I had an interesting discussion today with the excellent libertarian blogger David Friedman prompted by a USA Today interview with Mohamed El-Erian, the CEO of Pimco. El-Erian was stressing his idea of the New Normal, “which predicts a post-financial-crisis world of lower investment returns, slower economic growth and higher odds of another out-of-the-blue financial shock. In short, a world in which the range of financial outcomes — and risk — is much wider than normal.”
David on Facebook commented: “Pimco’s CEO echoes what I have been saying for a while now: (1) cash is king; (2) asset returns will be negligible for the foreseeable future. You’ve been listening to me, right? You’ve liquidated your real estate holdings and are now renting, right? Right?”
And the edited exchange between us went thus:
Jamie Dettmer: “Actually, David, my old Cambridge contemporary doesn’t say anything of the sort. He does say there is too much home bias but it makes no sense to sell your property now in the troughs of the markets. Sure if you had investment property you should have sold long ago. Otherwise you sit tight — you have to live somewhere. Or rent your property out, if you are in a high-rent area and can go to a low-rent area for your needs. One thing that ordinary people make a mistake on is taking the advice of gurus like Mohamed. His clients are big corporations and high net-worth individuals. But I think he is right about the New Normal and that ordinary investors in particular should be careful of equities and look to emerging markets and foreign currency holdings. But should they sit on a lot of cash — more than, say, a year’s need? I am not so sure. In savings accounts and fixed bonds they are losing money when inflation and tax is taken into account — it maybe better, depending on personal circumstances, to pay the mortgage off or down. They would secure a better return.”
David Friedman: “Admittedly, his phrase “a lot of home bias” is ambiguous. I can see it being interpreted either as meaning too much money in one’s home or too much money invested in one’s home country. Which, in essence, is a distinction without a difference. So, I don’t see why you say he doesn’t say anything about home ownership.
But, generally, yes, the more equity one has in one’s home the more able one is to ride out rough economic storms. But, many people don’t have sufficient equity in their homes and so are teetering on the edge of bankruptcy. Better to liquidate one’s expensive, illiquid, and leveraged “investment” than to suffer the caprices of economic growth.
Finally, it’s not true that housing is a hedge against inflation.”
Jamie Dettmer: “No, my point about paying off or down on the mortgage wasn’t as a hedge against inflation as such. It was more that they are paying interest on their mortgage and by keeping lots of cash they are not getting a return on their savings to match or compensate what they are paying for their mortgage — at least over the long or even medium term. I agree that if someone is struggling and is over-leveraged on their home and they can get a sale, them they are better advised to escape. His comment about home bias is highly ambiguous — does he mean investing at home or being invested in a home? Even if it is the latter, then personal circumstances kick in. Last, it also comes down to where your property is. The US has a national housing market but with significant variations. I am reasonably content with having property in the DC-Baltimore metro area — but I would not be sitting comfortably if my property was in Enid,OK, say. But as I get older there are two things I am fairly sure about — taxes and death! Wow, that’s a bit depressing — think I need another espresso.”
David Friedman: “But, if we assume that he means US investors are over-invested in their home country, and we further make the assumption that most people’s largest investment is in their house, then it follows that most people would be better off liquidating their real estate investment and investing that cash abroad….”
Jamie Dettmer: “That might be. But he also notes that you should avoid big risks with equities and that things are going to be topsy-turvy and that people should invest in what they know. Further, I do have most of my cash in foreign currencies but I can find no really worthwhile fixed bond or savings account that would not have me losing when tax is taken into account. Standard Chartered offers an offshore fixed bond of 4.5 percent over a year. Others at the 4 percent mark require the bond to run for three to five years.”
David Friedman: ‘Well, it seems to me that what he’s really talking about here is that one should diversify across asset classes, and make that diversification international. Which is fine, as far as it goes, but as you say, that’s not practical for the average investor. So, the average investor, who more likely than not, has most of his net worth concentrated in his house, is sort of screwed.
On the other hand, when financial crises hit, all correlations go to 1, as we saw in 2009.
I think the lesson here is that volatility is inherent to financial markets, and that no government can mitigate that volatility. Better, then, to make peace with volatility, than to try to defeat it. Admittedly, that’s a fatalistic view of finance, but there you have it.”
Jamie Dettmer: “Yea, I think that’s right. We are mere corks floating on the water.”
David Friedman: “The first person who figures out how to properly hedge portfolios 100% of the time is going to make trillions.”
Jamie Dettmer: “Well, several big investment banks thought they were doing just that — great while it lasted, for them. And they were encouraged by Brown (the end of boom and bust) and Greenspan.”
I ought to point out that the David Friedman in this exchange is not David D. Friedman.
Fine piece, by Mary Ann Sieghart in today’s Independent on baby-boomer selfishness but somewhat over harsh towards the middle aged and elderly by criticizing them for seeing property as a future pension. Of course, they did. The state pension in the UK is an insult and Brown & Co. made an outrageous raid on pension funds that reduced significantly the value of private pensions. Where else were they meant to turn but to property, if they wanted to stay out of penury in their old age?
Personal finance experts warn that a further rise in inflation in the UK would make savings accounts worthless….
The foreign tourists are still visiting Largo di Bolsena and you can still hear the voices on the south Tuscan beaches of affluent Brits, Americans and north Europeans but the visitor numbers are down significantly – and the voices sound a little less sure than when the credit spigots were flowing.
This year in Lazio the consequences of the crisis are more obvious with local businesses complaining their takings are down. Lazio has never been the tourist hotspot of Tuscany or Umbria, but in the late 1990s, and until the financial crisis hit a couple of years ago, the region enjoyed a steady increase in foreign visitors.
And why not the – the countryside is every bit as lovely as Umbria to the north and the Lazio villages are gems. The region enjoys a fine coast and one of Italy’s most unspoilt large lakes with fresh clear water and excellent fish. Slowly but surely property prices had risen, driven by foreigners unable to afford Tuscan prices and Romans seeking tranquility outside the city.
Although property prices have not declined in the last two years they have flattened now and locals appear to be getting more realistic when it comes to foreigners and what they will pay.
If one were to guess which north European countries are not doing badly in the crisis, spotting country number plates in Lazio wouldn’t be a bad way of making an assessment. Throughout the summer there have been few British, French or Belgian cars touring the lanes and roads of Lazio. Dutch and German have been far and away the most obvious. And for the first time in a decade of visiting or living in the region, I noticed some Czech and Polish cars.
But away from the tourists, life for my neighbors and other ordinary Italians has got seriously harder. A psychologist in the nearby town of Bagnoregio told me that many of her clients say they have cut down on the basics and now have only one major family meal a day. Supporting evidence of this would include the local restaurant owners complaining of much lighter traffic and of several local greengrocers telling me that their takings this year are down by about 40 percent.
With the political crisis intensifying – most Italians expect an early parliamentary election this autumn and the departure of Silvio Berlusconi – there is fear about the future in the air.
One thing that Italy does have going for it – and one not noticed by many of the financial commentators in the UK and the United States — is that while the country has been as free and easy as its south Mediterranean neighbors with government spending, Italy owes a large proportion of its debt to itself and not to foreigners – Italian savers have been propping up Italian government expenditure by buying government bonds. A downgrading by the credit agencies of Italy would have less effect than a downgrading on several other Europeans countries.
Italian economic performance is as ever hard to assess: about 30 percent, and maybe more, of the Italian economy is black, a testimony to traditional widespread tax evasion.
Even so, signs of private and public belt-tightening are clearer now. My local village of Celleno will shortly see the closing of the local school, a consequence of the decision to consolidate schools in the region.
The Daily Telegraph reports today on how South African authorities are considering the possibility of filing charges against Naomi Campbell and others for handling the gift the model received of uncut diamonds from alleged war criminal Charles Taylor. This follows her testimony and actress Mia Farrow’s at the former Liberian leader’s war crimes trial in The Hague.
The newspaper reports also that: “The model, who was born in Streatham, South East London, was pictured relaxing on holiday in Sardinia with boyfriend, Russian billionaire Vladimir Doronin, and actor Leonardo Di Caprio.
Di Caprio was the star of the film Blood Diamond, which rose awareness about the issue of diamonds being used to fund the conflict in Sierra Leone.”
Sadly some American politicians and talk show hosts have decided that the proposal to build a mosque two blocks from Ground Zero should be opposed — their arguments lean heavily on conflating Islam and Al Qaeda. My take on the Cordoba House debate was carried by the Daily Caller today.
If you took the U.K. Business Secretary Vince Cable at face value in his interview carried in yesterday’s Sunday Telegraph, you would think that he is unaware that Britain already has a graduated or “progressive” tax system where the wealthier pay a larger percentage of their earnings to the government than those less well off.
Take this remark from Cable yesterday in an interview full of his mantra about “fair taxes”: “What we are trying to inject into the argument is that if you become a very highly paid investment banker you finish up paying more than if you’ve gone off and become a voluntary worker or become a physicist in the National Physical Laboratory, or whatever. I want to make it progressive in that sense.”
The “it” in question is Cable’s graduate tax proposal that now seems worryingly to have secured some support from the Coalition’s David Willetts, the Universities Minister, who is now saying that more university finance should be met by graduates “after they are in well-paid jobs”.
Recommendations for how to cope with Britain’s universities funding crisis will soon be forthcoming from a review headed by Lord Browne. Despite disapproval from many Conservative MPs, the independent review into university finance was asked by the government to include Cable’ graduate tax idea in the mix of solutions to be considered. The review reports in the autumn.
What is strange when reading or listening to Cable explaining his graduate tax is that he seems less interested in finding a solution to Britain’s university funding crisis and more interested in using the opportunity it presents to increase taxes. The graduate tax is motivated by his wealth redistribution obsession – taxes, as far as he is concerned, are just not high enough.
In the interview, he avoids saying that directly but then how are we meant to interpret his position differently? When asked what he would consider success after five years as Business Secretary he responds: “a tax system that means people at the bottom end of the scale pay less and at the top end of the scale pay more.” Again, Britain already has such a system and will continue to have one with or without the graduate tax. The only conclusion is that Cable wants even higher taxes on the middle-class and the wealthy. So how high should they go?
The top rate of U.K. income tax stands at 50 percent. Impose a graduate tax of, say, 5 percent and will that be enough to satisfy the Coalition’s Business Secretary? Will that be enough redistribution? And how many Britons will emigrate as taxes rise?
What adds to the shock of the Sunday Telegraph interview is how uninterested Cable is with his ministerial portfolio as Business Secretary. Success in the post for him is to increase taxes – not to improve Britain’s corporate competitiveness, not research and development, not commercial or product innovation, not productivity and not even – at least in this interview – corporate governance. There is no discussion of industrial policy and what the right balance is between government intervention and the free market or whether government should avoid trying to pick winners and losers or instead focus on creating the right environment and circumstances for enterprise and the free market to flourish.
No, as far as this Business Secretary is concerned success will be determined by having imposed even higher taxes. One can only assume that Prime Minister David Cameron is prepared to let Cable talk as though he’s the Chancellor the Exchequer and Universities Minister and Business Secretary all rolled into one because to do otherwise will prompt a breach and a row in the Coalition government.
On some many levels, the graduate tax is a bad idea – as are higher taxes in general. On the fairness scale the tax doesn’t pass the smell test, as a study released today by the University and College Union shows. Yes, a graduate who went on to be a highly-paid investment banker would pay a ton of cash over his working lifetime for his degree but so would those lower down the income scale. A nurse, for example, could end up paying three or four times the actual cost of tuition fees and a doctor seven times. How is that equitable? The burden on the nurse, for example, is going to be heavy and much harder to cope with than the burden faced by the investment banker.
The graduate tax would have the inevitable consequence of encouraging a brain drain on the scale of what hit Britain in the 1970s and young Britons would have greater options and ease now of moving overseas and securing jobs because of their work rights in the European Union and because Asia and the developing World is competitively keen to secure talent and skills.
And those British graduates who did so and remained abroad would in effect get their higher education for free – they would never pay the graduate tax.
Second, the universities sector is now global and big business. As the Economist pointed out this week, the number of students enrolled outside their home country has trebled since 1980. America is the World leader in this global higher education market with Britain in second place. But that could change and the U.K. could lose its place easily because of increased and aggressive competition. There are now many continental universities that teach wholly or partly in English, American universities – and British ones – are opening more campuses overseas, in Europe, the Gulf and Asia.
The government not only has to ensure that British universities remain excellent and well funded in order to attract foreign students (who represent a revenue stream) but it will need in future to do everything it can encourage Britons to stay and study in the U.K. because increasingly they will have easier opportunities and maybe cheaper ones, if the proposed graduate tax is taken into account, to study for their first degrees, let alone their graduate ones, abroad.
That will certainly be the case for British students from wealthy or affluent families but the market is changing so fast that there will be a global education loans market developing quickly and available for students to tap into and free themselves from the constraints and restrictions imposed by individual countries and governments.
This is something that doesn’t seem to have occurred to Cable and others in the Coalition government. The brain drain could start involving Britons who have not even graduated yet. Britain is only an island when it comes to geography.
In the brave New One World we live in, education and the retaining of the best and brightest is going to determine the winners and losers when it comes to national economies. Instead of obsessing about wealth redistribution, the Coalition’s Business Secretary should be thinking along these lines and worrying about how to keep Britain competitive.
Steve Webb, Britain’s Pensions Minister, has told the Daily Telegraph that the Coalition is “making changes to reinvigorate a culture of saving”, all part of the government’s plan to raise the retirement age sooner than was expected. Apparently, new figures show that life expectancy in the U.K. is increasing more rapidly than was forecast even just four years ago when Labour drew up its plans to raise, more slowly than the Coalition, the retirement age.
But doesn’t there seem to be a colossal mismatch between what the Coalition has actually been doing on the savings front with all of its talk about reinvigorating a culture of saving?
Following on from Labour – and the same is happening on the other side of the Atlantic – interest rates are being kept so low that inflation is being allowed to eat away at savings.
And the Coalition has clobbered those who are trying to save for their retirements by increasing the Capital Gains Tax on the sale of second homes and shares.
As I noted in an earlier blog posting, about 250,000 British families own a second home and there are one million buy-to-let properties. Many who bought a second home are not wealthy but decided after the Brown government raided private pensions that the best way to help weather their retirements with a little bit of dignity was to invest in property. After all no one can live on the old age pensions the U.K. supplies – that is if they want to avoid penury. So Coalition is punishing the people who are trying to ensure that they are not an increasing charge on the State.
Not content with raising CGT, thousands of British holiday-home owners face losing a range of tax benefits under changes announced in the Budget. From April next year, holiday property landlords will no longer be able to write off “trading” losses from second homes against their tax bill. Capital allowances and capital gains benefits will also go. That will also disrupt the pension plans of tens of thousands of people – many of who based retirement plans on the current tax rules for holiday lets.
So much for reinvigorating a culture of saving! But it gets worse in the Coalition’s obvious undermining of savers. New so-called tax simplification rules being proposed by the Treasury are also going to hit savers and those close to retirement. As economics commentator Ian Cowie has pointed out: “Many members of final salary company or occupational pensions face big annual tax bills and other savers will be prevented from topping up their pensions in the year of their retirement, if the Treasury proceeds with its latest proposals for ‘tax simplification’.”
On top of that the increase in Value Added Tax will leave even less money available to save. When it comes to saving, Coalition deeds are totally at odds with Coalition words.
Part 2: The Silliness of Simon Heffer
On 30th July in a Daily Telegraph column ostensibly criticising Chancellor George Osborne for arguing that any Trident replacement should come out of Ministry of Defence funds we got these gems from Simon:
“We live in a world whose massive instability seems to have passed the Prime Minister by.”
“Dave (by this Simon means Prime Minister Cameron) so obsessed is he with image management that real issues of governance are pushed to the margins.”
“If there is the political will, the money can be found to maintain the defence of the realm. As I have argued before, end the overseas aid budget, which is a pointless, socialist waste of money at £7 billion a year.”
As I asked in an earlier blog posting on Simon, are these really the comments one expects from a serious commentator writing for a supposedly serious daily newspaper?
You may or may not agree with Cameron’s recent criticisms of Israel and Pakistan or think they should have been made so publicly (I for one think the Prime Minister was right in the content of what he said and how and where he made his remarks), but does anyone really believe that the Prime Minister is unaware that we live in a dangerous World – always have actually – and that instability from elsewhere threatens?
When commenting on the Coalition, Simon likes to press the idea that the Prime Minister is just a PR man focused on image solely. What he ignores is how radical this government is planning to be – and radical in a lot of Conservative/Libertarian ways. Nothing less than a radical reform of the state and the relationship between the state and the public is being aimed for, a point emphasized last week by the Economist, which noted that “it is shaping up to be an ambitious administration.”
According to Simon, the Prime Minister is not interested in “real issues of governance” but let’s look at the short record so far. The Coalition has introduced an austerity package aimed at ending the country’s fiscal deficit that could see most government departments facing cuts of up to 40 percent – it is a spending reduction package that shames other European governments who claim they too are intent on putting the public books in good order.
But the Coalition is not stopping there. Coalition ministers intend to seize the opportunity to reshape the State and are proposing truly radical changes to NHS management, the Welfare system, schools, and the relationship between the police and the public. The Coalition is already acting to push back on the astonishing civil rights encroachments of the Blair and Brown governments. As the Economist – hardly a lefty or Lib Dem publication – argued “the historic nature of the coalition government itself is now less interesting than its domestic politics.”
So much for the Simon claim that the Prime Minister is pushing to the margins real issues of governance!
Does Simon think that he is writing fine commentary when he sneers and insults and misrepresents and tries to make out that Cameron and his ministers are ignorant and immature. Is this how Heffer’s mentor T.E. Utley wrote? Utley was an ideological Conservative but in his columns he was not bombastic and stuck to the facts and he would never have demeaned a Prime Minister by referring to them in a condescending manner by their first name.
So what does Simon think he is doing? And why he is doing what he is? Well, his chums on the right of the Conservative Party no doubt are egging him on. They, of course, are unable to accept any compromises to their narrow Conservatism. As far as they are concerned Britain should have no mass immigration – European Union citizens included – and Conservatives should not share government power. They want an old Britain that stands alone, proud, free and brave, etc. That fits in well with the kind of Britain Simon would like – the England of Trollope, where the Celtic fringes and working class people knew their places.
And so to be brave and free and proud we need an independent nuclear deterrent and shouldn’t be wasting money on some natives overseas. And according to them the nuclear replacement should not come out of defence funds but the government reserve. Well, boys, I have news for you – there isn’t a government reserve, the coffers are empty!
Britain’s nuclear deterrent isn’t and never will be independent – the Americans would have to agree before we fired it! And which country are we going to shoot at? The Russians? We knock out a couple of their cities and they knock out Britain lock, stock and barrel. Terrorists who sneak in a suitcase bomb? Iran has a far more important target than the U.K. – Israel.
I can well understand why Reagan thought all the generals talking about MAD were mad.
Back to Simon, briefly. The days when Britain’s overseas budget went straight into the pockets of Third World dictators are kind of over, Simon. Aid is far more targeted and monitored – although more monitoring is needed – and aid is starting to get more results-oriented, something Andrew Mitchell, the International Development Secretary, is keen to increase.
Yes, money to India and China should cease now but a lot of good can come from that aid budget in Africa and less developed countries, helping to ease the instability Simon worries about so much and encouraging economic development and that helps to ease the immigration pressures on us. Simon, maybe you should read less Trollope and start reading more studies and books on economic development, aid mechanics and even brush-up on what is actually happening in Africa.
