Posts Tagged ‘Government’

Uk Population

Here’s a chart for the UK population as of now with a line for the official projections 10 years hence.

As a tool for prediction this chart can be quite powerful; pictures speak a lot louder than words.  The way to use the chart is to imagine the blue and red lines being pulled across the page as we all move inexorably towards God’s waiting room on the right.

We’ll be pulled past 2 marks on the way. The left block shows where young people (16 – 24) might find themselves becoming employed and paying taxes – remember that 20% don’t though so the ‘new workers’ line is copied and shifted lower.

The next mark, for the retiring age for men, shows an ever increasing rate of retirees, after a very steep previous 10 years there will be another 7 million arriving during our 10 year look into the future. You might notice an almost mirror image of the lowered ‘new workers’ line but the unemployed are living off the state too, so there is another 1 million to be added to the line on the right if we want to balance workers vs. state supported.

Unfortunately, because the leading edge of retirees points up and the leading edge of new workers points down, things just get worse. While this demonstrates the ex-growth nature of the economy it is reassuring to compare the huge block of substantially employed people and the much smaller wedge shaped block of the already retired.

So it looks a lot less gloomy right now but as our 10 year view unfolds it builds to uncomfortable levels all the way up to and past the baby boomer’s peak in 15 years.

Note how the red projection line slumps after the retirement age. I’d like to think that this is not an early death syndrome but rather an indication that retired people like to head off to countries with blue skies and sunshine. As we have seen, the retiree level is really lower than the new workers level and that’s a significant first; it just gets progressively worse after this as the retirees line builds even steeper and the workers line pulls across a dip. Incidentally there are dips because WW1 and WW2 were one breeding cycle apart (27 years) and the resulting post war pulses have yet to die down.

If you are about 50 now you are at the population peak age. Births subsequently declined for 13 consecutive years, and that was another first, signalling the end of centuries of perpetual population growth. Because accounting practices, pension arrangements, government finance, and much more, all worked because growth conveniently forgave all sorts of silly thinking, there were, and still are, bound to be some serious consequences.  The way the world works has changed forever.

The workings of pension schemes are of particular interest. With perpetual growth there was always a bigger pool of funds to pay out the liabilities so nobody needed to be particularly efficient. That is no longer the case and you can be sure there will be a raft of pension scheme failures.

With such a huge pension liability arriving over the next 15 years the pension funds have to prepare by switching out of equities and into bonds and then progressively the bonds are then sold as net payouts increase. Logically we might expect weak equities and strong bonds eventually followed by weak bonds.  When the bond sell-off stage arrives one wonders how the Government finances will work – who will they sell bonds to then?

An ex growth world has some implications for equities. Shareholders have got used to accepting lower yields in exchange for corporate growth. As soon as the growth stops then a proper yield will be required. As an example a company yielding 2% and going ex-growth might have to yield 4% to remain attractive. So that means the share price would have to halve!  How likely is this scenario?

Well take a supermarket for example. As a footfall company, whose profits are directly linked to the traffic through the door, the impact of an ex-growth population will be severe. Actually the population is not quite ex-growth, it is just slowing down, but even so companies in this category are subject to massive falls as soon as their growth is seen to end. Just to be safe, sell all your growth stocks?

You can see why there was a property boom over recent decades as the only way the available housing stock grew was via owners dying or new houses being built. Looking back it seems so obvious that fewer old people (from a previously smaller population) supplying demand from a much bigger block of house seekers would result in big price rises.

The chart is giving a strong indication of a repeat performance. Note how there is a bulge moving into the first time buyers age groups and then compare that to the lower height of the chart where old people might shuffle off. Demand will clearly outstrip supply for a while and looking forward 10 years this is increased by immigration as can be seen by the way the bulge actually grows as it moves across. The low end of the housing market looks like a good bet and you can expect a rally in the house builders too.

All this is good for the economy with an added twist. The baby boomers already have a house and yet they are about to inherit their parents houses which can easily be sold on at today’s fairly substantial prices; an added boost to the economy for several years to come.

This last point reinforces the idea that retiring couples with windfall cash will head for the sun. That’s bullish for overseas holiday homes so get in while they are depressed.

Any negatives? Well the way the dotted red line sits above the blue line has implications for NHS services over the next 10 years. It doesn’t look much but in percentage terms there is a significant increase with a detrimental age bias to account for too. An already stretched service has a crisis looming.

The big bulge in the new adults group will all be driving cars for the first time; good for the motor industry but bad for traffic jams.

Conclusions:  No great dramas for the next 10 years but this is the lull before the storm. After 15 years the peak of the baby boomers will be at retirement age and from then on it is hard to see how the books stack up unless the, already brimming, country is filled with more foreigners.

The houses to buyers ratio is likely to top out, leading to a sustained bear market in house prices. The stock market will slump horribly as it goes absolutely ex-growth and the pension funds go into net draw down.  The Government will find it hard to fund the state pension burden and increased demands on public services. Borrowing to bridge the gap will be hard as traditional lenders, in the net draw-down scenario, have no need to buy bonds. Interest rates may well climb as a result and then the National debt financing costs spiral up. Pay more, borrow more, pay higher; sounds familiar.

A UK Government default before 2028?  Not so hard to imagine is it?

Data – The Office for National Statistics

Opinion – Patrick O’Connormist


It’s a bit odd isn’t it? How can you reduce debt by spending more? That great raconteur of our times George Osborne likes to point out the evident ridiculousness of such an idea. With that cheeky grin of his, he says: “I don’t believe you can cut debt by spending more.”

And yet, despite the silliness of the very suggestion, UK debt is not falling. It is not like that in the US, however, where the government has been far more Keynesian in its approach.

The US deficit this year is expected to be $642 billion, or so estimates the Congressional Budget Office. To put that in context, last year the deficit was $1.1 trillion. It will, in fact, be the first time since 2008 that the US deficit is less than $1 trillion. And, by the way, not so long ago the Congressional Budget Office was projecting a deficit of almost $200 billion more than that.

Looking forward, the deficit is expected to fall even further, dropping to $378 billion in 2015.

The good news does not stop there, however. US household debt has fallen from $12.7 trillion in 2008, to $11.2 trillion at the end of last year. In fact, according to IMF data, US household debt to income has fallen from a ratio of 1.3 in the mid-noughties to around 1.05. In fact, the ratio is now higher in the Eurozone.

Back to the public deficit, and two main factors explain the fall. The expiry of George Dubya Bush’s payroll tax credit means more income is coming in. Recovering US housing prices mean the US government expects a windfall from Fannie Mae and Freddie Mac.

You would expect cheers over the news in the US, wouldn’t you? Well no doubt Mr Obama is cheering, but oddly economists and politicians on the left and right are fretting.

On the right they don’t like it. They fear that they are losing the moral high ground. How can they demand tax and spending cuts to get debt under control when it is falling so fast anyway? The truth is that the arch Austerians have a philosophical problem with any form of government spending except on perhaps on law, order and defence. They want to see cuts, whatever is happening to debt.

On the left, they don’t like it because they think the US needs more government spending; it needs more Keynesian policies, and the fact that debt is falling is symptomatic of a lack of government stimulus.

In the longer term two problems remain.

By the mid-2020s government debt is expected to rise again as the baby boomer generation retires – this problem can be overcome, however, by raising the retirement age.

A more serious challenge may relate to the burgeoning level of student debt. Nobel Laureate Joseph Stligtz reckons this is the next debt crisis in waiting. See: Student Debt and the Crushing of the American Dream

© Investment & Business News 2013

What is better: boom and bust or gradual?

In the US it was boom time in the noughties. Real house prices soared some 40 per cent between 2000 and 2006. Household debt leapt from around 90 per cent of income in 2000 to around 130 per cent in 2006.

In Europe, things were more gradual. Real house prices peaked in 2007 when they were around 30 per cent up on the 2000 level. Household debt to income rose from about 80 per cent of income in 2000 to around 108 per cent by 2012.

It is just that in the US, real house prices crashed, falling back to their 2000 level by around 2012, and have been slowly recovering since then. Household debt to income dropped from 130 or so per cent to around 106 today.

In the euro area, house prices have now fallen back, but are still some 18 per cent over peak.

In other words, US household debt to income is now lower than in Europe, and house prices appear to be on the road to a slow recovery.

In Europe house prices probably have further to fall and debt to income is looking worrisome. The US had a very nasty recession circa 2008, but is now recovering. The euro area seems stuck in depression.

© Investment & Business News 2013


Of course the headlines may be a little misleading. Union members may look at it and say: “We never went away.” But you know what it means. Time was when unions seemed to be holding the real power in the UK, and their control was too much. In the 1970s Ted Heath’s government went to the electorate and asked the simple question: ‘Who runs the country: the government or the unions?’ Since Heath lost the election one assumes the country chose the unions. There then followed a period in which the UK went into very sharp decline. Then Thatcher was elected, and while the unions were not exactly destroyed, it did seem as though they were disembowelled. And from that moment on unions were relegated to the back seat.

These days the old union ways seem to be so very, well…, so very post war years, so old fashioned, so completely inappropriate in today’s age. And maybe that is right. But ask yourself this question: Why is it that when the union power was at its height, the UK economy enjoyed its best ever 25 year period of growth?

It may be a coincidence, of course, correlation does not mean causation. If there are a lot of doctors in an area where there has been a disease outbreak, it does not mean the doctors caused the disease. Maybe the growth we enjoyed in the post war years led to the rise in unions. Maybe unions were a luxury during this era that the country could afford, and when it could no longer afford them, it elected Thatcher.

But here is a controversial idea for you. For a country to grow on the back of internal demand it needs wages to rise; it needs its workforce to feel confident. Under certain circumstances – note that the following statement does not apply all the time, just occasionally – the country’s best interests are served by ceding more power to the work force, and taking power from employers.

Take wages. With good reason, employers want the wage bill to be as low as possible. Some might reason that in order to attract the best staff a company needs to pay more, but the principle is right: the lower the cost, the better for companies. But apply that policy across the economy and the result can be disastrous. The economy needs wages to rise in order to enjoy sustainable rises in demand.

Take two pieces of news that have broken over the last few days. According to the ‘FT’, government ministers are considering freezing or even reducing the minimum wage. Their logic is simple: reduce the minimum wage, and employers will take on more staff. But think about that. If the minimum wage is cut, won’t that mean some workers will see their wage fall, and won’t that mean less demand? It surely depends on the circumstances of a particular moment, on the nature of the labour market, and on productivity. Economic theory says that a fall in the minimum wage will led to higher employment, but this does rather depend on what an economist calls the marginal productivity of labour, and how sharply the curve representing marginal productivity of labour is falling.

Right now, the UK’s main problem is not employment – in fact employment is at record levels – rather the UK’s main challenge is productivity. How will a cut in the minimum wage help that?

Then take flexibility of labour. According to the 2011 Workplace Employment Relations Study published earlier this year, the proportion of workers on what is called zero hours contracts has risen from 11 per cent in 2004 to 23 per cent in 2011. That means more employers are taking on staff, but only making use of them from time to time.

Once again, we can see the benefits to employers, but step back and look at the macro economy and the picture looks different. When that many workers are on uncertain job contracts, how can they possibly justify spending more money than they absolutely need to spend?

A concept described here before is the paradox of flexibility and, related to that, the paradox of toil. The two theories suggest that under certain circumstances – namely with zero interest rates and a higher output gap – if we all start working harder, or the labour market becomes more flexible the result can be higher unemployment.

This is a bigger problem that it seems. New technology has changed the nature of the labour market. Power has drifted from workers, and the unions who once represented them, to employers.

In a world of increasing automation, and highly competitive global labour markets, the balance of power is likely to shift even further in favour of employers. Paradoxically, from a macro point of view, and very much from the point of view of the collective interests of employers, it may be well be that we need to find ways to re-redress that balance.

©2013 Investment and Business News.

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