Posts Tagged ‘baby boomers’

The thing about Japan is that it may have high debts – very high debts actually – but it has lots of savings too.

It’s classic stuff. Households saved rather a lot. This meant lack of demand across the economy, and the economy played with recession for nigh on two decades. But you might ask: where did all those savings go? Why they went into government bonds – or a lot of them did. Therefore, goes the argument, does it not make sense for Japan’s government to borrow this money which its people are so keen to lend to it, and spend it on their behalf?

This is what has happened. Some say it hasn’t happened enough, that Japan’s government has been too slow to borrow and spend this money, but even so, Japan’s public debt right now is around 250 per cent of GDP. That’s rather a lot.

Its new Prime Minister, Shinzo Abe (to be precise he is sort of new, for Mr Abe has been Prime Minister before), has ideas.

He wants to see Japan’s central bank print a lot more money. It has engaged in QE in the past, but this time he wants to see QE big time, and has pretty such said to the country’s independent central bank: ’You’d better independently decide to agree with me, or you might lose your independence’.

He also wants to see a lot more fiscal stimulus and as an aside (it’s an important aside, but not relevant to this article) wants to ditch Japan’s pacifist constitution and play hardball with China. (As another irrelevant but important aside, that worries some people.)

There are snags.

Snag number one is that Japan still has lots of zombies, and could well benefit from some creative destruction. (As a kind of aside of an aside: have you seen the drubbing experienced by Japan’s consumer electronics industry at the hands of Apple, Samsung and co?)

There is another snag. And that is savings.

For alas Japan’s households are not saving like they used to. Its saving ratio is now down to 2 per cent; why it’s higher than that in the UK. Some fear that as more of Japan’s public debt is funded externally, interest rates will rise.

So what happens if Japan’s households stop saving, but public debt keeps rising? Oh and what happens if Japans’ population shrinks at the same time?  Let’s put it this way – if Japan’s population shrinks, GDP per capita stays put and public debt does not fall, then Japan‘s public debt to GDP per capita will start looking pretty scary.

There is another point. Japan’s demographics are like those in the West, but just further advanced.

At stage one, many Japanese looked at their forthcoming retirement and said: ’Cripes, I need to save more’. So they did, hence the rise in Japan’s saving.

The West, including the UK, is at that stage now.

But Japan may have passed to stage two. Now big chunks of its population are no longer worrying about how they will fund their retirement because they are retired. This means they are now drawing down savings, hence the fall in savings ratios.

In the UK the baby boomers are just beginning to retire. The process of their retirement will last around 20 years. If you want to know what that means for the economy, look at Japan.

©2012 Investment and Business News.

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Let’s say you get paid on the last day of the month, but what happens if your pay doesn’t arrive? You check your bank account and it’s not there, no pay. How long will you be able to last?

According to research from HSBC, no less than 8 million households would run out of money before the weekend.

In fact, HSBC reckons that 31 per cent of all UK households have less than £250 set aside as a financial safety net. Apparently, the recommended minimum ‘salary cushion’ is three months’ average monthly take-home pay, which is £5,756.20.

So there you have it; we are not saving enough. We must save more.

On this theme, a report was issued last week from an organised called Save Our Savers. Here is the report if you want to read it: it’s called ‘What’s wrong with the economy’. The thing is the report said a lot that was right. It pointed to the huge level of debt in the UK, and referred to a zombie economy, one in which failing businesses and business practises are saved by the government, meaning we can never move on. It is just that the report’s conclusion was wrong.

This is what it said: “Savings are being undermined. But savings provide the investment funds without which an economy is incapable of long-term sustained growth. Low interest rates and QE do not produce growth but distort the economy, devalue pensions and annuities and create inflation.”

But the report’s authors miss the point. While it is true that some sectors of the UK are in debt – way too much debt – other sectors are saving too much. According to a report from Ernst and Young published earlier this year, corporates themselves are sitting on a cash pile of a £754 billion.

According to a survey from YouGov, when asked how they would spend a windfall equivalent to one month’s income, 84 per cent of households said they would save it, or use it to pay down debts (33.7 per cent), while only 16 per cent said they would spend it.

You can understand why households want to do that. The truth is that despite interest rates being at record lows, households want to save more.

Zoom out, and take a look at the big picture. Factor in the retirement of the baby boomers. Just to remind you, the 1990s was a good time to retire because equities had performed so well over the previous couple of decades. Most of the noughties were a good time to retire for those who owned their home because of the rise in house prices.

But we are set to see the largest scale of retirement ever in the history of this country. If the odd baby boomer downsizes and funds his or her retirement from the equity in his or her home, that may be fine. But when this occurs en masse, the result won’t be so pretty.

Baby boomers need to save more, and despite low interest rates, will save more.

But for UK plc this will be a disaster.

As savings rise, spending will fall, GDP will contract, and debt to GDP will rise even further.

Returning to the HSBC report,  no doubt UK households would feel a lot happier if they had savings equal to three months’ pay in their bank account. But if this were to happen too quickly, say over the next two years; if households everywhere were try to build up savings very rapidly, the result may well be a much deeper recession than the one we just pulled out of. Job losses would mount, and savings worth three months’ pay wouldn’t be enough.

What would make sense for the economy at large, however, is for a kind of national insurance, in which we put, say, 12 per cent of our pay into a national scheme, and those who lose their jobs, can dig into this national savings scheme. It is just that some might say such a system already exists, albeit many want to be rid of it.

And finally, as for the argument that QE and bank bail-outs are bad for savers, just remember if banks had not been bailed out, the result would have been for banks across the world to go under. The only way savers have avoided losing their savings was deposit protection schemes. In other words, savers would have expected to have been bailed out by governments, which in turn would have led to even greater government debt.

©2012 Investment and Business News.

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If you had read the ‘Sunday Times’ this weekend you could be forgiven for believing the UK is at last on the mend. The good old days are set to return. No more bust; lots more boom. Except –

Well, before we get to the ‘except’ part, let’s remind ourselves of the news that one just has to accept is good.

Employment hit its highest level ever in the three months to August, says the Office of National Statistics, and unemployment fell to 7.8 per cent during the same period, which is the lowest level since spring time 2011. Inflation is falling too, with the CPI rate going down from 2.5 per cent in August, to 2.2 per cent in September. Okay, with averages wages in the year to August rising by 1.7 per cent, the average worker was worse off, but the gap between inflation measured by this index and rising wages was the smallest since April 2010. And finally, if that isn’t enough good news for one day, other data out last week revealed a good month for the High Street, with retail sales rising by 0.6 per cent in September on the month before. Apparently, total sales were at their joint highest ever in the month.


There are several problems, but here is the big one – at least it’s a theory, and it’s a view not recognised by economists.

Saving is the new black. Saving has become fashionable. During the boom getting into debt was seen by some as a form of machismo, but now saving is the all the rage. That is partly why interest rates are so low. The Bank of England reckons we are saving too much, so its cuts rates in order to encourage less saving and more borrowing.

There are several reasons for this rise in the popularity of savings. During the 1990s we enjoyed money for nothing as stock markets boomed. Modest savings put into a pension fund rose at a pace that was completely off the charts in comparison with rising output. Who needed to save much, when most of us appeared to be guaranteed a prosperous retirement regardless?

The stock markets crashed, and the FTSE 100 peaked on December 30 1999, and it still languishes around 1,000 points below that level. But then house prices surged. Who needs to save when year in, year out our homes rise in value at a rate almost as high as our annual salary?

The retirement of the baby boomers always was a problem in the making, but the snag is that we had a finance crisis before this generation got around to retiring, making a bad problem a good deal more serious.

In 2008, many economists were missing the possibility that saving rates may start to rise. They are missing it again.

In Q2 this year income per household rose by an average of £69 (after allowing for inflation), yet spending fell. Why? Because the extra money was saved, lifting the savings ratio from 6.0 per cent in Q1 to 6.7 per cent. Some economists say that as inflation falls below increases in average wages, spending will start to increase, which will lift the UK out of recession into sustainable growth.  Maybe, but it is equally possible the difference will just be saved as panicking baby boomers fret about how they will fund their old age.

What is the solution? There are limited answers, but one is for the government to take the money UK individuals are so keen to lend to it, and use it to fund investment in public infrastructure and, even more importantly, in providing funding for budding entrepreneurs.

©2012 Investment and Business News.

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The latest data from the Nationwide, Hometrack and Halifax on UK house prices was out last week. And for the second time in three months they were unanimous. They all had month on month house prices falling: Hometrack by 0.1 per cent, Nationwide by 0.4 per cent, and the Halifax index recorded a 0.4 per cent drop in September. It has been frustrating over the last couple of years observing these housing surveys. Each month they have seemed to contradict each other. But all three reported falls in July, and in August two of the three reported falls (Nationwide had prices rising), and in September this rare agreement thing has happened again.

Perhaps more to the point, on an annual basis all three had prices falling too: Hometrack by 0.5 per cent, Nationwide by 1.4 per cent and Halifax by 1.2 per cent.

Mind you, they might have prices falling but house prices are not exactly crashing.

Meanwhile, politicians are busy trying to dream up ideas to try to get prices up. Nick Clegg wants to use money sitting in pension schemes to fund deposits, while Ed Balls has mooted the idea of using income from licensing 4G to fund a cut in stamp duty.

But, as is their wont, while on one hand the government is trying to dream up ideas to kick start the property market – such as funding for lending – is the other hand is also busy coming up with ideas to derail the market. According to analysis from Morgan Stanley, banks could be forced to find an extra £22bn in capital to fund changes to the way in which mortgages are risk weighted. The issue is complicated. Under the Basel rules, banks are required to hold a certain amount of capital. And under impending changes they will need to maintain 10 per cent capital ratios – other than mortgages, that is. Mortgages are seen as different, and carry a much lower risk rating than other asset classes. And who chooses this risk rating? Why the banks themselves, of course. It turns out that some banks have put such a low risk rating on their mortgage assets that, in fact, they can achieve leverage of near 100 to one – or one per cent capital.

It is not difficult to understand why the regulator is worried about this. This may seem like a radical concept, but some might say that it should not be down to the banks to risk assess their own assets.

So far then it all makes sense. Banks should not be allowed to risk assess their assets, and should not be allowed leverage of around 100:1 on some mortgage debt. It is just that if the regulators’ perfectly reasonable reservations were taken into account, bank mortgage lending might crash faster than you can say ‘property snakes and ladders’.

And that brings us to the baby boomers – you know those people who are due to swell the ranks of the retired to record levels. According to research from Lloyds Bank, just over half (51 per cent) of potential home movers are looking to ‘downsize’ within the next three years, compared to just a fifth (22 per cent) looking to trade up to a larger property. It is not that rare for home owners reaching retirement to downsize. The Lloyds TSB report, however, found that the reasons for downsizing have broadened in these tough economic times. Whilst 59 per cent want to move to a smaller property that is better suited to their circumstances, a third of potential downsizers would like to move to a smaller property to help reduce bills. Almost two fifths would like to free up equity in the property, and almost one in three said they want to downsize to help support retirement plans. A fifth of those considering downsizing are looking to trade down earlier than expected, with the majority citing financial concerns as the key driver.

So there you have it. The government can try to nudge us all into saving more, but as the UK enters the demographic moment of dread – the retirement of baby boomers – we are set to see a rush of people downsizing, creating an influx of supply onto the property market.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here