may have thought they would pay off their debts easily, and it is turning out that it is not as easy as they had hoped,”

    Yup. That’s the kicker with debt, you get to find out it’s not half as easy to pay back as it was to take out, welcome to the magic of compound interest, this time working against you. Particularly if you’ve left the debt to fester for a few years and particularly in an environment when middle class jobs are hollowing out.  Bankruptcy and IVAs are the only way some of these guys are going to be able to sock it to The Man. At least in America, where that study was done, you can walk away from a mortgage in negative equity… In a final statement of the bleedin’ obvious

    “We found that the positive effects may wear off over time, but they still have to pay the bills.  The question is whether they will be able to.  There needs to be additional research to answer this question.”

    Don’tcha love sociology. I can save you the trouble of that additional research, Rachel. Most of them won’t be able to. How do I know that? I did my own research, it didn’t cost me anything and it was done in an afternoon. Allow me to introduce me to The Money Shop, a common sight in Britain’s High Streets. In the States you have Mister Money doing the same job.

    A Money Shop

    Both of these are symptoms that the falcon can no longer hear the falconer, and the centre is losing its grip… The strapline of the research title gives it away – What, Me Worry? Young Adults get Self-Esteem Boost from Debt. They’re hardly going to dump something that boosts their self-esteem, are they? However, let’s not just blame the young’uns here. They at least have the excuse that they are new to the game. If you’re over 30 and carrying on like these young adults, then what’s your excuse for believing it’ll be all right on the night?

     

     

    21 May 2011, 12:32am
    economy:
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  • The Times They are A Changing – Be No Boiled Frog

    Change is part of life, it indeed is characteristic of life itself. It’s a double-edged sword; it makes life more interesting on one hand. We go on holiday to find change, else we’d just stick at home and go to the park on our time off.

    On the other hand, it makes it hard to live life, set in a sea of roiling change in the society and expectations around us. One of the characteristics of previous ages was that people lived more stable lives – there were people only a generation or two ago who grew up, raised a family and lived and died without having ever been more than 50 miles from the place they were born. George Ewart Evans related some of these tales from first-hand interviews in his book “Ask the Fellows Who Cut The Hay”.

    As a result, societal changes happened slowly, whereas now they happen a lot more quickly.

    There are some assumptions that many people build into their lives that were drawn from how their parents and other lived. In particular, some of the assumptions of how to live a middle class life are becoming very shaky indeed.

    President Obama called it out well in his State of the Union speech.

    “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.”

    There are lots of difficult questions we might want to ask our politicians about how they delivered us such a screwed up world where so many of us have taken the shaft. In return, the more astute of them might return that they are merely a mirror to our desires and hopes. The problem is that

    we wanted it all, and we wanted it now, and it was mainly in terms of things and stuff

    Satisfaction delivered, largely, in the West. In the first half of the 20th century, lots of Stuff made great improvements in people’s lives, you can’t knock decent sanitation, the arrival of electricity in the 1930s, washing machines and vacuum cleaners in the 1950s, cars in the 1960s and 70s, central heating and double glazing in the 1970s.

    Then it all started to go wrong, and in a sudden rush of blood to the head we wanted more and more stuff, while not realising that we were taking on more and more debt simply to live.

    That was sustainable in the world that President Obama described, of stable jobs and a steady society. However, we started to demand more and more of our companies, and in order to deliver on the promises they made to our pension funds, our companies started to demand more and more of us. We could have had the Fifties lifestyle but working far fewer hours, but companies don’t like hiring part time staff, so what we got was a lot more unemployment, and a rise in asset prices like houses.

    Let’s take a look at where things have gone wrong:

    Jobs

    • there aren’t enough of them, decent ones anyway. We doubled the workforce in the 1970s, and the economy hasn’t adapted well
    • they aren’t particularly secure
    • you don’t get career progression, everything is a fight now
    • on the job training is disappearing
    • job descriptions are exploding in complexity without much cash return
    • people are managed as interchangeable components, less and less attention is paid to using them to the best mix of talents and specialisations
    • increased focus on paper accreditations rather than successful work done
    • far less opportunity to shine as an individual, everyone is a cog in a team now
    • more rigid structures
    • outsourcing and faux-self-employed agency working without rights

    Housing

    • Ever since Thatcher’s sale of council housing we have had insufficient housing, poor rental conditions and increasingly overpriced owner-occupation
    • the rise and rise of the interest only loan. Why do people to this to themselves FFS.
    • the rigidity of owner-occupation doesn’t suit the mobility requirements of todays insecure jobs, so we have accidental amateur landlords
    • Buy To Let. About time you started to pay capital gains tax, guys. There’s actually a case to be made for that on all property, but definitely on non-main-residences.  It also results in old money competing with young money, and old money always wins…
    • You need two earners to be able to afford a house

    Education

    • When everybody gets a gold star because we can’t allow ourselves to tell some of our children that they are thick, we can’t tell who’s bright and who isn’t. Plus some people get to leave school without being able to read properly or add up.
    • University. What is it for and what good is it? How do we know who is good enough and who isn’t. Is there any such thing as not good enough?
    • Student Loans/tax
    • Is 50% university entry desirable? This means university entry for people with an IQ of 100 or above. IMO universities should be more selective, they were in my day, taking about 7% of school-leavers.

    This is what has gone wrong in the last 20-30 years. Let’s take a look and what is likely to go wrong in the next 20:

    • Britain, and the West in general is bankrupt. In the end the rest of the world is going to get bored with giving us money to keep our lifestyles high. What that means is that wages, in real terms, are going to come down. Big time – I would guess at least 50%, if not more.
    • We have an increasing polarisation of wealth

    The share of UK income taken by those on various slices of the top income ranges

    Look at where that is going. That means you want to be in the top 10-20% of the income distribution. You can find out where you are with the Institute of Fiscal Studies’ Where Do You Fit In page.

    If you’re not up there, then you will find it increasingly hard to do many of the things that you saw your parents do. If your household income isn’t in the top 10% you would be unwise to take out a mortgage to buy a house in my view, as over the 25 year term you will probably not be able to accumulate enough wealth to pay down the capital. You’re better off renting, because losing a house involuntarily means it gets sold off for a song and you still get chased for the debt, unlike in the US with their non-recourse mortgages. You still get to lose your house in the States, but the debt is cleared.

    If you’re young, you probably want to think about whether you want to move abroad to a more dynamic economy. Asia isn’t bad… Germany is good for budding engineers, if I were in my 20s Germany is where I would be looking! There may be advantages to your university funding, should you choose that way.

    University – to go or not to go? I can’t really understand why anybody would go in England, saving £30,000 seems worth learning a foreign language for and studying at least in Europe.

    Lots of people are going to come unstuck in the couple of decades ahead making bad assumptions that they will track some of the life path their parents did. I was older when I discharged my mortgage that my Dad was when he paid off his mortgage, we were both single wage-earners, but he managed to do it while raising children! I was a white-collar worker, he was blue-collar. The reason it took me longer is written in the shape of that graph – Dad managed to buy his house on the downswing when wealth was shared more evenly from 1960 to 1985, I was in the upswing from 1988 to 2008. Not only that, he was competing with other families with a single breadwinner, I was the single breadwinner as only occupant, competing with two-income households so I had to pay more for my house as a proportion of my salary, even though on other measures I was earning more than Dad. That will hold more and more, as governments lower benefits and increase taxation to try and balance the books.

    Additionally, we have increasing competition. From 1950 to 2000, the West had a clear run, but other countries are catching up fast, and they have far larger and younger populations.

    The world may start running out of resources, particularly oil. we’ve only got one world, and we are adding an increasing number of people to it, and their lifestyle is increasing. There’s not enough world for everybody to have a European lifestyle. Globalisation will be the great leveller, it was great when it meant cheap DVD players in Tesco, it’s not so great when it means petrol at £50/litre.

    How do you respond to this?

    • You avoid debt, at all costs, particularly debt incurred to fund a ‘lifestyle’
    • eliminate fixed costs as far a possible
    • where possible, organise with other people to produce essentials for yourselves and grow food.
    • Spend less than you earn
    • Consider some of these ideas

    It’s all about resilience and eliminating unnecessary costs. It’s about people, not things – a lot of your quality of life comes from who you know, not what you have. There is a whole advertising industry telling you otherwise, but a lie repeated is still a lie. Our lifestyle and  standard of living may have to drop, but if we live in a way more according with our values and relate better to each other then our quality of life may not drop.

    Forewarned is forearmed. It’s more comfortable to go lalalalalalalala and believe the ads. Taking on extra debt is like the junk food mantra ‘a moment on the lips, a lifetime on the hips’. Live within your means – or be a wage slave for your whole life. It will be harder in future to recover from a debt binge.

    Funnily enough, Vince Cable seems to be of a similar opinion regarding the coming decline in British living standards.

    People do not understand how bad the economy is […] politicians have not made clear the time and pain needed to restructure Britain’s broken economic model

     

    29 Nov 2010, 9:27pm
    economy reflections:
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  • So Why do Governments get to Borrow and Never Repay

    Watching the Irish go through all their hair-shirt measures, it made me wonder.  The question will probably show me as an economic ingenue, but nevertheless it occurred to me. Why the hell do governments get to borrow so much without having to pay it back?

    Looking at other enterprises, getting away with that sort of thing is unusual. Take individuals for instance. It’s fair enough to borrow early in one’s working life, either for education, though this is becoming of doubtful value, or to buy a house. In the past you tended to aim to pay these back over time. Take a company. It raises debt, but ideally uses this to finance productive capacity, that creates more money than the debt destroys in interest, eventually repaying the debt or rolling it over to finance more productive expansion.

    The theory is meant to be that governments do this too – borrowing either to finance productive infrastructure expansion or to oppose the variations in the business cycle. The first gets paid for by increased tax receipts on the economic activity facilitated by the infrastructure, the second by the tax receipts during the upswing parts of the economic cycle, remember the golden rule of Gordon “no more boom and bust” Brown… He had the theory okay, just the practice was wrong.

    All that theory seems to have gone to pot in the last few decades. The Irish situation just highlights it. It seems nutty enough for the 5 million strong taxpayers to take on the amassed debts of banks that have behaved like drunken sailors over the last decade and a half. Now they get to borrow money to pay for those debts from the EU and the IMF. Since when was borrowing to pay for borrowing the way to financial Nirvana?

    It’s not like the taxpayer had the benefit of the binge drinking at the party, but they sure get to experience the hangover at best, or the morgue at worst. I can’t see how they can come back from here, they might as well throw in the towel and take the hit of defaulting now. They’ll struggle on, only to default later.

    Finally, what is so special about bondholders, anyway? One of the problems seems to be that governments have got into the habit of endlessly borrowing money they have no intention of paying back, merely of servicing the interest. Obviously if you plan to keep on doing that you have to suck up to the sources of lending.

    Something I learned in clearing all my debts including the mortgage is that I didn’t want to be beholden to anybody. Nobody is entitled to knock on my door and demand to be repaid, and I’d tell them to stick it if they tried. You gain a certain amount of power through not owing people money, and you lose a lot of power if you do.

    Redeeming my mortgage was an irrational thing to do in a low-interest rate environment, but at least now if I lose my job my main problems are how to get to eat, heat and drink, rather than if the repo men with thick necks and baseball bats want to visit. Or even their sharp-suited counterparts from a mortgage company.

    Governments could do with learning some of that attitude. We were told that we were within hours of the ATMs not working when Alistair Darling stepped in. At the time most of my capital assets were in £ demoninated investments apart from my house, so perhaps I would have rued him taking a default strategy as I would have been wiped out. I have corrected that since, getting about half my capital wealth into non-financial assets to forestall that sort of thing in future, since I expect the second dip sometime in the next five years. For what it’s worth, though I’ve been tempted to goldbuggery I consider gold as a financial investment, albeit independent of of the UK governments devaluationary policies 😉

    However, let’s face it, the majority of people in the UK don’t have capital assets – they have debts, in terms of mortgages and unsecured debt. A default strategy might have more attraction for them, rather than being clobbered for years with declining real terms wages and employment falling. Although Argentina showed in 2001 that the social unrest following default on loans wasn’t pretty, it was survivable, and Argentina’s economy has largely recovered. Issuing the haircut command to bondholders is something an economy can come back from.

    Either way we can’t carry on endlessly borrowing and never repaying. Otherwise, as the Irish are discovering, economic policy is not determined by the people you elect as a government – it’s decided by the people who own your debt. Hello IMF, hello EU, perhaps hello Angela Merkel, the only European country that seems to have a working economy at the moment. Living on the never-never catches you out in the end, whether you’re an individual or a country. Sometimes bankruptcy is the only way out.

    8 Aug 2010, 5:47pm
    economy:
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  • Banks Don’t Make People Bankrupt, People make People Bankrupt

    There was a bizarre piece on Woman’s Hour today, asking how is it that so many women are going bankrupt nowadays.

    One of the reasons advocated is that more women are exposed to the economy by being wage earners etc and that part of the argument is fair enough, there are more in the line of fire.

    Then we had Alexis, who got herself into £31,000 worth of debt. Let’s take a look at some of her reasoning:

    Jenni (interviewer) “How did it [your debt] get so high”?

    Alexis “It got so high because I was able to borrow so much money”

    WTF? Can this lady run safely with scissors, is she allowed to cross the road on her own?

    Alexis “unfortunately, nobody put the brakes on me except myself”

    Jenni (incredulous tone of voice) “Hang on, what were you spending it on?”

    Alexis “Anything, I genuinely was shopping constantly, I had this attitude that life is short, and if I wanted it I should have it, and we do live in this society where we are told, ‘Look at all these worderful things you can have’ look at all these wonderful things these celebrities have got, and why don’t you have it and if you can’t afford it just borrow the money”

    Prof Sheila Crispin then goes on to say that people think that “if the bank is prepared to lend me 20,000, then I must be able to afford it.”

    Since when did adults get infantilised in this way? There are some things that have hidden risks that are hard to gauge and quantify. But there’s not much that is hard about spotting the risk of borrowing £1000 when you can’t see a way to paying it back.

    I’m not talking about to people unfortunate enough to lose their jobs, or have other unforeseen financial events catch them out. This was a woman who sounded coherent, reasonably intelligent and who had finally seen the error of her ways. But was she raised by wolves? Why didn’t her parents teach her the basics

    all advertising is a story designed to make you want to spend

    I’m sick of people of both genders blaming the banks for making them overspend. Banks have made their own mistakes, and been greedy on their own behalf, but they aren’t a conspiracy to make us overspend. They held up a mirror to our own greed and lack of responsibility. We cannot blame the mirror if the ugliness of the reflected image disturbs us. A failure of macroeconomic policy and regulation made this worse, but nobody had their arm twisted by a banker in a balaclava holding a gun to their head, saying

    borrow this £31,000 or we shoot your husband and kids

    It just didn’t happen.

     
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