On Wednesday night, I gave a talk at my old primary school, Johnstown National School in Dún Laoghaire. One of the many interesting questions from the parents of the pupils focused on pensions and what this early-middle-aged group could expect from them.
I am considering this question in more detail now as I fly to the States. The little map on my screen tells me that I am at 38,000 feet above Newfoundland, the vast territory uncharted until French Canadian trappers began to map it out. The question for your pension is whether we are now in similar territory.
In the old days, when short-term interest rates were around 5 per cent, the pension fund manager could simply buy a government bond yielding 6 per cent and go on holidays, sage in the knowledge that the government would pay him 6 per cent at the end of the year. If the stocks he also bought did reasonably well, he might be able to generate a sweet double-digit return on the pension without having to do much. In such an environment, inflation is likely to be running at around 3 per cent, but punters tended to look at the headline number. Back in the 1970s when I was at Johnstown National School, pensions would have been yielding double-digit headline returns due to high inflation.
However, since that time, inflation has been falling – and so too have interest rates.
But the interest rate is driven by more than just what is happening to inflation.
The rate of interest is set by the Central Bank in order to achieve certain things in the economy. If, for example, the economy is very weak and has just experienced a recession, the rate of interest will be cut dramatically to support demand by encouraging people to borrow.
Alternatively, if the economy is overheating and growing too quickly, the rate of interest will be increased to stop people spending too much, as a higher interest rate encourages people to save.
So the natural rate of interest is the one that would pertain if central banks were neither trying to cool down the economy nor trying to heat it up. Over the past 30 years, the ‘natural rate of interest’ has fallen from about 6 or 7 per cent to around 1.5 per cent in Britain, near zero for the US and below zero for the eurozone. These are very low levels of interest; you would normally associate these levels with recessions, but we are not in recession.
The US is growing strongly, unemployment is below 5 per cent and most indicators point to an economy that is in mature recovery – so much so that all the talk now is of the next rate rise, not cut. Britain is also growing, unemployment is also low and exports are robust post-Brexit. Only in the EU is the zero interest rate reflective of a truly convalescent economy.
So why are rates so low, and why is your pension costing you, rather than making you, money? The real reason for the decline in the natural interest rate is the forces that are affecting the supply and demand for funds. These include ageing. Old people save rather than spend. Slowing productivity growth is also a factor because as productivity slows, economies tend to invest less. There is also the China effect, which is the fall in the price of big investment goods. Big machines that used to cost companies so much in the old days, and demand lots of funds to do so, have fallen in price because they are now made more cheaply in China.
We have also seen a sharp decline in public investment for building schools, hospitals and roads. The fewer of these our societies build, the less money the state needs to borrow. Obviously, austerity amplified this process. Rising inequality plays its part because if more and more money that used to go to lots of people now goes to fewer and fewer people, the demand for cash will fall because fewer and fewer people can never spend as much – even if they try (and they do).
Taken together, these global factors imply that there is money sitting in bank accounts, rather than being used productively in the economy. This excess supply of savings is driving rates down.
But if everyone is saving, who is spending? And if everyone is saving and the return on ‘safe’ assets, like government bonds, has collapsed, what are fund managers doing with your money?
They are taking bigger and bigger risks to generate yield for you. This means they are buying products that promise higher returns. But in a low-interest environment, how can products generate higher return? They must entail more risk, because you can’t have higher return without taking more risk. This is the name of the game. The only way something that looks safe can generate more return for you is if it has lots of leverage, so you think you are buying more of something than you are because the leverage allows you to gain more exposure for your investment.
But be careful, because – as we experienced in the housing boom – leverage is a great man when things are going up, but when the market turns, leverage not only destroys your one investment, but leaves you owing lots of money too.
With financial markets at all-time highs and interest rates in the US on the way up, the risk of whiplash in some leveraged pension products sold over the past three years to unsuspecting punters is increasing by the day.
Be wary when a man in a Hugo Boss suit promises you over-the-odds returns on a pension product. And remember, he takes his fee first whether the investment goes up or down and, by the way, his fee is your money.
David you raise an issue that should be dear to all our hearts. Pension funds, not surprisingly, are mainly for the benefit of the financial system. It wasn’t always the case. I’m not a socialist but one wonders what the future woukd be fir PENSIONERS if governments and cibil servants had maintain defined benefit pokicy and not succumbed to the defined contribution future. We’re told DB was not sustainable. Why – because companies profits were effected and governments didn’t want to only spend 19 shillings and 6 pence. Mccawberland comes at a price that nobody seems to want to pay.… Read more »
But the argument above excludes the fact that global debt levels have increased by something like $70Trn over the past 8 years. All this money is sitting somewhere, and bank accounts are the only place that money can sit (excluding money under beds). Interest rates are not just ‘low’, they are at all time record lows. In the UK, where reasonably reliable trade records go back almost 1,000 years, this means that interest rates are at a 1,000 year low! And have been there for almost 8 years – thats a full business cycle. Further, were people really saving rather… Read more »
In New Zealand we have what you would call a UBI for all New Zealanders over the age of, now, 65. It is provided by the Government. At the moment it is NZ$769.00 per fortnight for a person living alone and NZ$1152.40 for a couple. It is adjusted every April to account for inflation and is a % of the average wage. Generally speaking it doesn’t matter what you own or what other income you have, all New Zealanders get it. It is adjusted every April to account for inflation and is a % of the average wage. This has… Read more »
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I am reminded of an incident during the boom era. When a highly leverage fund formed by a former Revenue Commissioner, specialised in tax efficient investments that made no economic sense, based on fundamentals. But with Tricky Jean Claude pulling the interest rate lever, the projects were possible. In fact low interest rates, elevated many dodgy investments to viable. And then there was the asset price inflation. In any case, the whole thing was funded by Anglo Irish Bank. Actually, it was a case of “extreme” leverage. Leverage on steroids. A bit like some of the bankers themselves. Professionals, would… Read more »
After Madoff got sentenced, the New York’s King of Ponzi pronounced the most telling quote of all. An open and frank admission.
He declared public debt, with it’s massive commitments, and over extended state reach to be unredeemable. He was thinking about the US Federal Deficit. He was proven correct with respect to Greece. He will be proven correct with respect to Belgium, Ireland and possibly Italy.
http://faculty.marianopolis.edu/c.belanger/nfldhistory/NewfoundlandHistory-EarlyColonizationandSettlementofNewfoundland.htm https://en.wikipedia.org/wiki/Newfoundland_(island) ” Thomas Nash was an Irish Catholic fisherman who permanently settled in Newfoundland despite English rule. He established the fishing town of Branch.[15] He and his cousin Father Patrick Power of Callan, County Kilkenny, spread Catholicism in Newfoundland. This settlement attracted a major migration of Irish Catholic immigrants to Newfoundland in the early eighteenth century.[16]” much of the rest of Canada may have been explored by French Trappers this was not the case with Newfoundland. Visted and briefly settled by Norse in the 1100’s the Newfoundland Grand Banks were the attraction for the huge volume of the cod… Read more »
Interesting ;
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http://www.washingtonexaminer.com/want-to-understand-hillary-clinton-read-saul-alinsky/article/2602071
Hi David,
How can you write an article like this and not mention debt levels (public and private) and government deficits?
Ah, yes! The sinking of the Bismarck legacy…..pension were only ever invented to stall the Bolshevik threat, it was never intended to actually pay out. Ditto the entire ‘pension industry’ scamsters who, as the song goes: “The sanest days are mad Why don’t you find out for yourself? Then you’ll see the price Very closely Some men here They have a special interest In your career They want to help you to grow And then siphon all your dough Why don’t you find out for yourself? Then you’ll see the glass Hidden in the grass” ‘Retirement’ is just another Capitalist… Read more »
“The US is growing strongly, unemployment is below 5 per cent and most indicators point to an economy that is in mature recovery – so much so that all the talk now is of the next rate rise, not cut. ” This statement is a bold faced lie. Talk is cheap. Cheaper than the proposed interest rate hikes. It has been many years since 2009 when we were assured the US was in recovery. Why, “green shoots” were the rage. Not a raise was forecast but a string of them in succession. What happened. Why the debts increased many fold.… Read more »
“So why are rates so low, and why is your pension costing you, rather than making you, money? The real reason for the decline in the natural interest rate is the forces that are affecting the supply and demand for funds.” Not a mention of the central banking system and the fractional reserve policies of the commercial banks flooding the world with debt so much, that nobody wants any more. There is so much garbage paper money flying around that the interest rates have gone negative. I’ll pay you to borrow is the cry. The reasons that the OAP’s are… Read more »
“Be wary when a man in a Hugo Boss suit promises you over-the-odds returns on a pension product. And remember, he takes his fee first whether the investment goes up or down and, by the way, his fee is your money.” Be more wary of central bankers promising you a golden future when the inflation robs you blind every year. Especially when surrounded by a bunch of economists, whose advice is pandered by the complicit press, trained and inculcated by the central banks themselves. Those who set up the central banking system set it up to fail. Fail it will.… Read more »
This is the looming immediate future for pensioners. Everyone else too.
The great reset when the bond bubble bursts. That will be when interest rates find their natural level.
https://www.peakprosperity.com/podcast/101694/michael-pento-coming-bond-bubble-collapse
The indexes have been near all time highs or so it’s claimed. What’s driving the indexes. It’s not miners or bankers or energy producers. Strip those categories out and you end up with a very hot “niche” bubble. The surge in the indexes is very narrow. Very like the Irish economy just before the bust, there is a huge imbalance. The whole system is resting on very narrow shoulders. That’s just an observation. WHEN/if the day of reckoning comes it won’t be pleasent. Ireland for example is on a knife edge. Our levels of personal taxation are extremely high and… Read more »
David McWilliams’ writes about Mr Donald Trump’s plan, “He’s assuming trade deficits are synonymous with job losses. They are not. (For example, the UK has the highest trade deficit in Europe but one of the lowest rates of unemployment.)”. While trade deficits are not the only factor leading to job loses, there are some macroeconomic schools who correlate them with unemployment – i.e. the Stock-Flow Consistent models show that fiscal balances of the government and financial sectors (domestic and foreign) must, by definition, have a zero-sum of deficits and surpluses across them. Thus if peripheral EU countries have huge government… Read more »
Way back in the 1980s when we made the central Banks’ independent, that is from parliament, a world world wide fiasco was created. In my view the only answer from that is for all parliaments to take economic policy back from the Central Banks into the hands of Government. QE, that is the removing of the Banks’ bad debts, will do nothing. But if Parliament demanded that all the QE monies held by the Banks is now lent back to Governments, at zero interest, to invest in infrastructure that would actually start a surge in GDP – if GDP is… Read more »
http://www.breitbart.com/london/2016/09/13/breitbart-contributor-sue-soros-backed-newspaper-alleged-defamation-claim/
A first rate tax avoider, with a first rate abaility at self publicity, and a second rate musical talent, has said that he is not happy with Trump.
Actually, I am not happy with second rate citizens who carry the passport, and go around lecturing other people on how to run their affairs.
He has used this country’s good name, to make himself rich. He proceeds to use another country to make sure that this country never gets anything out of it.
An extractive pop-star. Not an artist. He has not produced ‘art’ in twenty years.
The un-artful tax-dodger.
“Over the odds pension returns” are for select Irish citizens only. The contributory pension of 230 euro/wk for 400,000 retired Irish workers costs approx 4.8 bn yearly. This money helps ALL retired workers with their basic safety needs such as food, clothes, medicine and shelter. ALL of this money is put straight back into the economy. Then we have Irelands Plastic Pension lump sums and payments. These are pension payments above the contributory pension that have no fund. These unfunded pension payments are for select Irish citizens only and are completely unconstitutional. No financial logic is even offered for these… Read more »
I reckon Ireland’s most vociferous hypocrite intervening with his opinion on the US Presidential Contest is a sure sign that Trump is the lesser of two evils. He has no problem with the Clintons. No problem with their dodgy foundation. No problem with ‘pay2play’. No problem with ambassadorships for sale. No problem with Seth Rich getting murdered, in the context of Seth Rich being the likely leak behind the DNC revelations (that the DNC were blaming on th Russians). What astounds me is that a rat with such sewer-smelling pals, gets be feted by the Irish media. Respect him. Take… Read more »
Some leopards do change their spots! They camouflage their real position.
http://www.gopusa.com/?p=15041?omhide=true
“The world, to be sure, is involved in a liquidity trend that is not about to stop. In fact, as we speculated yesterday, the idea is to create an unstoppable wave of liquidity that will eventually crash upon the world and justify a whole new financial system,
This is probably why central banks have taken to purchasing gold again: They know what’s coming.”
http://www.thedailybell.com/news-analysis/worlds-liquidity-trap-will-not-yield-surprise-monetary-reversals/
http://www.goldcore.com/us/gold-blog/gold-bugs/
“So having a bit of gold in your portfolio – just like our central bankers – seems like a sensible precaution.”
Seems like solid advice to offer any pensioner. There is nothing else to rely on.
http://investmentresearchdynamics.com/bye-bye-deutsche-bank/
Notice to all Pensioners.
Sever all dealings with Deutsche Bank at once.
“I’ve written about this topic before. In a cashless society, your economic liberty is forever at risk. Every transaction could be monitored, taxed and charged a fee. Capital controls would be crippling, assets could be seized. Just ask the Colombians and Venezuelans”
http://news.goldseek.com/GoldSeek/1474380120.php
There are famous economists gloating over innocent peoples’ suffering
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e.g.
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New York Times Paul Krugman Gloats over Demise of White America
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https://www.youtube.com/watch?v=YEv25Ly7TPI
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http://www.theoccidentalobserver.net/2015/07/paul-krugman-on-the-glorious-coming-demise-of-white-political-power/
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Ron Paul Responds to Paul Krugman
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July 31, 2015
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http://www.ronpaul.com/2015-07-31/ron-pauls-message-to-paul-krugman/
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Demographics imbalance spurred by porn ; . Japan is surely having to pursue what McCawber promotes — “welfaring” technology — to cope with lack in numbers of human providers. . . Excerpts from link below ; . . “Japan has become the main audience in terms of pornography consumption. . Japanese pornography is absolutely everywhere starting from magazines to apps for smartphones. . It simply kills normal human desires,” . . The Japanese phenomenon of lack of interest to sexual activities even has a name ; “celibacy syndrome.” . Surprisingly, Japan was never an sexually repressed nation compared to Europe.… Read more »
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Pensioners must wake up or stay working at jobs that do not pay well
“On the economy, with around 94 million people out of the workforce and the near record low Labor Force Participation rate, Dr. Roberts says, “The Labor Force Participation rate never falls during a recovery. It rises because people are entering the labor force to take advantage of the strong economy and jobs. So, there isn’t any economy. There is a house of cards that is held together by central bank money creation. The money flows into financial assets. That’s what keeps the stock market up, and it flows into bonds, which is why we have essentially 0% interest rates. .… Read more »
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