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Telegraph: Cheap Money Is Destroying All Our Futures And Killing Capitalism

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Not sure if posted elsewhere? Have skim read a few points and seemed to echo many thoughts on this site.

Allister Heath

Karl Marx was wrong: free markets are wonderful. They have delivered prosperity on an astonishing scale and helped bind the world together. But their greatest triumph has been their ability to turn workers into capitalists. Forget about those obsolete class-war theories so beloved of Jeremy Corbyn’s fans: Middle Britain’s army of home owners, investors and wealth accumulators own trillions of pounds worth of capital.

Yet all of this progress towards a genuinely classless society, in the Marxist sense at least, is now at risk. The ongoing devaluation of thrift, the rise of zero or negative interest rates and our economic establishment’s obsession with free credit means that it is becoming unreasonably hard for non-financial experts to accumulate wealth, especially for the young and those who are starting from nothing.

Savers, the linchpin of middle-class stability, the epitome of the responsible individualism that underpins all successful democracies, are facing their greatest challenge since the 1970s.

This matters hugely, not least because contemporary Britain rests on a number of grand bargains. One is that hard work, thrift and long-term planning should be rewarded in return for the public being asked to take control of their personal finances. Because we now live longer, the company-organised private sector final salary pension model is no longer financially viable; the state is also far too stretched and can only provide, at best, a basic safety net. The responsibility and risk of providing for one’s retirement have therefore been shifted to individuals, and rightly so: the old paternalistic model was always an aberration, an unsustainable phase of early-stage capitalism.

“It’s not just a problem for insurance companies, it’s a problem for retirees, it’s a problem for anyone that’s stuck with fixed investments and finds that their income is a pittance”
Warren Buffett

The problem is that ultra-low interest rates are destroying the economics of wealth accumulation. Since the end of the 19th century at least, savers were propelled not just by how much they could put aside but by the wonders of compounding: by reinvesting interest and dividend payments, portfolio values grow and eventually snowball. Today, with gilt yields of 0.5 per cent and inflation at 0.6 per cent, compounding is dead. Real returns are either zero or negative; time is no longer the saver’s friend. As recently as in the early 1980s, the US or British governments had to pay 15 per cent interest on their IOUs to attract savers; even when accounting for much higher inflation, this was a hugely better deal.

The flip side is that it has become impossible to live off interest or dividends. A decade ago, anybody seeking to enjoy a £35,000 annuity in retirement needed to accumulate £761,000 to do so. Today, the savings pot required would be worth £1.4 million, beyond the reach of almost everybody and larger than the maximum allowed under current pension pot regulations. It’s madness. Needless to say, the current generation of savers has benefited enormously from the boom in asset prices caused by quantitative easing and the lowering of the cost of money.

The issue is the future. Clever risk-takers can still make a killing on the stock market, but bank and savings accounts are now useless, as are all forms of safe investments, including the gilts that older investors and pension funds are advised to stock up on. When the music eventually stops and our great house price boom peters out, Britain’s wealth-owning majority will suddenly realise how fiendishly hard it has become to make money from money. Panic and anger will set in, and there is nothing scarier than the middle classes on the warpath.

In the past, there were three ways to ruin those whom Marxists would disparagingly describe as petit bourgeois savers; in all cases, the outcome was chaos and social dislocation. One was hyperinflation – as in Latin American banana republics. Another was expropriation through downright theft or oppressive taxation of wealth, interest and inheritance. The third was mass retail banking bankruptcies, as after the 1929 crash, a horror we only just avoided in 2008-09. We can now add a fourth threat: permanently negative interest rates that make it much harder to preserve, let alone to grow, capital, and which put home-ownership and retirement beyond the reach of all but the wealthiest. The fallout won’t be as dramatic; there won’t be a revolution, merely a gradual and dangerous rise in resentment.

“There is nothing scarier than the middle classes on the warpath”

John Maynard Keynes would have been delighted: writing in 1936, he called for the “euthanasia of the rentiers”, the destruction of those who rely on interest, dividends and rents for their income. Keynes thought that this would save capitalism; in reality, his recipe would have destroyed it.

There are plenty of downsides to super-low interest rates. They are making it hard for banks to make a profit, threatening the supply of loans. They are damaging pension and insurance companies, leading to likely hikes in premiums. They have created a massive black hole at the heart of residual final salary pension schemes, threatening the retirement prospects of millions. The funds are making less money from their investments, and their future liabilities are worth more. One reason for the UK’s relatively low level of business investment is that companies are forced to spend so much plugging these holes, rather than on factories or machines.

“We're going to have an impaired financial system. It means fewer long-term financial services that are credible for society... Central banks are like doctors, they never walk away from the patient; they will continue prescribing”
Mohamed El-Erian of Allianz on negative interest rates

The deficits are so large that the Government may need to allow such funds to pay out less in future, perhaps adopting a softer measure of inflation for indexed pensions. There are no easy solutions to the crisis facing Britain’s ownership society. The fundamental problem is that interest rates have fallen too much all over the world. Some of this has been caused by genuine macroeconomic forces. But governments and central banks are also to blame: their obsession with pushing down the cost of borrowing has led to a monumental mispricing of money.

It may be, in the end, that we will all have to contribute twice as much, saving up to 20 per cent of our incomes across our working life, while spending less on luxuries and retiring even later. But Theresa May and Philip Hammond must also take a long, hard look at our monetary policy. Free credit comes at a crippling, hidden cost.

http://www.telegraph.co.uk/news/2016/08/24/rock-bottom-interest-rates-are-tearing-up-britains-steady-invest/

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'When the music eventually stops and our great house price boom peters out, Britain’s wealth-owning majority will suddenly realise how fiendishly hard it has become to make money from money. Panic and anger will set in, and there is nothing scarier than the middle classes on the warpath.'

Nail head hit.

Edit to add:Heath clearly knows what's coming.As do most of the City types I suspect.

Edited by Sancho Panza

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So what exactly will the middle class do? Vote for Corbyn? Wait for proper tory leadership? Or just think how clever they have been by buying a house. Middle class on the war path, waving their copies of the Telegraph .... oooooh so scary, what can they really do?

Take an en masse gap year?

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Throughout history the middle class have been the ones drawing up the death-lists, carrying out the management of revolutions, planning the execution time-tables etc.

There can be no revolution without the active involvement and leadership of the middle class.

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Don't really rate Heath, he is a BTL apologist. Collecting a dividend on a share I or anyone else can buy is totally different to collecting rent on a BTL and depriving people of housing. basic stuff imo.

His beloved free market does not exist in housing yet he happily lumps BTL under this flag. Disgraceful sleight of hand.

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On a similar theme quite enjoyed this article:
George Osborne’s gone, thank God. So why’s Mark Carney still around? JAMES DELINGPOLE

http://www.spectator.co.uk/2016/08/george-osbornes-gone-thank-god-so-whys-mark-carney-still-around/

"Policies like money-printing (quantitative easing), ultra-low (or even negative) interest rates and the mooted and inevitable ‘helicopter money’, are designed to keep asset prices (housing, shares, etc) high and government borrowing cheap. Which is great news if you’re wealthy already or you’re a chancellor with a reputation for austerity who needs discreetly to conjure up more cash with which to bribe the electorate. But apart from creating bubbles, profligacy and cronyism, it also leads to the kind of spectacular, disgusting inequality which may, ironically, have contributed to the popular revolt of the Brexit vote."

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It is pretty much all common sense, and I have been angry at super-low rate setting ever since. It would have made more sense to let rates rip and deprive boomer pensioners on fixed rate pension schemes via wage inflation for the working. Anyway, it will not end well, that is sure.

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Don't really rate Heath, he is a BTL apologist. Collecting a dividend on a share I or anyone else can buy is totally different to collecting rent on a BTL and depriving people of housing. basic stuff imo.

His beloved free market does not exist in housing yet he happily lumps BTL under this flag. Disgraceful sleight of hand.

+1

Since 1979 we've witnessed the privatisation, globalisation and deregulation of just about everything except housing! The author is a complete and utter jackass.

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'When the music eventually stops and our great house price boom peters out, Britain’s wealth-owning majority will suddenly realise how fiendishly hard it has become to make money from money. Panic and anger will set in, and there is nothing scarier than the middle classes on the warpath.'

On a slightly different tack, who actually decreed there was a god given right to make money from money.

Perhaps if money gradually decayed people would make better use of it.

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On a slightly different tack, who actually decreed there was a god given right to make money from money.

Perhaps if money gradually decayed people would make better use of it.

When money was gold and silver, you would have to pay back more than what you had borrowed to make up for the credit risk you posed. Edited by Silverfinger

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If the govt continue to hose money at the unproductive then the economy will remain weak and low interest rates will remain. Compensating (unproductive) pensioners with top ups for their poor cash returns just makes things worse.

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On a slightly different tack, who actually decreed there was a god given right to make money from money.

I'll accept no yield without risk in exchange for cheap housing. Its having the former without the latter thats the real killer as there is no opportunity for most people to build a cash reserve if housing is soaking up everyone's earnings.

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On a similar theme quite enjoyed this article:

George Osbornes gone, thank God. So whys Mark Carney still around? JAMES DELINGPOLE

http://www.spectator.co.uk/2016/08/george-osbornes-gone-thank-god-so-whys-mark-carney-still-around/

"Policies like money-printing (quantitative easing), ultra-low (or even negative) interest rates and the mooted and inevitable helicopter money, are designed to keep asset prices (housing, shares, etc) high and government borrowing cheap. Which is great news if youre wealthy already or youre a chancellor with a reputation for austerity who needs discreetly to conjure up more cash with which to bribe the electorate. But apart from creating bubbles, profligacy and cronyism, it also leads to the kind of spectacular, disgusting inequality which may, ironically, have contributed to the popular revolt of the Brexit vote."

I suspect that getting rid of Mark Carney is a bit like when Liverpool wanted rid of a Brendan Rogers. Simply that it would be counterproductive until a better alternative was available. Also destabilising when the rest of the government was in flux.

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Risk is precisely directly proportional to the yield.

LOL... I couldn't have come up with a more sarcastic gybe at the market fundamentalists' quip that "the price is always right."

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If capitalism wants to eat itself and go into a death spiral, that's OK with me. Similarly, if governments want to tear up the social contract of hard work and thrift paying off - let them reap the whirlwind. Once the populace properly wakes up, it'll be hilarious to watch. Given how much the likes of Farage and Corbyn seemingly upsets the powers that be, I can't wait.

For all of this horror stuff about savings etc though, the super rich still seem to be getting richer. Strange that.It's almost like this doom and gloom was being used to initiate some massive wealth transfer from the poor and doing OK to the super wealthy...

Edited by StainlessSteelCat

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On a slightly different tack, who actually decreed there was a god given right to make money from money.

Perhaps if money gradually decayed people would make better use of it.

In markets, no one decrees anything. That's the point.

There are two reasons, the economists think, that money makes money. Firstly, "time value of money". People seem, understandably IMO, to value money today more highly than money in a year's time. If you have £100 and lend it to Joe Bloggs, most people would want to see £102 returned in a year's time as pure compensation for losing the liquidity for a year - even if the payback is 100% guaranteed.

The second reason is compensation for risk. In reality, there's no guarantee you'll get anything back - so most people demand a promise of a little more to be paid back to cover that risk. The value of that risk compensation will vary depending on the risk - so lending to a sound fellow with a track record of repayment and loads of assets of his own would see a lower risk premium than lending to some fly by night chancer you've only just met down the pub.

Those are the economic theories. But there's no decree - everyone is able to strike whatever bargains they fancy. And I'm sure there are some people who, for whatever reasons, lend a tenner but ask only for a fiver to be repayed. It's their money, after all and they can do as they wish - spend it on Cheese Strings and prostitutes or lend at whatever rates they fancy. But at a population level, the tendency for people to demand the time value of money and to be compensated for risk show through on the average. Hence the popular phrase "money makes money".

And money, well paper money, does decay. Cash is an investment that is guaranteed to lose you money. Hence why people are incentivised to lend it and see the returns outlined above. This is good for an economy as lending means business can grow, people can be employed, etc, etc.

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So what exactly will the middle class do?

The nuclear option is for the middle classes to do nothing.

It's the middle class that keep "the system" functional. Not just through the roles they play in management, in professions, in government but also via their central function as the financial beasts of burden who pay the taxes. The pooe don't pay tax. The rich are few in number and to varying degrees tax is optional (they can always take the bus t'Malta, for example). So it's the middle classes who keep the whole edifice together both through their jobs and their self assessment cheques.

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The nuclear option is for the middle classes to do nothing.

It's the middle class that keep "the system" functional. Not just through the roles they play in management, in professions, in government but also via their central function as the financial beasts of burden who pay the taxes. The pooe don't pay tax. The rich are few in number and to varying degrees tax is optional (they can always take the bus t'Malta, for example). So it's the middle classes who keep the whole edifice together both through their jobs and their self assessment cheques.

Exactly. Although I've come from poverty class, I would probably be considered middle class now. However, I've pulled away from consumer lifestyle and debt. House is paid for so no mortgage. Other costs are being minimised and zero debt elsewhere. And when faced with the chance of growing my business to put myself into the higher rates of tax, I decided to pull back and spend more of my free time on holidays/working towards tax minimisation through pension contributions etc.

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Capitalism? He means materialism and rentierism (with a nice bit of stateism thrown in for good measure) surely?

We're about as capitalist as the Soviet Union was really communist.

Strip out house prices and consider debt and let us see how much capital people really have.

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Does make one wonder what today's retired or nearly retired middle classes would do if they had their time again. Seems to me there is a huge danger which is not really talked about, entirely absent from the debates about work etc, which is the cost of over providing for your retirement.

I see lots of retirees, recently so in many cases (mostly parents of friends as I am in my 30s) many of whom appear to have more money than they know what to do with, and in many cases few interests or hobbies, stripped away during a period where they over worked and were handsomely rewarded for it.

If you are into empire building then there is an incentive to slave away but for many people the opportunities are not there anymore so the most efficient means of reducing the tax take is to pay yourself as much free time, tax free, as you can.

The state only cares about money so the debate is framed around provision, but a more individualistic approach would be based on healthy lifespan away from work in my view.

Edited and added to, apologies.

Edited by The Knimbies who say No

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Exactly. Although I've come from poverty class, I would probably be considered middle class now. However, I've pulled away from consumer lifestyle and debt. House is paid for so no mortgage. Other costs are being minimised and zero debt elsewhere. And when faced with the chance of growing my business to put myself into the higher rates of tax, I decided to pull back and spend more of my free time on holidays/working towards tax minimisation through pension contributions etc.

Just what i did.Sick of paying so much tax so set up my own small business.I only make the tax allowance each year,so probably work 12 hours a week.House paid and costs very low.I pretty much retired at 41.My partner is working but only 26 hours a week,she is slightly in to tax so she puts the extra into a SIPP to bring it down to zero.We went from paying roughly £40k a year tax to about £3k now (council tax,fuel duty,tiny amount of VAT).

The problem is most of the middle class and the working working class cant help but want the holiday,the lease car,the shiny new kitchen,so they are lambs to the slaughter.I know plenty of people on benefits who have escaped the rat race,but hardly any through saving,lifestyle change.High house prices and the death of DB pensions are designed to embed that fact as well of course.

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