Anti-FIRE – the YOLO train-wreck edition

It’ll soon be the season of goodwill, which also seems to bring about exceptional financial muppetry for some reason. A few years ago it was Shona Sibary and her excessive brood that was financial folly du jour, along with TV producer Charlotte and a few also-rans. Along with running articles on how you can get to retire early, we’ve had a few on people who don’t seem to be planning on retiring ever.

I was tickled by this young 30-year old singleton living with her parents. Now I have some sympathy for her original plight of living in London on 40k a year. If you don’t want to share your living costs with other people, be they a partner or some sort of shared housing/flatshare arrangement, I can believe 40k isn’t enough to live in London. What’s a girl to do in such a quandary? Clearing off back home to live with Mum and Dad seems like an eminently sensible thing to do. Hats off to her for effective action in the face of adversity.

£40k p.a and living in her childhood bedroom, but still with a negative savings rate. WTAF?

I also have to admire that she doesn’t have a credit card because she’s too worried about ending up in debt. Wise move, that. But where I am totally nonplussed is that of her £2200 pcm take home,

By the time I’ve paid rent, done some food shopping (I want to pay my way as much as I can), settled my phone bill and insured, taxed and put petrol in my car, there’s not a great deal left.

I mean FFS? Let’s leave aside the breathless insouciance of not getting that: hitting Bank of M&D for a few hundred sods a month for foreseeable expenses like eating and car maintenance is not paying your own way by any of the usual definitions of the term.

An ermine spent some £400 on road tax and insurance and £1k on servicing and fuel last year. My phone bill is some £50 a month, so that’s about £2k p.a. Let’s say that’s £200 a month. Leaves our heroine with £2k a month. Say she spends £1000 a month on drinking with her workmates and clothes, and surely the reduced rent to Mum and Dad plus food can’t eat up the remaining £1k. I’d say our young lady has a serious drugs habit she’s not letting on about if it’s really true that none of the £2200 a month actually sticks to the sides. There’s precious little detail about what she actually does spend it on, this is Grazia, after all, which seems to have little detail about anything. It did, however, introduce me to the latest wheeze to part the financially naive from their hard-earned:

Klarna – a buy-now pay later app

As I was considering a corduroy pink boiler suit in the Topshop Black Friday pre-sales, under the Add to Basket button, a rectangular box winked at me: “Pretend it’s pay day! Pay ⅓ now and the rest later”. That’s Klarna.

I confess I’ve read the entire article, and looked at the Klarna website, and it looks like a credit account that’s restricted in stores you can use it to pay. It absolutely beats the hell out of me why on earth you would want to do that, but if a subset of Millennials really are so gormless that they find ease of use of payment so important to them that they will take these restrictions lying down, then they deserved everything that’s coming to them, quite frankly. A jolly good shafting, by the looks of it.

Financial Friction is your Friend

There’s a strong hint that Klarna’s bad for your wealth right in the rubric here

Klarna is the millennial store card, designed for a generation who want things as easily as possible, or in Klarna’s words “a frictionless buying experience”

You want friction in the buying experience. It throws sand in the wheels of your advertising-addled monkey-brain. One of the wins I had in racking back my spending was the simple addition of controlled friction. If it cost more that £100, I wrote it down on a piece of paper with a date. Allow a week to pass. If it still looks like a good idea a week later, go get it. It’s really quite amazing how many things don’t look like such a good idea a week later. Hours of your life died to earn that money. Honour the sacrifice by taking the time out to think. Obviously if it’s a piece of safety equipment or it’s going to save life right now then go right ahead, but most purchases really aren’t that urgent. A little bit of sand in the wheels of the Iwantitnow reflex doesn’t hurt. Nowadays I can get away with 24 hours, but the week cooling-off period is a good one to break the I-want-it-now habit at the start.

Klarna is good for them. It’s not good for you. Much of Grazie’s article is spent talking about how great it is to be able to ‘buy’ a gazillion sizes, try out the ones that fit and return the others, without having to front the money. In the old days you could do that in the store, it was called a changing room. But fair enough, I geddit, things change, Millennials live busy lives and don’t do face to face, life is lived best through the screen of a smartphone. What I can’t get is what does Klarna do here that my trusty credit card can’t.

If I buy five pairs of high heels just after I pay the card off, I get well over a month before I even need to think about paying back my flexible friend. That’s probably long enough to find out which four pairs will give me bunions and return the buggers for a refund 1

a hard credit search each time you want to slice it

But the worst thing about Klarna is that say I am Grazie’s Sian, and while Klarna lets me return 9 out of my 10 items without raising the capital up front, I still decide that I need to slice it because my 40k salary is insufficient to buy myself all the things and experiences I wish to have in my young life. Each and every time Sian hits the old ‘slice it’ button, that’s a new hard credit search. Since she’s in the habit of spending more than she earns, that’s a new hard credit search every month, if not every purchase.

In comparison, if a grizzled Ermine decides to slice it, that’s called ‘not paying off the credit card in full every month’. No new credit search, just business as usual. It’s a stupid way of living for all the usual reasons, but were I saving for my house deposit then when I get to ask for a mortgage the bank isn’t going to go ‘Holy cow, 12 hard credit searches in the last year, no way am I lending this punter a single lousy penny, never mind a couple hundred grand’.

Nobody will lend me any money, because I have virtually zero income. The last time a hard credit search for ‘would you lend this mustelid any money’ was run on me was when I took out my credit cards, which was when I was still employed – it’s getting on for over ten years now. I took a look for credit searches on me. They are all for insurance and ID qualification, plus one for Starling bank. Who then go on to lie about my balance, saying it’s £0. It’s £2500 FFS, because they pay me a gnat’s cock of interest on the current account as well as being the solution to not getting receipts for contactless payments. They also don’t charge me stupid amount for using the card abroad 2.

Over There and Overindebted

Everything’s bigger in the States – houses, hot dogs, cars, and debt. And Financial Folly in the pseudonymous Kate and Tom. The problem is simple. Too many snowflake kids, too many airs about the kids, too much house.

Our first house was perfectly fine, but I was pregnant with our third child, and we had three bedrooms in that house and wanted a fourth.

They could probably afford the kids – just save the $15k pa each that goes on private schooling and give it to them as a bounty on reaching 21. See Rule 5 later on

But we have a good deal — we’ll pay $15,000 for the three of them. But, of course, it’s all going back on credit. There’s a company that offers educational loans for private school.

I love the way he claims to be good for $90k a year, and get works as a bartender at night. I mean, how does that bartending job even get to shift the needle on the dial? Then there’s this sort of addled thinking:

Tom: To be fair, we do try to save money where we can. We had a lease on a minivan that was costing us $405 a month that we just downsized to a $208 car.
Kate: We always lease cars. Honestly, we can’t afford repairs. If our car broke down, we wouldn’t have the $3,000 to fix it. We need to have that high car payment because, frankly, we are not good enough with money to have savings.

Dudes, it’s simple. If you need to lease a car, you can’t afford to drive one. End of. Sure, if you could afford to buy one, but choose to lease, well, perhaps you get the new car smell more often. I pay too much for some things, because I can’t be arsed to squeeze the lemon on everything. I can afford to do that because I don’t borrow money for these things.

These guys aren’t stupid and they’re earning a decent screw. They’re playing a strong hand incredibly badly.

More and more I start to wonder if the road to financial success is far less about what you do do. It’s a tough one – in nearly all other endeavours you progress by getting better at what you do do. With money, an individual surrounded by clever people manipulating the atavistic monkey-brain with advertising, social media FOMO and people who want your money finds themselves in an unfair fight. It’s what you don’t do that matters:

Rule 1: Don’t spend more than you earn

Rule 2: if you really must break Rule 1, then not on wasting assets. Sadly wasting assets often includes education nowadays

Rule 3: Don’t lock in commitments you can’t afford

Rule 4: Never own anything that eats while you sleep

Rule 5: invest in your children. Teach them the skills to be self-sufficient adults

The writers of The Millionaire Next Door bring out rule 5 of unassuming millionaires: Their adult children are economically self-sufficient.

None of that is about investing. You gotta plug enough of the holes in the bucket to stop running out of month before you run out of money.


  1. I guess as a quadruped an ermine will need two pairs of heels to strut its stuff, but Visa and Mastercard can handle that 
  2. Not that that’s going to be a thing until we find out which way is up with all the Brexit bollocks coming along. 
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Toxic car finance could work out the best way to pay for a new car

I pinched the headline straight from the Torygraph, and I have searched the page to see if it is an advertorial. [ref]If it were, it’s against Queensberry rules to take the piss, because the whole point of of an advert is to make you buy shit that you don’t need with money you don’t have to impress people you don’t like[/ref]. But no, this financial foolery is being prosyletised in the name of money/consumer affairs. The article goes into great length to find a financial edge case where you buy a brand new Mercedes E-Class saloon with an on-the-road value of £35,205 and if it all goes right then you pay £19,255 in depreciation if you pay cash and £18,404.24 using a PCP. Thus saving being ripped off less by a whopping £851 using PCP.

If you need to borrow for a consumer good, you can’t afford it

The rule was codifed by that Wilkins Micawber chap, and it’s good. It’s one of the deep tragedies about personal finance that if you are desperate enough to need to borrow the money, you usually can’t afford to buy what you want, with two exceptions, housing and education.

How to decide if borrowing money to buy it is a good idea

The most toxic thing about borrowing to buy a new car is that half the value of the car falls off it in three years, which is why buying new cars is a mug’s game. If you want to do that sort of conspicuous consumption of an expensive wasting asset you should be rich enough to pay cash, and face up to burning half of it in one go, rather than trying to stretch it out. If you need to ‘save’ £851 putzing about with PCP then you’re not rich enough to do it in the first place. As the lede says

More and more drivers want to be driving the newest cars available

Well, yeah, I’d like world peace and there to be half as many humans on it as there are now[ref]this was roughly the number of people on earth as when I was born[/ref]  so as we get to keep that peace, but what you wants is not what you gets, eh? They talk a good talk about PCP giving you a saving on £851, about 3% on the price. To be honest, if you are going to spunk 18 grand of capital depreciation to drive a car for three years, you’re not the type of person who is going to squeeze the lemon for that £851. If the PCP looks attractive to you it is telling you one thing only.

You are not rich enough to piss away that much money on running a new car for three years.

The reason you’re not rich enough is that Bad Shit can happen to you, you get to lose your job or get sick or any of the vicissitudes that can affect a fellow who spends more than you earn. All of a sudden some of the break clauses in the PCP contract come to bite you on the ass if you stop paying. Whereas if you really are rich enough to pay cash up front, paradoxically you can actually use the PCP to save yourself the 3%. If Bad Shit happens you just carry on paying the instalments from your vast wealth until the balloon payment is due and then you do whatever’s the best at the time. In that case knock yourself out and put the money to work.

I understand the principle of what the Torygraph is saying, because I’ve done it. Many moons ago, in 1981, a young ermine bought a secondhand Audio Research preamplifier on an interest-free loan for half of his annual net salary, saved up over a while. In personal finance terms that was an extremely dumb thing to do, Mr Money Mustache would have reached back in time and punched me in the face,[ref] MMM would tell me that had I invested the money at a 4.5% real terms ROI then as Monevator’s compound interest calculator tells me I would now be sitting on £25,000. I think the old Ermine would have socked him on the mush back because I had 36 years of enjoyment from that thing[/ref]but I wanted it there and then, and there were fewer consumer gewgaws for youthful excess in those days than now. What made it less dumb was that I was rich enough to afford it, because I had saved up first. I paid the finance company on time each month until the principal was redeemed.

A grizzled ermine sold that preamplifier on Ebay earlier this year for about half the nominal price, so it gave me good value for thirty-six years. So I do understand the principle – you can save money using finance, because I had the cash saved up when I bought it. I parked it with the Nationwide Building society and in those distant times you could earn interest on your saved money. It actually cost me less to take the interest free loan than if I’d bought it cash.

Sad fact is, most people borrow money for consumer purchases because they haven’t got the money at the time of purchase. It is a rare consumer indeed who buys on credit to stooze the cash they saved up for the item beforehand. It was right up there in the credit card ads on the 1970s

Access takes the waiting out of wanting

If that’s you, you are about to borrow from your future self.

To use PCP properly, have the cash to buy the car outright when you sign for the car loan

And then you need to park that cash somewhere safe. Ideally earn interest on it 😉 Alternatively, you need to have at least the depreciation in cash, and have insurance against the sorts of events than would write the car off while you’re still potentially on the hook for the balloon payment, should the car get trashed. If you’re doing anything else, then you are driving more new car than you can afford. If you’re lucky, you’ll make it to the balloon payment without Bad Shit happening in your life. That’s the sting in the the tail. Driving more car than you can afford is a risk nobody needs to take. PCP conceals the downside in all the messy stuff in the small print that nobody thinks will happen to them.

Micawber was right. Save up for you car first, even if you do use PCP 😉 In the edge case of people who are rich enough to be able to pay cash, toxic car finance is probably the best way to pay for a new car. For everybody else, PCP is just…toxic. Imagine listening to Britney on loop for three years 😉 That’s how toxic…

Papers please – the early retiree as identity cleanskin

Mortgage – check. PAYE – check. Credit card loans – check. In my wage slave days I threw off enough data crumbs to feed the data harvesting operation that has grown into the identity check industry. There’s a creeping centralisation and authoritarian streak to finance these days, due to the odious Know Your Customer (KYC) regulatory burden. In a curious reversal of the burden of proof, banks can freeze/shut down your accounts, and the ancients rights of the Magna Carta do not apply and you do not get due process – the bank will refuse to confirm of deny anything about the account. This is why you should never have all your liquid cash in one bank account, I have three although I use one mostly, but the others have savings and current accounts ready to roll should I lose access to that. I have never had an account frozen, but the authoritarianism goes deeply against the principles of habeas corpus I was taught at school, that in theory an Englishman has the right to hear in court the trumped up charges held against him. It just doesn’t apply.

However, for some reason I increasingly have pain with the KYC regulations. I got into a massive fight with Betfair betting exchange in my abortive foray into matched betting when they took my money but decided they didn’t want to release the deposit, never mind the winnings because they couldn’t confirm I existed. Clearly I was not their typical gambling customer. I believe this general grief is the penalty of not being a wage slave, not using a mobile phone on a regular basis, and it being several years since I owed anyone any money. I can’t be found in mortgage records, and while I have three credit cards I haven’t changed these for nearly ten years, and my bank accounts are all old. I am a fail on MSE’s Credit club which makes me think that a thin file with Experian is my problem –

There are a few reasons which may stop Experian from being able to verify your identity; for example, you may have a ‘thin file’. This just means there may be too little information held about you to be able to verify your identity.

[…]

Older accounts can also cause verification issues…

– Was your account opened before 1998? If so, your bank may not be sharing the account details with Experian as it was opened before the Data Protection Act came into force. To remedy this, you can contact your bank and ask that it applies a marker to ensure your account details are shared with the credit reference agencies.

I encountered this most recently when I tried to register online for NS&I, not particularly because I wanted to check on my roughly 15k worth of ILSCs but because I was going to register a lasting power of attorney to add to my mother’s motley collection of Premium Bonds[ref]personally I don’t touch Premium Bonds, but since any income is tax-free and NS&I doesn’t need FSCS protection it’s a good match for the risk tolerance of an elderly widow[/ref]. The online system barfed and I have to use the post. Same with registering for online self assessment a couple of years ago. I had grief with Barclays when I wanted to register the LPA though I have to say that they actually brought human beings and a decent helping of common sense to the operation and sorted it out.

I still have an old paper driving licence with no photocard so some organisations get shirty about taking that, and I am down to one last utility bill as a paper bill, kept that way purely to have something to support proof of address.

Papers please? On yer bike, officer…

Think the UK doesn’t have ID cards? You’re wrong. Like the Jesuits, we like to get to them when they are young

One of the joys of being a Brit is that for cultural reasons we don’t like the idea of the authorities being able to demand your papers please as you are walking down the street – you don’t have to carry ID about your normal business. That is A Good Thing in my view. Obviously if you start breaking into a shop with a crowbar you will get arrested, but it’s kinda nice to actually have to be committing a crime before you get your collar felt 😉 But I suspect this will disappear in the coming years, in the same way as the simplicity of how  I opened two of those bank accounts disappeared over the years since the millennium. I simply went into the branch and producing my works staff card and a payslip, rather than the tedious string of paperwork that seems to be needed now.

There are many forces demanding more traceability and accountability where we used to muddle along fine without it. Terrorism keep getting rolled out as a great reason for ID cards, though I am sure cars kill more people in the UK than terrorism, so a rational approach to reducing early deaths would be to get self-driving cars ASAP. And for God’s sake do stop falling off high places… Don’t get me wrong, I am all for nutting mean-spirited psychos from killing random people because their twisted mentality says so, but canning more common  sources of random death first seems a better win, and surrendering centuries’ old freedoms to reduce the very low chance of getting killed that way seems a bum deal. I have reigned myself to the fact I am likely to see some version of John Walker’s Unicard in the next few decades…

The end of the tax year is coming up. Don’t leave it to the last minute

It’s time to use one’s capital gains tax limit and to fill up this year’s ISA, and because of all these pettifogging rules and regulations it pays to do that a good few weeks before the April 5th deadline. Just in case some obstructive oik says you need to provide this or that documentation. I have to say that opening investment accounts has been relatively pain-free for me compared to anything to do with banks or the GOV.UK website, but it still takes time. It was a hell of a job to squeak in opening a SIPP in time to take advantage of an extra year of saving after Osborne’s kind offer of pensions freedom a couple of years ago, and certainly if you need to open an ISA this year then it’s worth having a few weeks in hand to do it. Particularly if you are going to try and Bed and ISA (or -SIPP) unwrapped shares to use your capital gains limit this year. What that means is do it now

It seems peculiarly tough that you have to be part of the almost universal trend towards spending and living on more than you earn to be considered a participant in the 21st century economy. There are shadows of the societies of the sci-fi I used to read as a teenager where the oddballs became unpersons – Ray Bradbury’s The Pedestrian springs to mind. The System can’t identify people who don’t work and don’t owe any money or claim benefits. They just don’t exist in the models of Britons that are used by the powers that be, with their shadowy and unaccountable data jacks on the citizenry’s digital lifestreams. The signals dribbling through their data taps are too weak compared to the streams of new credit applications and the richness of normal people’s economic lives. I don’t know if it’s a down on the FIRE community in general or I am a particular outlier. But it’s a pain, I don’t now assume any sort of account opening on change is going to happen in less than a month.

Now is the winter of our future consumer selves

The shortest day is one where attention turns to Winter, and the promise of an eventual Spring. I’m going to be contrarian and think about a nascent Winter – for the collective spendthrifts that seems to be the Great British Public, from hero to zero and beyond in six years:

this ain't gonna end well
this ain’t gonna end well

I see the party out and about, particularly at this time of year. So does Barclaycard – apparently the lower oil price has done wonders for the restaurateurs of the country.

apparently Barclaycard process half of credit card transactions in Britian, which I find hard to believe. Anyway, these are the changes in spending
apparently Barclaycard process half of credit card transactions in Britian, which I find hard to believe. Anyway, these are the changes in spending

The good thing is that the predicted rate of change in overspending is slowing. And of course everybody is feeling chipper. Bless their cotton socks, the opposition tried to make political capital out of this without doing what I am doing in this post and hollering out like Scrooge

Britons – you are overspending way beyond your means. Cancel Christmas and Stop It Now

After all Cameron got into no end of hot water when he said that a few years ago 😉 Learning from the flack he took, which is basically don’t you dare tell people to spend less, even if it is the very thing they need to do, what this came out like was

Ms Malhotra added: “Of course families need access to credit and the ability to borrow to invest for the future.

Families do not invest for the future. They live by YOLO.  Families overspend and firefight the mess as best they can later

No. I’m sorry, but the general level of financial awareness in Britain is just not that high. Families in general have no understanding of the meaning of the word invest. The principles my parents outlined thirty years ago still hold. Don’t borrow to buy wasting assets. Only borrow if you will save more in total (housing – where you expect a relatively settled lifestyle) or earn more than the total cost (education, in some circumstances which are getting rarer). For all else pay cash, and if you haven’t got it you can’t afford it.

There are very, very few good reasons to borrow money in Britain. Under some circumstances borrowing money to buy a house is one, although I am not so sure that now is one of those times. I borrowed too much money to buy a house. The damage to my personal finances is still visible after 30 years – the only reason I am in a better financial position than some of my peers is I managed to shut down some of the other ways British households misallocate capital by borrowing it.

Let me tally a number of ways many families fail to invest –

  • in the immortal words of a good lady friend “they pick up financial commitments like pets and children without thinking through the financial consequences”
  • They borrow for university, an asset that is being rapidly devalued through oversupply and becoming an increasingly unaffordable luxury. Once upon a time (1990s to 2010) you could have made a case for investing in a degree. It’s tough  to make that case now.
  • They borrow to buy wasting assets like cars, for God’s sake. You can get a damned fine used car for £5k and a decent runner for less.
  • They borrow to buy shit they don’t need to impress people they don’t like and keep up with the Joneses
  • They overspend on Christmas because they lack the integrity to tell their children that times are harder now. The road back from that sort of inattention is much longer and harder than recognising straitened circumstances at the time and shutting elective spending down until you know where you are.

There are other subtler ways that people malinvest, but borrowing to spend on wants rather than needs is never ‘investment’. The shortest day of the year seems a good time to recall that borrowing money is a great way to give your future self a hard time. There are going to be a good many consumers whose forthcoming financial Winter will hold no Spring.

The problem is that very few people invest. And those people, which probably includes many regular readers, are people who are relatively wealthy compared to most Britons. You don’t usually get wealthy by investing, that is what Work is for if you spend less than you earn, but it is often the way you stay wealthy. There is a massive difference between investing and spending. Opportunities to invest are hard to find and come rarely, and usually involve some sort of uncertainty. Opportunities to spend are commonplace.

Of course families need access to credit and the ability to borrow to invest for the future

is a chimera. I’m of the opinion that Britain would be a much happier place if there were far less access to credit for British families – like the credit controls of the 1960s and 1970s. The excess of credit since then seems to have made the banks richer and the people poorer, because they are increasingly forced to overspend on housing precisely because of this credit. It is a classic tragedy of the commons – of course I want to borrow more mortgage to outcompete you. But like an ostensibly neutral country supplying arms to both sides, the banks have no specific loyalty to me, it’s when you can borrow more to fight back that this becomes a gun that fires on both ends – we both pay more for our houses and the banks get to lend more money out. What’s not to like? Well, the opportunity cost of what else we could have done with that money!

Sooner or later we are going to have to nail this problem. Sometimes you shouldn’t be allowed to do what you want to do, and the litany of commonplace consumer cock-ups with credit is getting longer and longer. It’s no fun any more, and the promise of endless financial winter doesn’t sound so great either. We managed to shut down a lot of Money Shops. We managed to slow the number of Liar Loans on owner occupation. We are taking the battle to the tragedy of the commons otherwise known as BTL. There is hope. Perhaps we need to make it easier to repudiate consumer debt, then banks would be more circumspect about who they lend money to, since the old ways of having credit controls is considered dirigiste and fuddy-duddy in these laissez-faire times. What exactly is so terribly wrong about expecting people to have the money up front for their consumer wants?

Since you, dear readers, are presumably not among these consumer spendthrifts, a happy Christmas to y’all!

The cash conundrum

Cash is a terrible ‘investment’. As far as I’m concerned it isn’t one -though there appears to be one period over which it outperformed the FTSE100 TR. If you were dumb enough to sit on a shedload of cash and invest it all in one go in December 1999 then you’d have been better keeping it as cash for 15 years. Well, yeah, but who saves for a pension in cash over half their working lifetime, chucks it all on red and then goes home? If you are such a soul, you deserved all you get. Most of us save for a pension as we earn, albeit at varying rates through our working lives. In general, if you suddenly have a whacking great lump like that you haven’t earned it, so tough luck if you came into an inheritance in late 1999 and blew it all into the dotcom bust. Easy come, easy go…

£100, waiting to be turned into booze, Harry Wraggs and Sky TV vouchers
£100 will remain £100 but won’t be worth £100 as time goes by

In theory private investors can give up part of their lives to moving cash about between the latest best-buy accounts for years. You’ll be working hard for a lousy return, but at least no volatility.

Cash is not an investment. It is a mediocre store of value but a great medium of exchange

At the moment, interest rates are low. There is a lot of grousing about this, which I don’t have a huge amount of fellow-feeling for. I have never regarded cash as an investment. It’s a proxy for a claim on work in the future, and medium of exchange. It is crystallised power. It is symbolism, it is not procreative in itself. It still surprises me when people think they can get a real return on cash.

The stories your parents told you about saving cash and it growing were largely a lie. They were right that if you add £1 a week you end up with £52 after a year, it grows as you add to it, rather than in and of itself. You still have to work for that. If you want it to grow in value by itself, well, that, indeed, is why you invest. Indeed, the story of the talents I was taught at school is a much more accurate portrayal. If you want your wealth to grow you have to put it to work in doing something. Merely digging it into the ground, sticking it under the mattress or putting it into a bank account isn’t good enough. You can put it to work in the stock market, you can put it to work in a BTL house portfolio, you can put it to work in building a business or buying productive capacity, be that training of yourself or machinery and plant to make better widgets. All of these need skill and judgement calls, and involve some element of risk because what you think should happen doesn’t always happen. There be dragons.

If you want relative security of cash, it ain’t gonna grow – you will largely be running down your capital in retirement. There’s nothing wrong in that. It is what I am doing at the moment. It is what an annuity does. Everybody panics when they think of not getting an income. They want the security that the number at the bottom doesn’t change without their say-so. Clearly they’ve never read Lady Windermere’s Fan, in which Oscar Wilde summarises the problems of conflating price and value,

a man who knows the price of everything and the value of nothing

In doing that they miss that the value of that number slowly degrades with time, but that’s a different story.

Continue reading “The cash conundrum”

Zorba the Gr€€k is still skint after five years

As the euro continues to fall amid disappointment that the EU has not come up with a solid rescue plan for Greece, Zorba makes an appearance

Patrick Blower, Feb 2010

It was five years ago to the day that I saw this livedraw on what was then the Guardian’s Comment is Free[ref]Sadly along with it’s other faults the Internet is not forever – because meaning is held on the transitory relations of bits of spinning discs and network switchery that somebody has to pay for the rust that is linkrot  never sleeps. Analogue media coded information in what they were and didn’t need a constant supply of power and rent, though they had their own decay mechanisms. I was surprised to find this was hard to get hold of again after only five years. For me at least the Guardian’s link doesn’t play, but the artists own livedraw site still has it. I used a youtube link[/ref]. Only one of the leaders in the cartoon is still standing after the five years, – five years is a really long time in politics.

In those heady days, a nervous Ermine was still at work, but had roughed out a flight plan for the exit. All this turbulence in the market seemed hazard and opportunity, and I was convinced the Euro was going to blow, the internal contradictions of a finance union without a transfer union, the lack of common cause.

None of these things have changed, but I underestimated the doggedness with which people cling to old forms, and of course perhaps the preparations the rest of the eurozone felt they needed to do to bolster the creaking edifice against Grexit. Even now it’s hard to say – will I look back at this in five years time and wonder how nothing has changed? Exactly how long can the markets stay irrational while the entirety of the Eurozone grinds its way into insolvency.

Just like then, it feels that the forces are gathering for a showdown. It is in points of change that opportunity arises and destruction threatens. The five year anniversary seems to be a good one to invoke the spirit of Zorba the the Gr€€k once again. The world has still not recovered from the 2008 financial crisis, there is still too much capital chasing not enough productive assets. Greece is a symptom as well as a cause – the Eurozone serves two masters. As Lincoln observed the problem in a different field

A house divided against itself cannot stand. I believe this government cannot endure, permanently, half slave and half free. I do not expect the Union to be dissolved — I do not expect the house to fall — but I do expect it will cease to be divided. It will become all one thing or all the other.

Abraham Lincoln, 1858

So too with the Eurozone, it lumbers endlessly from crisis to crisis, and it is time for it to become one thing or another. It has crushed too many dreams already, and it needs to shape up or to start to cut away the dead wood, and become small enough to for a political and transfer union to hold. Or the United States of Europe needs to be constructed.

To call in another American view on the fiasco, I was glad to hear Greenspan finally call it out in public

“I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognises that parting is the best strategy.
[…]

The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”

Until that comes to pass or the whole misbegotten enterprise disintegrates from its internal inconsistencies the rotting corpse that was wounded by the original financial crisis will endlessly stink up the place and ruin Europeans’ lives – particularly young folk by the looks of it.

As a young man I was unlucky enough to graduate into Thatcher’s first recession in 1982, but although deep it recovered relatively quickly compared to the 2008 recession that seems to be combining with other strategic shifts in the workplace. In Britain although these problems may be affecting the quality of jobs, in the Eurozone and southern Europe there seems to be grinding youth unemployment as well as a general protracted recession – five years of that is a serious hit on one’s working life. No wonder there is a Greek youth brain drain.

Can’t pay, won’t pay

The Greeks are never going to repay the debt in Euros. Writing the debt off which is what Syriza seem to want isn’t going to help them in the long run either. They are yoked by the Euro to people that like to live in a different way. Let’s see what happened in the past. I hit up these guys for some historical USD to GDR, GBP and DEM from 1990 to 2001. I then normalised everything to a value of 1 on Jan 1990. Basically you needed 2½ times as many Drachma to buy a US dollar in 2000 than you’d needed 10 years before. Germans, who didn’t exactly have a great 1990s needed roughly the same and even in Blighty we only needed about 20% more GBP to buy that dollar. You can quibble as to what sort of store of value a US dollar represents but the difference cancels that out. There’s something different about the way Greece likes to do things and its currency reflected that.

As time went by you needed more and more drachma to buy that US dollar

When Zorba the Gr€€k was drawn, roughly the same distance as is covered by this chart had elapsed after the drachma was crash-locked to the Deutschemark’s proxy the Euro. Now it’s 1.5 times the space covered by this chart. There’s no point in resetting this to zero now, it’s a structural difference. In a true currency union like the United States, rich parts continuously transfer money to poor parts, else a New York City dollar would appreciate against a Detroit, MI dollar – in the chart above you’d need a lot more Detroit dollars to buy a beer in NYC at the end than at the start.

The Greeks may be the canary in the coal-mine

Those Gr€€k €uro debts ain’t gonna get paid. There’s a history lesson in this for the rest of us too. In the good times it’s easy to believe in financial promises, but in the end a lot of finance is just that, promises. A lot[ref]okay – all of it – a solar flare/EMP would vaporise the lot, but even without that some promises are more hand-waving than others[/ref] of my ISA is also promises, so are all those British mortgages taken out of overinflated house prices at low interest rates by people who will never earn enough in a lifetime to discharge those debts unless something changes. At the moment the lens is focused on Greece, but it can move, and maybe zoom out. Odd things are happening in the economy – we have created a lot of money to buy off the day of reckoning in 20o8 and after seven years it’s still not finding things of value to stand proxy for, companies are hoarding cash because they can’t invest it to make things people can/will buy more of. It’s not necessarily all bad. Maybe it is the final denouement of consumerism -the Post Carbon Institute’s Richard Heinberg in a curiously upbeat mode

The practical result of declining overall societal EROEI[ref]energy return on energy invested – how much energy you have to invest in getting energy[/ref]will be the need to devote proportionally more capital and labor to energy production processes. This is likely to translate, for example, to the requirement for more farm labor, and to fewer opportunities in professions not centered on directly productive activities: we’ll need more people making or growing things, and fewer people marketing, advertising, financing, regulating, and litigating them. For folks who think we have way too much marketing, advertising, financialization, regulation, and litigation in our current society, this may not seem like such a bad thing; prospects are likewise favorable for those who desire more control over their time, labor, and sources of sustenance (food and energy).

[…]

The energy glut of the 20th century enabled us to embody energy in a mind-numbing array of buildings, infrastructure, machines, gadgets, and packaging. Middle-class families got used to buying and discarding enormous quantities of manufactured goods representing generous portions of previously expended energy. If we have less energy available to us in our renewable future, this will impact more than the operation of our machines and the lighting and heating of our buildings. It will also translate to a shrinking flow of manufactured goods that embody past energy expenditure, and a reduced ability to construct high energy-input structures. We might find we need to purchase fewer items of clothing and furniture, and fewer electronic devices, and inhabit smaller spaces. We might also use old goods longer, and re-use and re-purpose whatever can be repaired. We might need to get used to buying more basic foods again, rather than highly processed and excessively packaged food products. Exactly how far these trends might proceed is impossible to say: we are almost surely headed toward a simpler society, but no one knows ultimately how simple. Nevertheless, it’s fair to assume that this overall shift would constitute the end of consumerism (i.e., our current economic model that depends on ever-increasing consumption of consumer goods and services). Here again, there are more than a few people who believe that advanced industrial nations consume excessively, and that some simplification of rich- and middle-class lifestyles would be a good thing.

I grew up in a simpler London, and when I look around me at the shocking waste and inefficiency of consumerism compared to only 40 years ago I do wish we could distil the many great and genuine innovations and improvements from all the destructive busywork and tat that takes away.

Why? For crying out load, why?
Consumerism. Why did this misallocation of resources happen?

Perhaps Greece rubbing up against the evil heart of darkness in the common cause assumptions of the Euro is reminding us that in the battle of illusion against reality the latter tends to win out over time. We tell ourselves many stories round the virtual campfires weaving meaning into the flickering shadows on the wall. Although these myths are symbolic, not all of them are true. It is going to be an increasingly difficult task to find a way of turning cash into usefully productive long-term assets against a background of secular stagnation, and making easy assumptions is probably not the way to do it. Much of the appreciation is asset prices like shares and houses doesn’t reflect an increase in underlying value or future income stream in the case of shares. It merely reflects the increased amount of QE money chasing those assets. Anybody could be a great investor over the last few years with that sort of tailwind, though the day of reckoning seems to be getting closer with the help of our Greek friends shining a light on what unrealistic claims upon the future look like.

The Greeks want to live with a currency that depreciates faster than the Germans. It is called the drachma. Possibly if Northern Europe wants its money back from the repudiated € loans, sue Goldman Sachs who aided the Greeks get into the Euro under false pretences, and good luck with that. It’s always good when seeking repayment to pressure people who actually have some money, and the Vampire Squid would seem to be where a lot of the money ended up 😉

Goldman Sachs arranged swaps that effectively allowed Greece to borrow 1 billion Euros without adding to its official public debt. While it arranged the swaps, Goldman also sought to buy insurance on Greek debt and engage in other trades to protect itself against the risk of a default on those swaps. Eventually, Goldman sold the swaps to the national bank of Greece.

The drachma is dead. Long live the drachma.

What will the power shift from labour to capital make things look like?

As we wander around the many lovely historical relics that Britain has, usually in the care of the National Trust these days, we think we are looking at the past. Wander around the many rooms, and marvel at the effort it would have taken to keep these clean in a world without fossil fuels or vacuum cleaners.

Stately pile in Leicestershire
Stately pile in Leicestershire

Now everybody in the personal finance world is trying to build capital, to make income. It’s the Holy Grail of pension planning, the vanishing point at the distant horizon, the Ermine sitting in his back garden drinking iced coffee while other people toil to fix the sewers and bring water and power and ideas to him. We don’t do this in the up-close and personal way that the Downton Abbey set do[ref]I’m inferring this from press reports about the programme, I’ve never watched it personally[/ref]. We use machines and energy to do it, and if you see people power substituting for capital you know that someone’s thrown the big red switch and the projection reels are rolling – in reverse, and that the aristocracy will be in the ascendant again.

Financial Independence is the non plus ultra  – the destination for which we PF types forego all the gratuitous consumerism of our fellow men, living like celibate monks in a brothel. It’s quite a new concept in human societies. Those grand buildings in the care of the NT were serviced by an army of grunts, basically working for The Man. Over a working lifetime, they didn’t get to save enough money to retire, because they didn’t earn enough money over and above their living requirements. Although we often associate this retirement with the welfare state, trades unions and friendly societies were in this space in the early years of the 20th century.

One of the mantras of the PF world is you can earn a 4-5% real return on capital in a suitably diversified portfolio of assets. This isn’t bad – be grateful you’re living now rather than earlier in the 20th century 😉 In even earlier times, however, the return on capital was better, presumably because the servants never earned enough spare over their needs to retire! On the downside if you were the Man you had to be the first-born son of The Previous Man – capital was inherited, passed down the line by the doctrine of primogeniture. It was a drag if you were the second son, and you were SOL if you were female.

shamelessly pinched from Krugman who pinched it from piketty
shamelessly pinched from Krugman who pinched it from Piketty

I got this from Krugman’s Why We’re in a New Gilded Age but I think he got it from Thomas Piketty. There are a few interesting things here. One is that this is the return on capital after taxes – it can of course be varied using taxes. You’ll note there was a low in the period that had the two World Wars – I guess taxation was high and the destruction of capital too. Another thing that is interesting is that the high-water mark of world GDP growth encompasses my working lifetime – I finished work at the end of it. I guess there’s some kind of limits To Growth forecasting in there, or maybe Piketty’s been reading Life After Growth. Either way we’re seriously into unknown unknowns there.

It is, therefore, possible, that my story is a blip on the thread of financial planning – the thought that an average grunt who left school owning a kettle and the shirt on his back could command enough resources to retire 34 years later. For that piece of luck I am duly grateful.

What do we learn from this? One is that the rate of return on capital assumed by a lot of PF thinking isn’t that unusual, from a historical perspective. It is, however, a bit unusual compared to recent historical perspective. We really could do without any more bloody wars in Europe, and the associated high taxation. OTOH there did seem a big stimulus to growth, although on such a coarse scale it’s hard to say that this wasn’t due to progress in agricultural yields or due to electrification. One of the valid questions would be does growth inherently reduce the return on capital, or is this correlation with something else?

An ermine looking back 30 years, about to enter university. Or not.

One thing does seem clear, however. We are headed towards a world where capital is getting a larger slice of the pie. We see that in wage stagnation, and also in a fall in growth. One fo the hypotheses for the fall in growth is the increasing cost of energy. So what does the future look like?

Much more stratified and class-bound, I would hazard. If I were collecting my A levels today, and if there were and older Ermine-head on the shoulders[ref]because in reality I was much more susceptible to peer-pressure and going along with established norms in my 20s[/ref], I would question some of the shibboleths and assumptions of the consumer lifestyle and image.

I would note that the modern world offers three doors for the A level student. One is the route of university and £30,000 worth of debt. Now in the world I have worked through, £30,000 of debt would probably have been worth the candle, but in the world I see before me, I don’t feel that way at all – I have much sympathy for this viewpoint that university is an unaffordable luxury. There are two reasons why this is different today from 30 years ago:

  • 30 years ago, the exams were much harder [ref] the exams were norm-referenced (ie a fixed percentage of entrants got As)  [/ref] I think it was 7% when I entered and 11% when I left in 1982 of school leavers went to university at all. The exams screened strongly for academic ability, in ways you aren’t even allowed to think about today because it hurts the feelings of those that don’t make it. As a result of this, there were far fewer graduates in the workforce, the graduate premium was stronger.
  • Poorer students got grants and I believe everyone had their course fees paid for by the LEA, whereas now we have the loans situation, which means a student is indebted by £30,000 as well as the opportunity cost of losing the money they might have earned in the first 8-10% of their working life. Although it’s not exactly the same as going to Mastercard and taking out a loan for £30,000 as Martin Lewis is at pains to explain, the trouble is that with a 50% entry target, university is by definition targets at those of average academic ability and up. As a result the graduate premium is much lower, for the simple reason that the product is a lot more common. It’s true that in there are the same 11% of old, but the problem now is employers have to find them, assuming academic ability correlates with better ability at what they want. One of the biggest problems has been that heft in student numbers – it meant that the taxpayer couldn’t afford to support five times[ref]one of the things that pisses me off is the mantra oh my generation pulled up the drawbridge. We didn’t do it deliberately, but did it by being so weak-willed that we couldn’t face telling the less able of our blessed children they weren’t smart enough to benefit from university. This was lily-livered incompetence, not malice as far as I can tell. It is bad, but without knowing how we got ourselves into the shit we can’t formulate a way out of it. Paying fees and maintenance to five times as many people wouldn’t help. We either need to make more jobs that are matched to the lower levels of ability, or eliminate enough undergraduate places to get the proportion to match the jobs we do have. It was right 30 years ago, maybe the proportions want to be higher now because we have a different employment scene and people might be a bit smarter but an increase of FIVE times in 30 years? You don’t need a degree to work a call centre. And society should be honest enough about your ability not to encourage you to spend £30k chasing an empty dream. Which would you rather have – not getting your grades or a place in clearing or picking up a £30,000 debt and lose three years of potential working life to end up in the same position but with a fancy piece of paper? I do accept that the adult world is not serving its offspring at all well here but the answer isn’t pay five times as many people through university as we did three decades ago. Two times, maybe, and there I am all for student grants and fees being paid from general taxation – HMRC will get it back in higher tax receipts later[/ref] as many so the cost of the opportunity has gone up for the students at the same time as the value of the product has been dropped because the market has been flooded.

All round this seems to be a policy failure. We haven’t asked the fundamental questions, which are

what is university for?

  • if it is to provide better work cannon-fodder, is this what companies and the available work want?
  • is it better if companies train their staff themselves – vocational training used to be a lot better – the Ermine was trained in how to use a lathe and other gear by companies, not schools, even though it was a peripheral part of what I would be doing, I have never used a lathe directly in my line of work but needed to know what could be done with one.
  • Is is right to normalise debt to our young adults so early in life – a student debt is more money than I have ever borrowed in my life other than as a mortgage

At the same time I note that there are other routes

  • England is an expensive place to go to university, particularly if you are English – European universities where under EU rules you have equivalent access to courses and support may be a cheaper option (and often taught in English!)
  • The modern world offers the entrepreneurial and talented more opportunities to get to market and a much more efficient business operation than was possible in the past. You don’t need a university degree if you don’t have to convince an employer to employ you – code an app needs knowledge, not a degree and you can learn an awful lot of things online nowadays. Against that the odds against the successful entrepreneur are bad. Many are called but few are chosen to succeed.

The good thing is you have far more options. The bad thing is that the value of the default option has been mullered – price up and value down. I personally wouldn’t go to university in England if I were 18 now, though I would consider Europe[ref]studying abroad also makes you look more enterprising and go-getting, which everybody likes, and at ease with other cultures which some employers seem to like. But I’m no expert, so DYOR[/ref].

Minimize debt in a slow-growth world

One of the macro reasons is that in a low-growth world, debt is a very-dangerous thing indeed, because it’s hard to outrun with wage inflation. Debt also means mortgages. Part of the romance Britain has with house price inflation is because one generation did well out of that (it was my Dad’s generation, not mine – I got slaughtered by housing in the UK). The oil shocks of the 1970s caused high inflation and labour had the whip hand – enough power to drive up wages. They didn’t get any richer, because productivity didn’t go up, but inflation did and their wages kept pace with inflation, reducing the value of the debt in real terms.

Labour will be much, much weaker in the coming thirty years[ref]I mean labour in aggregate. At the moment a lot of capital is being appropriated by the 1% and particularly the 0.1% as income, and technically this is also labour[/ref]. Globalisation and increasing automation will see to that. We may get inflation, but wages need to keep up with it for house price inflation to be A Good Thing. Otherwise we get what we have now – the real value of houses rising and fewer people being able to afford them, and that is not a Good Thing – for anybody[ref]I guess it is a good thing for buy to letters but that’s it. It isn’t a good thing for owners unless they downsize, as they still need somewhere to live, and it tempts twits like Shona Sibary to live above their means.[/ref]

In a low-growth world, even those student loans are going to be more onerous. So beware the debt, or at least investigate getting it down, first by asking whether university is necessary and a good match to your skills and aspirations[ref]this in itself is a beastly tough thing to ask when you’ve just started out – how the bloody hell are you supposed to know?[/ref], and if so considering the foreign option while it’s still open to you. Hopefully Cameron’s plans for an EU referendum won’t bugger that up.

Logan's Run
Logan’s Run, I suppose there are some compensations for the YOLO set

Student debt is an obvious one to minimise, but lifestyle costs are one way that the young do get through money[ref]I am staggered at what the kids of my ex-colleagues buy, though I am pleased to see one old trick is still active – if you want Dad to help you buy a car say to Mum you’re thinking of getting a moped or a motorbike :)[/ref]. You do need some conspicuous consumption to wine and dine and play the mating game, but a little bit of excess goes a long way, as long as it’s the right sort of excess. There’s a limit to how long it’s wise to take the YOLO mantra, unless you plan on taking a Logan’s Run approach to extreme early retirement. I avoided debt in my twenties by being exceedingly tight with housing[ref] only to throw the win away when I did buy a house – you can survive some big mistakes, just not too many[/ref]- I shared houses and targeted the lower, more tatty end of the market. I regularly pass one rental in town aimed at students that has a rate of £56pw – that’s probably the end I was running at. And debt due to consumerism is bad, again particularly so where labour is weak. The normalisation of consumer debt and student debt are the most toxic features arising since 1980 for personal finances. If you can’t pay for your consumer goods in  cash, you’re not worth it. End of.

If we zoom out even further, that power shift from labour to capital is harming productivity in the UK – it means it’s cheaper to hire people to do some jobs that capital. Take the humble car wash. In Britain garages used to get great big furry roller things that you’d drive into and put a coin in and it would wash your car for you while you were inside, not a human in sight.

The Ermine knows the meaning of the plastic bottle on the Downton promo shot
The Ermine knows the meaning of the plastic bottle on the Downton promo shot

Nowadays you see a lot of these car washes broken, but you see loads of signs for hand car wash in supermarket parking lots and btis of waste ground – people with a few buckets, chamois leathers and a pressure washer are cheap, It’s cheaper to pay people to do this now than invest in the machines. That is not a good sign – not a good sign at all. The Ermine knows the symbolic meaning of the plastic water bottle on the Downton Abbey promotion picture. The plot of Downton’s Abbey is running backwards, and the power of inherited wealth and aristocracy is rising again 😉

Look at the retired colonels of The Telegraph fulminating about death taxes. These parents know in their hearts that the best way for their children to get ahead is for them to inherit wealth, because they will probably not be able to earn it. It’s the most natural thing in the world for parents to want to featherbed their kids, over and above others. And parents realise in other ways that they try and buy privilege for their offspring – the whole independent school fees is also to try and build in advantage. Pass on capital – be it financial or social web capital, because the chance to earn your way ahead is thinning out. The aristocracy will be back. Not necessarily land, this time, financial capital will do, perhaps. Some of George Osborne’s DC pension changes play into this too – now the 55% tax rate on pensions going into an estate is removed.

So take care about the things you assume about the world ahead. What worked in the past won’t necessarily work that well in future – and loadsadebt and easy money are a particular hazard to getting ahead. Labour is going to be poorer than capital relative to the last 50 years. On the upside, the talented, the crafty and the well-connected will make bank like gangbusters, it’s the average to the modestly bright that will take the shaft – many of those that will be considering that £30,000 debt.

Wealth warning – this is the scribblings of a jaded fiftysomething that grew tired of the the way the modern world of work is. If you are a twentysomething you have the energy of youth, you have fire in your belly and I wish you all the best of British luck. I don’t think I have said anything that’s explicitly wrong, but the glass is half empty, and one of the specific advantages of youth is that your glass should always be viewed as half full.

From a personal finance point of view I do believe you should think about taking on a £30k claim on your future earnings very carefully and know why you’re doing it rather than just drift into it because it’s the done thing, and have a clear vision of how doing this will help you earn more than 30k in real terms across your lifetime  and compensate you for three years of not earning. Or if you are rich enough, whether a damn good time and one of the few rites of passage we have in the West is worth it as a consumer experience regardless…

Zooming even further out, what will that society look like? Staid and sclerotic – who you are will matter much more than what you know or even what you can do. Maybe Downton Abbey with more mod cons and better contraception. Don’t think we’ll be going to the moon. Or Mars. It’s where we are going if Life After Growth is true. But it isn’t predestined, maybe the other side of Wilkins Micawber will show, the one that isn’t normally cited in PF circles

Something will turn up