passive investors, are you destroying your children’s world?

Most of the brouhaha about the rise of passive investing comes from the intuitive feeling that passive investors are only along for the ride, they don’t know or care ‘owt for what the companies they hold passively are up to.  Insofar as they are not engaged shareholders, they don’t guide the companies they own collectively, and the burden of shareholder feedback falls upon a smaller band of active investors.

Most of the argument about this in the FI sphere is a concern on corporate governance and returns, and there are various forms of rebuttal. The dumb passive billions are like the carriages on a train following the remaining active engines, but they switch to a different locomotive depending on the outcome, the fickle bastards. So it comes out alright in the end, is the received wisdom – the passive crew are amplifiers to the results of the active guys, rather than sponsors of their yachts. So the dumb money is safe1, because it follows the smart money.

The Anglo-Saxon business model eats the future, quoth the British Academy

who make the case in an extensive report that the narrow definition of the aims of the corporation in the English-speaking Western world makes companies focus on making money to the exclusion of all else. They are required by law to make as much money as you can for your shareholders. There is an implied “by legal means”, but globalisation means that there is a race to the bottom because what’s legal there isn’t necessarily what’s legal here. That this has been damaging to Western working populations can be seen by the changes in the workplace, particularly since the global financial crash – disaffected Western aspirations voted for Trump, and Brexit.

One of the problems of globalisation is that it has massively reduced the leverage of government regulation. The UK government could regulate to reduce practices that harm the environment, but the activity so discouraged will then migrate to a jurisdiction that doesn’t have such scruples.

On the other side, as buyers we qualify our investments by the desired rate of return. This is marginal enough as it is – the common assumption is a 4-5% real return on investment integrated over decades. The corollary of that is that you need a capital of 20-25 times your desired annual income. Shift that down to 2 to 3% and that starts to become 50 times your desired income; doing that in a 30 year working life starts to look really tough.

A quick spin through the top components of a whole world index fund

Do big firms eat the future? A glance at the undesirable practices of the biggest components of a well-regarded recommendation of world index fund VWRL isn’t happy reading for those with a social conscience:

Apple Inc: Failure to adhere to Chinese labour laws. I’d charge ’em with price-fixing, planned obsolescence, anticompetitive practices, non-replaceable batteries2 and refusal to engage with third-party or DIY repairs. Pictures of workers and pollution here

MSFT: I couldn’t dig up that much dirt. Yesterday’s men, they tried to rule the world and failed, though they were done for antitrust offences ISTR. Bill’s still rich as Croesus

AMZN: So bad Wikipedia has a page dedicated to AMZN criticism. Closer to home they treat people like shit in distribution centres. I think their riposte boils down to ‘treating people like shit is part of our business’ and while it’s true that I left work because I was treated like shit at a critical juncture, it’s notable that for the vast majority of my working life treating people like shit wasn’t a widespread part of my work experience or that of people I know.

FB: Suborning the political process, getting rich on fake news, making sociopaths of us all, aiding and abetting Dominic Cummings, refusing to stop meddling in elections by showing different things to different people. Selling personal data to the highest bidder, lying about it until caught. The problem was manifest from the get-go as the youthful Zuck described his punters as dumb f**s. Evil courses through the company’s veins. If I were God for a day social media is a class of product/service I’d uninvent and rewire human brains so it could never be dreamed up again. Yes, it’s nice that Grandma in York can keep in touch with the grandkids Down Under but the collateral damage in terms of human misery is appalling IMO

JPM: I couldn’t come up with any dirt but they paid a $13bn fine for something to do with the GFC. Presumably they have enough money to pay decent lawyers to get them off the hook, so it must’ve been bad.

Two lots of Alphabet, Google’s holding/parent company: How’s that ‘Don’t be evil’ thing going down with y’all? Oh and this

on Youtube, owned by Google. It’s either irony, hubris or advertising, and I am not clever enough to determine which. Orwell called it forty or fifty years too early with “if you want a picture of the future, imagine a boot stamping on a human face – for ever.” Usual charges against Big Data, suborning the common weal, all that stuff. I’m kinda tickled that the Google search of what’s wrong with Google assumes you have technical problems, rather than searching for the central heart of darkness. Chapeau for the subtle control of framing, guys. What’s wrong with Google? Nothing to see here, move along now.

JNJ: I couldn’t dig up that much dirt.

VISA: I couldn’t dig up that much dirt.

NESTLE: Baby Milk Action. ’nuff said, although the £25 Kit-Kat should get an honourable mention just for taking the piss, I can’t make the case that it’s evil.

It may help me retire early, but I’m not sure I can actually feel good about owning VWRL. Perhaps I can tell myself that’s only 12% of the market cap (and mainly American) and that the levels of evil were dropping as I went down the list to the smaller fry, but to be honest I’m not sure I want to know what the rest of them get up to after this exercise!

On the other hand if you try and stick to being ethical you get slaughtered in the markets. Sin pays. You can read countervailing arguments, but it’s people talking their book. It is interesting to observe that ethical investment screening locks you out of nearly two-thirds of the UK’s largest firms. This suggests ethical passive investing just isn’t possible in the UK market. Passive investing only works if it is representative of the market by capitalisation, and a third just isn’t representative. Turn the telescope round and the British Academy chaps have some point – two thirds of the top British firms are harming the public good somewhere.

Maybe nobody will be able to retire in future if this is cleaned up, the rate of return will be so dreadful you just aren’t going to live long enough to save enough to get out of the rat race. Historically, capital accumulated very slowly across a human life, to the extent that dynastic and ancestral capital ruled society. You still see the background radiation of this in that 25000 landowners own half the UK. and the largest share of a third is the aristocracy, where the land has remained in the same families since William the Conk declared himself owner of all of it after 1066 3.

The problem is that money is power, and power corrupts. Most of these firms get an edge through scale. With the exception of FB, they all provide a useful or valued service, they just happen to cut corners in parts of their operation, and globalisation weakens limits on their ability to cut those corners in dark places. We’ve seen some of this movie before – the robber barons of the Gilded Age, and a lot of the pollution and abusive work practices echo what happened4 in the industrialising West in the last century or two. Tim Worstall would probably say that sort of exploitation is a price worth paying. It worked in the West and it’ll work for the global poor.

Globalisation was good for humanity in general, but not for most people in the West

In the article the crisis of capitalism Milanovic argues that

The western malaise is the product of uneven distribution of the gains from globalisation. When globalisation began in the 1980s, it was politically “sold” in the west – especially as it came together with “the end of history” – on the premise that it would disproportionately benefit richer countries. The outcome was the opposite. Asia in particular was a beneficiary, especially the most populous countries: China, India, Vietnam and Indonesia. In Europe, as in the US, it benefitted the 1%. It is the gap between the expectations entertained by the middle classes and the low growth in their incomes that has fuelled dissatisfaction with globalisation and, by association, with capitalism.

Harvard isn’t noted for being a hotbed of Marxist anti-globalisation thinking, but their Dani Rodrik made a similar case in 1997 in his book Has Globalisation Gone Too Far5, observing that lower-skilled wages have fallen in real terms in the US and then Europe since the 1970s. This fall predated my entry into the workplace. I did not observe this at first, because my experience of the workplace was different from my father’s6. He was a maintenance fitter, I worked in industrial research. The suckout took thirty years to reach me, but reach me it did – I retired eight years earlier than normal retirement age for The Firm to escape this deterioration in the workplace.

It’s quite chastening to see that the pathologies dragging us down now were foretold in 1997, exactly as I reached the halfway mark of my shortened working life. Of course, the problem with working out which portents of doom to heed is that  there are so many of them, most of the things that could go wrong don’t go wrong. The bear case always sounds smarter. It’s still eerie to see that over twenty years ago a forecast of the troubles we  face now was written:

Globalization is exposing social fissures between those with the education, skills, and mobility to flourish in an unfettered world market―the apparent “winners”―and those without. These apparent “losers” are increasingly anxious about their standards of living and their precarious place in an integrated world economy. The result is severe tension between the market and broad sectors of society, with governments caught in the middle. Compounding the very real problems that need to be addressed by all involved, the knee-jerk rhetoric of both sides threatens to crowd out rational debate.

The standard answer to that from Calvinist work-is-good-for-you believers is adapt to creative destruction, get on your bike, or die, suckas. Bollocks to that – life is about more than work, I don’t want to hustle for the rest of my days, because I loathe hustle and self-promotion. Had I been born ten years later, that escape route wouldn’t have been an option open to me.

There’s no good reason to put up with a deteriorating workplace if you can buy manumission from The Man. Arguably the stagnation in living standards since I left work meant I haven’t gotten relatively poorer as a result of rising wages in the time I have been out of the workforce. Observation shows that in the West, and in Britain in particular, work is getting more shit for most people. Rodrik was right.

There’s a case to be made that Brexit was partly a rejection of globalisation, the line that if I am going down, you lot are going down with me. Time will show if they get what they wished for. Let’s hope they like it, eh? They’re not going to get a do-over.

Globalisation is much more popular in Asia than in the West, according to Milanovic

But the dissatisfaction with globalised capitalism is not universal: a YouGov survey showed a very high degree of support for globalisation in Asia, with the lowest support in the US and France.

It stands to reason – it has been a win, particularly for the Asian middle class.

Who has gained from globalisation, 1998 to 2008. Tea-leafed from Milanovich’s report in the Harvard Business Review, “Why the Global 1% and the Asian Middle Class Have Gained the Most from Globalization”

Right-wing nut-jobs like the Adam Smith Institute’s Tim Worstall makes a cogent case that globalisation has been a good thing for humanity in the round. He is probably right in that nobody has experienced an absolute terms retrenchment7, but if I had followed my Dad into a blue collar job and Tim showed up in a bar telling me “chin up old boy, your end of the boat had to go down for the greater good, but though you can’t buy a house your telly’s sharper and your phone isn’t screwed to the wall like your Dad’s” then he might end up with a robust and physical riposte, because I don’t particularly care about humanity if I am feeling shat on. He’s also got an answer to the tosspot8 David Attenborough yammering on about environmental issues and that there is no problem that exists in the world to which the right answer is ‘more human beings’, basically don’tcha worry your little head about that, capitalism will fix that too.

Even on a white-collar income, Dani Rodrik’s declining trajectory is shown in my life. I discharged my mortgage ten years later in life than my Dad did, on his single household income. The arrow of time still points in the same direction, the retrenchment in home ownership9 in more recent generations. Worstall would say so what, Millennials will live longer than previous generations, and they have far more choice in what to spend their incomes on. If he makes the case in some hipster east London bar through a mouthful of smashed avocado on toast, he may be met with some pushback in the form of “as long as those things we can afford don’t include buying a house or having children, yes”.

Is your passive FI/RE dream eating your children’s future?

The British Academy lays out the charge on page 27, Corporate Financing that the arm’s-length passive ownership is not only detrimental to the common weal, but it amplifies the actions of bad actors

Traditionally, corporate financing has been concerned with the interests of investors alone. Stock market listed companies in the UK and US are dominated by dispersed passive shareholders who do not provide the active engagement with companies that is associated with larger share blocks in other countries around the world.

In particular, universal shareholders who hold the global portfolio of shares through index funds have risen to the fore. To the extent that there are engaged investors, they take the form of short-term hedge fund activists who hold blocks of shares in companies for an average of between two to four years.

What is for the most part missing in the UK and US are long-term, engaged holders of blocks of shares who act as true owners of corporate purposes . Since one cannot have a relationship with the anonymous, the absence of identifiable holders of blocks of shares undermines the provision of long-term relationship forms of equity finance. The result is not only insufficient governance and stewardship by investors but also a deficiency of committed owners of corporate purposes.

I am not clever enough to see if they are right, but at least some of that seems to have a grain of truth to it. This bell has been tolling for some time – 8 years ago I watched the programme Finished at Fifty that showed a stark contrast between the lifestyles of a Chinese middle class aspirant in an economy with rising prospects and a fifty-year old Brit who had already been offed from one job, carried too much mortgage for his stage of life, lived high on the hog and wasn’t looking at the road ahead. Some of the anger I had in that post is because I saw myself in him, and I was half-way through extricating myself from that sort of folly. We hate seeing in others the dim reflection of our Shadow, and that was why watching this berk do what I had done two years before got on my tits so much…

The stench of decline in the West has grown worse since that programme, in the English-speaking world it’s names are Trump and Brexit, and they harken back to making America Great Again and its Mini-Me Brexit Putting the Great back into Great Britain Again over here.

Putting the Great back into Britain

It just ain’t gonna happen, guys. Sic transit gloria mundi. Well, it’s going to happen for the better off, but although I am over halfway up the UK wealth scale10  I am nowhere near safe from that firestorm, and I don’t even have the right to live elsewhere any more11 any more because of these nostalgic dreamers of Imperial glories past selling their jingoistic story.

Jacob Rees-Mogg will do all right out of it

Jakes will do all right out of it. Of course he’s not influencing Somerset Capital Management‘s investment decisions since he’s an MP. So that’s all tickety-boo and above board then. But the engine of globalisation is driven by our money as well as his. Perhaps I am closer to Tim Worstall than I like to think. It’s not a good feeling.

  1. I am sure one day there will be someone with enough cash to be able to flush this dumb money by pumping and dumping enough stocks along the index rebalancing cycle, but it hasn’t happened so far that we know of. 
  2. The battery works on a chemical process and has a finite number of cycles before it loses capacity. Once upon a time you could change the rechargeable battery in a mobile phone just like in any other electronic doo-hickey. Apple led the way by glueing the damn thing inside the case, so you get to throw the whole thing in the trash when the battery is knackered. 
  3. The Domesday Book of 1086 is the first and last comprehensive record of land ownership in England. Unlike any other self-respecting European country the cadastral records of the modern Land Registry don’t cover 14% of the country because the aristocracy don’t want you to know how rich they are. Land is their preferred method of preserving capital across the generations. Estates aren’t sold when inherited, so they can do this on the Q.T. 
  4. for instance the Dhaka garment factory fire of 2012 has echoes of the Triangle Shirtwaist disaster in NYC a hundred years earlier 
  5. Yeah, that’s an Amazon link. I am part of the problem, as I’m sure are most of you. Don’t like His Jeffness? Google it…oh never mind 
  6. My Dad retired just after his 65th birthday, having worked at that company for 23 years, but he started work at 14, so he worked for 50 years in total. 
  7. I find this hard to square with the increasing signs of overt poverty in the UK, the increased amount of visible homelessness, the food banks that Iain Duncan-Smith regarded as just the third sector picking up the slack rather than the direct result of his vile disdain for the lower orders not being able to ride out the five-week delay built into Universal Credit welfare reforms pour encourager les autres. But let’s not pick the fight with Sir Tim Worstall, eh? 
  8. If you’re about to pound the keyboard giving me what for about the dastardly disrepect shown to Sir David, may I respectfully suggest to you that your irony detector has failed in service. 
  9. You can make the case that home-ownership isn’t as well suited to modern insecure working patterns. The trouble is that the rental market is too skewed to favour landlords in Britain, with virtually no security of tenure what with the section 21 eviction at short notice without reason, though there are moves afoot to change this. That won’t take things anywhere near the sort of security of tenure German renters have, for instance. 
  10. the median UK household wealth is about £260k according to the ONS 
  11. I suppose I could buy Maltese citizenship but Brexit has shown just how frail supranational entitlements of residency really are. You gotta admire Maltese chutzpah, when the EU gave them a bollocking for selling citizenship they simply raised the price (to more than I can probably afford) and said that that was all right then. Malta’s got other serious problems – it is far too close to obvious geopolitical hazards, the government seems to have issues with journalists who find out too much. Before Brits point fingers at those Maltese fly-by-nights note that the UK government sells citizenship on a sliding scale of £2,000,000 to £10,000,000. Interested? Apply right here on The extra £8M readies buys you three years off the settlement delay, and you can fast-track the application for 500 nuts (on top of the £1600 fee).  We don’t give you all that US bollocks about moral turpitude. Acts of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen are absolutely fine with us. As long as you do your crime and skip the country where you perpetrated it within 12 months, or your criminality is more than 10 years ago we’ll whistle a dancing tune and welcome you and your money with open arms. What’s more, unlike those money-grabbing Maltese the money is still yours, all we ask is you lob it in a UK bank and convert it to sterling. Ta muchly. Obviously if you wanted to get EU citizenship you are SOL, but £2mill ought to get you a suitable gated pad with a concierge, so you don’t need to fear the revolting proletariat in the years to come. Toodle pip old boy and the best of British luck in sharing your ill-gotten gains with us investing sagely. 

living standards are going down because of a power shift from labour to capital

Imagine. You’re in a tunnel and it’s dark, then you hear a thunderous noise and see an approaching light. Wouldn’t the sensible thing to do be to accept that an oncoming train is happening and prepare for it? Hit the deck and you might survive it.

When it comes to falling average wages in the West, however, the approach seems to be to ignore what is happening and yell out “living standards are going down! It’s unfair! How can we stop this!”. It’s a vote-winner maybe, but it isn’t effective. From an individual point of view – the response should be to try and get ahead of the curve. Consume less – and sign off the treadmill of Buying More Stuff Makes You Happy.

This applies particularly to the so-called ‘middle class’ – you are the people that are in the line of fire. If you don’t believe me, look at what Blackrock has shown is happening in the US in a throwaway chart in its 2014 Investment Outlook

Capital is getting more of the pie than labour for years now (source - BlackRock)
Capital is getting more of the pie than labour for years now (source – BlackRock)

What happened after 2000, then? The Happy Investors title is questionable, after haven’t we heard often enough that the stock market has been trading sideways ever since the dotcom bust

S&P500 - log Y axis
S&P500 – log Y axis

Well, it seems to have broken out of that now, and of course what isn’t shown on the chart is the dividend income. So what did happen after 2000 then?

I would hazard a guess at improved communications from the Internet, improved data processing, and the arrival of a shed-load of keen young workers from what used to be called the third world. Although it’s been fashionable for the likes of the Resolution Foundation to pretend that government action can push back on this:

The US experience also shows us that the fate of everyday workers in America is a product of economic and social policy choices, rather than the inevitable result of globalization, technological change and immigration.

In other words, we too have a choice: it is possible to reverse the trends in living standards that are beginning to emerge here in the UK.

I don’t think they’re right at all. For sure, government action may be able to ameliorate the effects of this via redistribution, but only up to a point. These improved communications and technology means that capital can flee taxation and regulation. Capital, labour and land/mineral resources are the factors of production, and it makes sense for capital to move towards where labour is cheaper.

Others blame the damn baby boomers for it all, and the yell goes up that it’s all so unfair, Living standards are going down. I would actually challenge that statement -I think living standards are going up for humanity as a whole.

Although not strictly about wealth, Hans Rosling’s time series shows improved living standards across the world in a pretty fundamental way. Seeing a lower proportion of of your kids die before 5 has got to be a step up in living standards!

It’s part of why people don’t talk about the Third World any more. It wasn’t aid that helped them up – it was trade. That trade made our goods a lot cheaper and a lot more varied in the 2000s, but it also brought a hell of a lot of competition into the workplace. And while living standards for humanity as a whole are going up, the backdraft of that means that wages will fall in the West relative to what they were for any typical skill level, until they roughly equalise globally. Robert Peston had a program on Europe and Niall Ferguson on China – both of them called out some inconvenient truths about competition and living standards in the West. President Obama called it out in two years ago in a State of the Union address.

“Many people watching tonight can probably remember a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn’t always need a degree, and your competition was pretty much limited to your neighbours. If you worked hard, chances are you’d have a job for life, with a decent paycheck, good benefits, and the occasional promotion. Maybe you’d even have the pride of seeing your kids work at the same company. That world has changed. And for many, the change has been painful.”

That’s what globalisation does – it means you can buy a DVD player for £18 in Tesco [ref]That still sounds awesome to me because I remember buying my first VCR secondhand ex-rental for £150 – about £400 in today’s money[/ref]. But the downside of that is your kids will struggle to get a job if they are of average ability, so all of a sudden cheap doesn’t look so cheap, really.

Your wages will fall, compared to what you’re used to, if you have a middle class job.

You will have less than your parents, if they were doing the same sort of job. They were competing against the rest of the West, you will be competing with half the world. Your gadgets will be far better and varied, and cheaper than theirs were. You will be healthier and live longer. But they had a more stable work environment, their employers were better because they had less choice. You will find it much easier, arguably too easy, to borrow money. Just because you can doesn’t mean you should.

Maybe Baby? Maybe not

You will find it much dearer to have children than your parents, because  consumer society is now set anticipating dual income households. The opportunity cost of children is more that it was for your parents. Having it all was never an option, though perhaps your grandchildren may get it if resource crunches or global warming don’t get humanity first. [ref]If Hans Rosling is right, there may one day become a day when the fertility rate has fallen so low that governments may actively promote new citizens for economic reasons, and then you may have it all. At the moment it is far easier and cheaper to import them, and the world is not short of humans at the moment.[/ref]

So for God’s sake do some forward planning. Think about the big things in life – who/if you marry/partner with. Think about where you are going to work, and live. Think about whether you can afford to have children before you have them. You are unlikely to be able to afford to have as many as your parents did, and if you do, your disposable income will be squeezed more than theirs was, all other things being equal.

You cna own your house. You can have four chidlren. What you can't do, Shona, is do both, not on your money.
You can own your house. You can have four children. What you can’t do, Shona, is both, not on your money.

Think about how much house you buy, and remember that a bigger house needs more maintenance, heating and furnishing than a smaller one. That also impacts the children decision – having children is a responsibility, not a right. Consider Shona Sibary as a cautionary tale  – far too many children for her means is the fundamental problem there, though it’s compounded by a lack of strategic planning and general economic muppetry.

Having children is a emotive subject, and there are some physical constraints. However, unlike some former generations, it is a choice nowadays. There has been a lot of focus on relative child poverty in the last administration, but one of the best ways of reducing child poverty is for people to have fewer children if resources are limited. Hans Rosling’s video shows that for what we may think of as poor countries, but Britain is becoming a poorer country for most people. The logic still applies even if the results of the poverty aren’t so stark. You incur a debt to the child as soon as you bring it into the word – the debt of nurturing and love – it isn’t simply a means of self-actualisation in creating a mini-me. It’s a responsibility, not a right that others have to help you with, despite what some people seem to think

The UK housing nightmare

Housing is a particular pathology in the UK, for several reasons. Thatcher’s sale of council housing to buy votes destabilised an effective system of social housing for those who couldn’t afford to buy, and the damage this did to the housing market, together with the rotten terms of the assured shorthold tenancies that prevail in UK renting gives owner-occupation a particularly privileged position. Owner occupation is a crap deal for tenancy for the owner, with huge fixed costs (moving, estate agent’s fees, Stamp Duty in some cases, redecoration/furnishing) and the risk of frozen capital if you have to move to chase work – all of which are more likely now as jobs are less secure and more mobile now than in Thatcher’s time. However, although it’s a crap deal, it’s a lot less crap than strings of assured threshold tenancies (AST) which is the alternative. Which is why people aspire to own rather than rent in the UK despite ownership being a very bad fit for modern working patterns.

There don’t seem to be any good answers here. Other European countries seem to have made renting a lot more attractive, and people are happy in accommodation that is often a lot denser in cities. The British preference for  houses rather than flats means housing is much dearer, and distances to amenities end up longer. This seems to be where the crunch is happening at the moment with living standards – we simply tie far too much of our earnings up in bricks and mortar. If you buy a house at a 4-5 times income multiple, that will consume about 8 times your gross salary [ref]at typical UK long-term interest rates of 4-6% you pay roughly double for your house over 25 years[/ref]. You pay out about a third of your gross salary in tax, so you are agreeing to pour your entire earnings for about 10 years into that house. The situation is improved by inflation (you want lots, as long as your earnings track, which they aren’t likely to nowadays), and many people get some career progression. The arithmetic is ugly, and rents follow the cost of housing by substitution since everyone needs to live somewhere.

Live intentionally – to live well

The global  competition isn’t going away any time real soon, and that means the value of Western middle class labour is going to fall because it’s no longer the only game in town. This is a long-term secular trend, it isn’t particularly about the credit crunch or this particular financial crisis, but the crisis throws a harsh light on it – in the UK the welfare system was used to soften the blow, but that’s likely to be scaled back more and more. These trends will adversely affect the lower end and the middle, they will probably favour the top 10%. That means that essentials like housing, energy and food will cost more than they used to, relatively speaking, because more people with the means to pay will be competing for it globally.

Gadgets and consumer frippery will probably cost less, because there will be more production and a far larger supply of skilled workers in the design and production side, as well as automation removing the need for medium-skilled workers, reducing costs. Looking more widely, the time will come in 5-20 years when a lot of the NHS will be so financially constrained that you will want to have options to go private for some elective treatments.  About £6,000 will get you most elective treatments. It isn’t a bad deal when you look at the fear and loathing that is the US system, but you will probably want to save towards that. Where the NHS scores is in acute and in chronic treatments, but I’m not banking on relying on it for elective medical intervention. It should be noted that saving to a medical emergency fund is not the only way of investing in health. As an early retiree who owns their own time, I choose to walk to places far more than when I was working. Keeping the machinery running is an indirect investment in health, and best of all it is free. Better than free, indeed – as it saves the bus fare/fuel for driving.

Much of the unhappiness about living standards is from unfulfilled expectations – if you are aware of the trends and accept the results of your actions, you will have less of the pain, because you are living intentionally. Whereas if it comes as a surprise to you because you feel you are fundamentally entitled to a steady increase, then you will feel sore and angry. One of the enduring myths of the West was that things always got better.

It’s not even true in living memory, it’s just been a while since the exceptions. Real incomes have fallen in the periods 1974-1977 and 1979-1982 [ref]IFS[/ref]. Britain will still be a rich country even if living standards fall to the levels of the 1990s. Many Britons had a good time then. It really wasn’t so terrible. So if we plan for that, and suddenly some magic happens and the economy takes off and median wages get dragged up, well, we get to have more parties. Whereas if expectations are set to more parties and we end up with 1990s living standards a lot of people will be pissed off. It just seems wise to set expectations lower. Buy less crap, and avoid building too many fixed costs into your life  –

the key to financial success is never taking financial responsibility for anything that eats

Jonathan Pond

As consumers, we are part of the problem

How did the world end up in such a screwed up state? Well, as consumers, we are also part of the problem, because capitalism is values-blind. I went to town to get some replacement bulbs for some Christmas lights, and watched in amazement at people spending shitloads of money on crap. Mainly cheap crap – in 99p and pound shops, this was stuff that should never have been made, never mind shipped here and sold. I eventually bought a replacement set of lights for £2.50, because they deliberately change the lamp bases so spares are only available for a couple of years. There’s no good reason for that, it is designed obsolescence. [ref]You can, however, retain the old bases and pick out the lamps, so I made sure to match the voltage and power, so I will scavenge the old set for lamps to insert into the plastic bases of the new set as the bulbs fail. The price of replacement bulbs is usurous – you get three for £1 or 20 for £2.50 – in a new set ;)[/ref]

We are part of the problem, because we want our stuff cheap. And getting stuff cheap means we buy from Amazon, supporting shit working conditions. We buy £2 chickens from Tesco, supporting shit animal welfare, and buying a load of overpriced water too. I saw a woman buy 20 boxes of Thornton’s chocolates in Wilkinson because they told her it was half-price, and £3, not £6. What they didn’t tell her was that these were non-standard boxes and the weight was lower 😉 She was rewarding deceptive marketing practices.

We fall for cynical marketing – an Apple iPhone is deliberately designed not to last a long time and have non-user replaceable parts, because you are renting an experience from Apple, with the rent levied on the capital cost of the gadget[ref]You may explicitly rent the device capital cost subsidized as part of a mobile phone contract[/ref] – the rental period is defined by the average service life. Even if you look after it, as the operating system moves on, older hardware becomes unsupported, and since you use apps rather than open standards an unsupported device becomes unusable, and destined for landfill even if it works correctly as originally designed. Contrast this with a preamplifier I purchased when I started my first job 31 years ago for £1500, the equivalent of £4000 in today’s money. Financially it was a damn fool thing to have done at that point, though at least I bought it on interest-free credit and paid on time. It is still in service.

The whole way we make electronics anything now is focused on new manufacture, planned obsolescence and no expectation of repair. I repaired a Maplin 150W inverter recently – it cost me a fiver to change two power transistors and a driver transistor. I could buy a new one for £20 – I repaired the old one because I just didn’t want to keep on adding needlessly to the mountains of e-waste when I could do otherwise. That worked for me because I had the skills – for most people this would be beyond economical repair once past the guarantee period.

If we wonder why many jobs are so shit now compared to what they were, occasionally we have to be prepared to charge the face in the mirror. Capital cares only about the bottom line, and it is gaining power, because whenever somebody presents us with a bill for protecting labour, we don’t want to pay the levy. So it goes away and does what we tell it to do – cut costs – do whatever it takes. At the moment capitalism is probably serving humanity okay from a global perspective as it lifts billions out of poverty. It’s not serving many people in the UK that well, because of this, which I’ve swiped from the Resolution Foundation

Median wages are tracing down, and that's what most people feel (from the Resolution Foundaton)
Median wages are tracking down as a share of GDP, and that’s what most people feel (from the Resolution Foundation)

Although I agree with their narrative, I don’t agree with their solution. In the end the fundamental problem is that middle-ability jobs are being leached from the economy. You can’t legislate for more GDP going to labour, because what will happen is that capital will scarper to places where it can produce GDP without being taxed for redistribution. Of course, we could renationalise the energy industry, which is where Ed Miliband is probably going in the end. In which case the question will change to “how would Sir like to pay for the increasing cost of energy? Higher bills or higher taxes, bit of both? It’s your call.”

You can run, but you can’t hide…

That global competition is coming your way. You can deal with is several ways. You can upskill, if you are bright enough, which will bring more in. You can hop from one leg to another and make a low keening noise that it isn’t fair, which won’t help your situation but will make you feel better for a while. You can downshift or not take on as many commitments – in the form of smaller housing, fewer children, fewer consumer purchases and knick-knacks or do what Jacob from ERE does. Or you can stick your fingers in your ears and go “la-lal-la-la-la”. Only two of those responses will help you avoid getting flattened by the oncoming train of falling average wages…

Of course, one of the ways of avoiding this is to add income from capital to the mix. But the rub here is that you need about 20 times your annual income from capital as a capital stake, and it isn’t easy to save that much up over a 40-year working life while being a good little consumer and buying crap all the time. However, if you are prepared to live differently and dramatically below your means you can make this work for you – it is part of the RITERE and MMM way. These guys will be better insulated from falling wages – because their income is coming from capital as time goes by, rather than labour, and the 21st seems to be the Century of Capital where the 20th was the Century of Labour – in the West at least.


The Times They are A Changing – Be No Boiled Frog

Change is part of life, it indeed is characteristic of life itself. It’s a double-edged sword; it makes life more interesting on one hand. We go on holiday to find change, else we’d just stick at home and go to the park on our time off.

On the other hand, it makes it hard to live life, set in a sea of roiling change in the society and expectations around us. One of the characteristics of previous ages was that people lived more stable lives – there were people only a generation or two ago who grew up, raised a family and lived and died without having ever been more than 50 miles from the place they were born. George Ewart Evans related some of these tales from first-hand interviews in his book “Ask the Fellows Who Cut The Hay”.

As a result, societal changes happened slowly, whereas now they happen a lot more quickly.

There are some assumptions that many people build into their lives that were drawn from how their parents and other lived. In particular, some of the assumptions of how to live a middle class life are becoming very shaky indeed.

President Obama called it out well in his State of the Union speech.

“Many people watching tonight can probably remember a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn’t always need a degree, and your competition was pretty much limited to your neighbours. If you worked hard, chances are you’d have a job for life, with a decent paycheck, good benefits, and the occasional promotion. Maybe you’d even have the pride of seeing your kids work at the same company. That world has changed. And for many, the change has been painful.”

There are lots of difficult questions we might want to ask our politicians about how they delivered us such a screwed up world where so many of us have taken the shaft. In return, the more astute of them might return that they are merely a mirror to our desires and hopes. The problem is that

we wanted it all, and we wanted it now, and it was mainly in terms of things and stuff

Satisfaction delivered, largely, in the West. In the first half of the 20th century, lots of Stuff made great improvements in people’s lives, you can’t knock decent sanitation, the arrival of electricity in the 1930s, washing machines and vacuum cleaners in the 1950s, cars in the 1960s and 70s, central heating and double glazing in the 1970s.

Then it all started to go wrong, and in a sudden rush of blood to the head we wanted more and more stuff, while not realising that we were taking on more and more debt simply to live.

That was sustainable in the world that President Obama described, of stable jobs and a steady society. However, we started to demand more and more of our companies, and in order to deliver on the promises they made to our pension funds, our companies started to demand more and more of us. We could have had the Fifties lifestyle but working far fewer hours, but companies don’t like hiring part time staff, so what we got was a lot more unemployment, and a rise in asset prices like houses.

Let’s take a look at where things have gone wrong:


  • there aren’t enough of them, decent ones anyway. We doubled the workforce in the 1970s, and the economy hasn’t adapted well
  • they aren’t particularly secure
  • you don’t get career progression, everything is a fight now
  • on the job training is disappearing
  • job descriptions are exploding in complexity without much cash return
  • people are managed as interchangeable components, less and less attention is paid to using them to the best mix of talents and specialisations
  • increased focus on paper accreditations rather than successful work done
  • far less opportunity to shine as an individual, everyone is a cog in a team now
  • more rigid structures
  • outsourcing and faux-self-employed agency working without rights


  • Ever since Thatcher’s sale of council housing we have had insufficient housing, poor rental conditions and increasingly overpriced owner-occupation
  • the rise and rise of the interest only loan. Why do people to this to themselves FFS.
  • the rigidity of owner-occupation doesn’t suit the mobility requirements of todays insecure jobs, so we have accidental amateur landlords
  • Buy To Let. About time you started to pay capital gains tax, guys. There’s actually a case to be made for that on all property, but definitely on non-main-residences.  It also results in old money competing with young money, and old money always wins…
  • You need two earners to be able to afford a house


  • When everybody gets a gold star because we can’t allow ourselves to tell some of our children that they are thick, we can’t tell who’s bright and who isn’t. Plus some people get to leave school without being able to read properly or add up.
  • University. What is it for and what good is it? How do we know who is good enough and who isn’t. Is there any such thing as not good enough?
  • Student Loans/tax
  • Is 50% university entry desirable? This means university entry for people with an IQ of 100 or above. IMO universities should be more selective, they were in my day, taking about 7% of school-leavers.

This is what has gone wrong in the last 20-30 years. Let’s take a look and what is likely to go wrong in the next 20:

  • Britain, and the West in general is bankrupt. In the end the rest of the world is going to get bored with giving us money to keep our lifestyles high. What that means is that wages, in real terms, are going to come down. Big time – I would guess at least 50%, if not more.
  • We have an increasing polarisation of wealth
The share of UK income taken by those on various slices of the top income ranges

Look at where that is going. That means you want to be in the top 10-20% of the income distribution. You can find out where you are with the Institute of Fiscal Studies’ Where Do You Fit In page.

If you’re not up there, then you will find it increasingly hard to do many of the things that you saw your parents do. If your household income isn’t in the top 10% you would be unwise to take out a mortgage to buy a house in my view, as over the 25 year term you will probably not be able to accumulate enough wealth to pay down the capital. You’re better off renting, because losing a house involuntarily means it gets sold off for a song and you still get chased for the debt, unlike in the US with their non-recourse mortgages. You still get to lose your house in the States, but the debt is cleared.

If you’re young, you probably want to think about whether you want to move abroad to a more dynamic economy. Asia isn’t bad… Germany is good for budding engineers, if I were in my 20s Germany is where I would be looking! There may be advantages to your university funding, should you choose that way.

University – to go or not to go? I can’t really understand why anybody would go in England, saving £30,000 seems worth learning a foreign language for and studying at least in Europe.

Lots of people are going to come unstuck in the couple of decades ahead making bad assumptions that they will track some of the life path their parents did. I was older when I discharged my mortgage that my Dad was when he paid off his mortgage, we were both single wage-earners, but he managed to do it while raising children! I was a white-collar worker, he was blue-collar. The reason it took me longer is written in the shape of that graph – Dad managed to buy his house on the downswing when wealth was shared more evenly from 1960 to 1985, I was in the upswing from 1988 to 2008. Not only that, he was competing with other families with a single breadwinner, I was the single breadwinner as only occupant, competing with two-income households so I had to pay more for my house as a proportion of my salary, even though on other measures I was earning more than Dad. That will hold more and more, as governments lower benefits and increase taxation to try and balance the books.

Additionally, we have increasing competition. From 1950 to 2000, the West had a clear run, but other countries are catching up fast, and they have far larger and younger populations.

The world may start running out of resources, particularly oil. we’ve only got one world, and we are adding an increasing number of people to it, and their lifestyle is increasing. There’s not enough world for everybody to have a European lifestyle. Globalisation will be the great leveller, it was great when it meant cheap DVD players in Tesco, it’s not so great when it means petrol at £50/litre.

How do you respond to this?

  • You avoid debt, at all costs, particularly debt incurred to fund a ‘lifestyle’
  • eliminate fixed costs as far a possible
  • where possible, organise with other people to produce essentials for yourselves and grow food.
  • Spend less than you earn
  • Consider some of these ideas

It’s all about resilience and eliminating unnecessary costs. It’s about people, not things – a lot of your quality of life comes from who you know, not what you have. There is a whole advertising industry telling you otherwise, but a lie repeated is still a lie. Our lifestyle and  standard of living may have to drop, but if we live in a way more according with our values and relate better to each other then our quality of life may not drop.

Forewarned is forearmed. It’s more comfortable to go lalalalalalalala and believe the ads. Taking on extra debt is like the junk food mantra ‘a moment on the lips, a lifetime on the hips’. Live within your means – or be a wage slave for your whole life. It will be harder in future to recover from a debt binge.

Funnily enough, Vince Cable seems to be of a similar opinion regarding the coming decline in British living standards.

People do not understand how bad the economy is […] politicians have not made clear the time and pain needed to restructure Britain’s broken economic model