Household Debt in the UK

Yesterday I argued that if you want to discuss what changes to household debt might mean, you need a decent framework for assessing the fluidity of the microstructure of debt. To illustrate I set out two hypothetical countries with identically modest aggregate household debt loads – but with different sensitivities to changes in interest rates, and differing levels of financial stability. I called them Debtzania (where debt is concentrated and debt-to-income ratios for debtor was high) and Feudaland (where debt is thinly spread and a few households are creditors).

Which of these economies does the UK most resemble?

Using the NMG/ Bank of England survey data we can examine where it is in the income distribution that UK household debt falls.

Table 2 shows that most debt is owed by those in the top three deciles of the income distribution, and on sums below £175k. The mortgage-dominated nature of this debt and the untroubling LTVs with which it is associated may explain it to some as both rational and desired.

Table 2: Where household debt sits, by pre-tax income decile and total debt cohort

We can perform the same analysis for deposit balances held among our sample (knowing that at the macro level, total monetary assets and total monetary liabilities in the household sector are roughly the same), the output of which is shown in Table 3. It is perhaps not surprising that most of the money is owned by members of the upper half of the income distribution.

Table 3: Where household deposits sit, by pre-tax income decile and total deposit cohort

We could treat each income decile as a separate sector and look at the transfer of net monetary claims between them (in the form of savings and borrowings). This is shown in Table 4, and the data suggests that the flow of savings is on a net basis from lower income cohorts to upper income cohorts, typically to deliver mid-sized mortgages (we could, of course, reverse the causality in this description). This concentration of debtors might sound a bit more Debtzanian than Feudalish.

Table 4: UK households by pre-tax income decile and total debt cohort, estimated net saving/ borrowing flow

But debt sustainability is only really an issue for those in debt, and will correspond to their ability to service debt. And so in Table 5 we examine how debt-to-income ratios vary across the our matrix of UK household debt and income distribution. After all, small cohorts of high debt-to-income ratios was the thing identified as problematic when looking at otherwise untroubling Debtzanian aggregate debt statistics. Here we can see that debt-to-income ratios look pretty high for almost all debtors, but least troubling for highest income households where most nominal debt resides.

Table 5: UK household debt-to-income ratios, by pre-tax income decile and total debt cohort

And so the problems for policymakers seeking some rules of thumb to estimate sustainable or unsustainable levels of household debt appear twofold.

First, there is a data issue. Our sample size of around 6,000 households is small (as evidenced by @jmackin2’s outrage yesterday), even before we start to exclude households that refuse to give data in which we have interest. For the purpose of this blog I have used a snapshot, but I think that we need to compare datasets on a longitudinal basis. When the numbers on the matrix change, we need to understand whether this the result of movement on the income dimension or debt dimension.

Second, we have a question over the appropriate unit of analysis. In discussing Feudaland and Debtzania we argue against this being the overall economy, but as suggested by a comparison between the matrices of debt and income distribution on the one hand, and deposits and income distribution on the other, splitting the population into income deciles takes us not much closer to the issue at hand. There are meaningful flows between debtors and creditors within members of any given income decile. The appropriate unit of analysis is perhaps the household. But that statement seems a bit nuts.

The chart below looks at individual households in the NMG survey, rather than treating them as aggregated cohorts. It’s messy, but maybe messy is what works.

Putting aside human concerns for families struggling with the very real problems attached to sever indebtedness, why should policymakers care?

FPC members care because widespread unsustainable household debt can lead to problems for financial stability. But, through this lens, problems in debt service among low income households with small but unsustainable debt balances are just not worthy of deep interest: they are insufficiently likely to cause systemic financial problems.

MPC members care because changes in appetite for debt might tell them something about the location of the neutral real interest rate. Through this lens it might seem that it doesn’t matter what individual households are doing, but does matter what they collectively do. And I guess that if this is true, changes in the optimal level of debt which can only be inferred from an examination of its microstructure will be an important in any decision as to the wisdom of ‘leaning against the wind’. And they will care because cashflow impacts for indebted households following changes in interest rates are part of the transmission mechanism.

What to do?

Despite data shortcomings, there are some suggestions that we can draw out. First, in considering changes to household debt, policymakers should do well to treat aggregate debt statistics with caution. Having an idea as to whether they are dealing with Feudaland or Debtzania, and the degree to which there is stability in the microstructure of the debt distribution seems important. Second, examining the entire distribution of nominal debt-weighted debt-to-income ratios (and changes thereof) appears to be a step towards more capturing more meaningful household debt characteristics, changes in household behaviour and systemic debt problems.

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Reverse ferret on household debt

A couple of blogs ago I posed the question as to how the sustainable level of household debt might be identified for an economy. I then reckoned that there might be a decent 30k ft way of addressing this question. This post serves as a bit of a reverse ferret. I’m not saying that the previous approach was wrong, but after some back-to-basics thinking I understand that its rightness is overly-dependent upon the stability of something that it may or may not be wise to assume. In my defence, I reckon *every* macro approach relies on this stability (comments section please to correct me). But I take little comfort in expressing a popular view based solely on its popularity.

Debt is an entirely distributional issue. Evenly distributed in a closed economy, no level of household debt is unserviceable or unsustainable. But evenly distributed, debt is also functionless. Every sustainability question rests upon the microstructure of debt loads across different households. And so, from a macro perspective, debt is tricksy to say the least.

This all becomes clear in an example. Let’s imagine two super-simple closed economies with no sectoral flows: the Kingdom of Feudaland and the Republic of Debtzania.

The Kingdom of Feudaland consists of 10m households, each of them with perfect equality of employment income (at £20k per annum), making its GDP worth £200bn per annum. Household debt sums to £20bn, and interest rates are 15%. Debt is owed by 9.625m households to the other 375,000 remaining households (evenly). Interest costs are eminently serviceable (£312 per annum per household in transfers from the debtors to the creditor households, each of whom receives a handsome £8,000 per annum in interest).

The Republic of Debtzania also consists of 10m households, each of them with perfect equality of employment income (at £20k per annum), making the GDP worth £200bn per annum. Household debt also sums to £20bn, and interest rates are also 15%. Debt is owed by 375,000 households to the other 9.625m households (evenly). Servicing this debt costs the debtor households £8,000 per annum. The creditor households each receive a modest £312 in interest income on their savings.

Table 1: Feudaland and Debtzanian debtmetrics

The aggregate debtmetrics for Feudaland and Debtzania are exactly the same (Table 1). At 10%, the aggregate household debt to income ratio looks pretty low, as do aggregate interest payments as a proportion of GDP at 1.5%. But the microstructure of the debt distribution is what matters in assessing the sustainability or otherwise of these two economy’s debt loads.

Feudaland, despite its wealth inequality, looks to be a beacon of financial stability. The debt-to-income ratios for debtors are pretty low at 10.4% of income, and servicing ongoing interest costs is universally manageable, absorbing 1.6% of income. Feudaland’s wealth inequality might eventually prove politically unsustainable, but it would be hard to call it financially unsustainable, even in an environment where interest rates doubled.

Despite exactly the same aggregate debt-metrics, Debtzania looks much more financially fragile than Feudaland. The majority of its citizens are savers, but they have amassed claims on the small minority of financially-fragile debtors who must pay out 40% of their incomes in interest payments to keep out of default. Debtzania debtors’ debt-to-income ratios are individually high at 267%, and it is probably fair to say that a doubling of interest rates might bring meaningful problems to Debtzania’s financial system (with associated morality stories).

Now imagine being a monetary policy maker in each of the two countries. At what point should you worry about changes to aggregate household debt, and at what point could you infer that household debt in your country is too high? If a policymaker looked to their countries’ respective histories for clues they would, in so doing, be making the assumption that the microstructure of debtor-creditor relationships would be relatively static (or at least semi-stable) over time.

With a static microstructure of debt in Feudaland we might expect to see household default rates relatively unresponsive to wild changes in aggregate debt loads or interest rates. Policy makers might draw the lesson that household debt – at only 10% of GDP – is far too low to worry about, and that rising debt could be a sign that households were moving towards their optimal debt load (and so should not be met by any ‘leaning against the wind’). One could even imagine the cultural trope of creditworthiness being assigned to Feudalanders (backed by the empirical evidence of minuscule historical credit losses).

With a static microstructure of debt in Debtzania, we might by contrast expect to see household defaults rise and fall with both real (and nominal) interest rates and debt-loads. Those 375k households who do the borrowing may – if cross-country evidence holds in our mythical land – do a disproportionate amount of the spending in the economy. And so monetary policy might prove a particularly speedy macro tool for demand management: introducing higher and lower pain thresholds to debtor households and transferring higher or lower amounts of debtor household incomes to creditor households with lower marginal propensities to spend. It would be unsurprising if Debtzanians acquired a reputation of being quick to default; concerned politicians might encourage them all to save more.

In short, if the structure of the distribution of debt was utterly unchanging in both countries, policymakers might reasonably rely on each country’s individual history of debtmetrics to determine policy pinch-points.

But the usefulness of any historical comparisons (in terms of aggregate debt-to-income ratios or debt-service ratios) rests on this microstructure of debt being pretty concrete. The more changeable the microstructure, the less useful any historical comparisons.

Imagine again that the microstructure of debt distribution in Feudaland shifted to match the distribution in Debtzania, perhaps as its demography shifted through population ageing and associated changes in savings habits. A policymaker following only aggregate debtmetrics might infer that the change in default patterns was associated with some cultural shift in the population. When in fact, aggregate debtmetrics had instead done a good job at masking this demographic sea change.

It is not clear that I, or anyone else who makes macro comments on matters of household debt, has a decent framework for assessing the fluidity of this microstructure.

In the next post I look at the data that I can see readily available for the UK.

In search of a better World Interest Rate

Financial market practitioners are, if nothing else, pragmatic in their approach to analysis. Finding something that works is great. And when something stops working it tends to be discarded. After a twitter convo last night with some smart folks I’m going to outline something that I have tried and discarded in the realm of seeking an answer to the question as to how the long dated real yields across the world might be determined by macroeconomic variables.

Some years ago when I was a full-time bond geek I asked my then CIO (the wonderful Michael Hughes of BZW Equity-Gilt Study fame) how he thought about assigning relative value in the inflation-linked bond market. (Please bear in mind that this preceded the ‘popular’ preoccupation with discerning the true r-star by some years.) 

Simple, he told me. Think of the real yield as the bid for international capital: there should be an inverse relationship with current account balances. I regressed 10yr real yields with current account deficits as a percentage of GDP, and there was an okay fit. Markets are forward-looking so I took consensus c/a balances (proxied by IMF forecasts). A better fit.

Here’s the chart* with and without the UK using today’s IMF forecasts:
It’s not the worst chart in the world at first glance (although @Barnejek might disagree). It gave me a speck of hope that there might be some useful stuff here that could improve on King & Low 2014.

King & Low sought to provide a ‘world interest rate’ series that can be used by all sorts of people. And it has since been heavily cited. They basically take an unweighted average of available ten year inflation-linked bond yields, and also a GDP-weighted average of the same instruments (finding them pretty indistinguishable). As far as papers by former G7 central bank governors go it is unextraordinary. But I like the idea of a global real yield and for play for having a stab at it.

As a practitioner, developments within one market appear to drive others, although the ‘aggressor’ market appears to change. (So, for example, it could be US Treasuries setting the tone for the world’s bond markets until the ECB decides to institute QQE and starts driving the car. And then the BoJ rocks up and declares Yield Curve Control. That sort of thing.) In financegeek language, developed market bond yields appear to be cointegrated. This is uncontroversial.

Finding a world interest rate that recognises adjustments for the international balance of payments (which looks from these charts like they might be a *thing*) could be interesting. Rather than looking at the simple average of the historically small number of issued bond yields and calling that the world interest rate, you could instead plot the course of the intercept of the regression line on the chart over time: a line not distorted by a country’s idiosyncratic balance of payment positions (or at least aggregating and controlling these idiosyncratic distortions).

When I tried this approach I came up with an answer that was not radically different from King & Low. The green line in the chart below is not far from King & Low’s blue line (which I extended by updating their dataset) and is modestly below (taking account of the degree to which King & Low’s issuers typically run current account deficits, and that they hadn’t made any credit spread adjustments to their data). Not that different. But better?

However, we now reach the disappointing part of the story. How stable is the relationship shown above in the nice scatter/bubble charts? Not very. As the next two charts show, the r-square of the relationship goes to pot 2008-2014 (although here I am using actual c/a balances rather than forecast ones). And the slope of the line actually flips from negative to positive in 2008 (admittedly, some really reallly crazy stuff was going on in international inflation-linked markets then – stuff that I still talk to people about today, so maybe that’s forgivable).

I haven’t GDP-, M3-, or duration-equivalent-bond-market-size-weighted the dots to find this r-square, so maybe things improve with a bit more work.

Bottom line: The cutting room floor is littered with ideas that don’t quite make the cut. I really like this way of thinking about international real yields, but am disturbed by the episodic nature of the relationship actually ‘working’. Pragmatism leads me to look in other directions if I want to link international real yields to international macroeconomic variables.

If anyone has had more success in this approach please do drop a comment in below.

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* I take the average IMF c/a balance for 2017-2021 as a percentage of GDP and compare here to 10yr real yields on inflation linked bonds as at 28th November 2017. I have adjusted the UK for the RPI-CPI ‘wedge’, and the Eurozone real yields by the difference in their 5yr CDS and Germany’s 5yr CDS so that it doesn’t become a credit quality chart. The bubble sizes are common currency GDP; I was wondering whether they should be common currency M3 or bond market size in 10yr duration equivalents. Not sure.

Finding the *right* level of household debt

My last post reflected on the Borio/ Vlieghe idea that the Equilibrium Real Rates (ERR) should perhaps be defined not just by inflation, but also by changing debt levels. Since then I have been thinking about that list of tricksy questions I listed at the end of the post. I want to have a stab at one – specifically, whether it is possible to define the ‘optimal nonfinancial debt’ for an economy. Short answer: maybe, but I don’t have the skills to know*; in the meantime I’ve got a way to think about it from 30k feet. 

Thinking about optimal debt loads from 30k feet by cleverer people than me has had a frankly shocking record.** That said, my MPhil thesis on the geopolitics of emerging market finance, has given me familiarity with debt sustainability models that I think could maybe be helpful. The bottom line of debt sustainability frameworks tends to be that there is rarely an impossible level of debt, but debt does get meaningfully tougher to service as debt rises, rates rise, and growth slows. Big surprise.

Let’s look at the UK household sector as a whole through the lens of a super-simplified sovereign debt dynamics framework.*** We know what disposable household income growth and effective interest rates have recently been. And we know where the household debt stock has got to. As the chart below shows, it has risen to 138% of disposable income.


So what is the ‘primary surplus’ (or in the households’ case the net acquisition of financial liabilities minus interest payments as a percentage of household disposable income) required to stabilise household debt-to-disposable-income at 138%? The answer is around about 2% right now. And what is the actual ‘primary surplus’? Around -2%. So debt is growing, and is growing quickly. And the Bank of England appears to be worried about this worrying rise in household debt. (Again, read the last blog on this here.)

We can compare the primary surplus required to stabilise debt levels over time (blue line in the chart below) to the actual primary surplus recorded by households (grey line). You may notice that when the grey line is below the blue line, debt rises. When the grey line is above the blue line, debt falls. It’s a super-simplified little framework. The chart on the right compares the gap between the two lines to the change in debt-to-income: we can see that it doesn’t capture everything, but it sort of works(ish).


While extremely simple, this framework highlights the degree to which the issue of changes in debt sustainability (a somewhat different and easier question to the optimal debt load question) is a function of income growth, interest rates and debt loads. And in seeking to answer the question as to why households have re-levered recently, we can quickly hypothesise an answer that doesn’t involve a spending splurge. (The incredibly smart Neville Hill at Credit Suisse, who kindly shared his data with me that I used to calculate the blue line, argues exactly that here.)

What pushes the blue line up and down so erratically? Well, the most volatile input to the little debt dynamics ‘model’ is household income growth. The spike up in the blue line in recent quarters appears to have been driven by a collapse in nominal household income growth through 2016. In other words, it sort of looks like households are expecting the sharp recent slowdown in income growth to be temporary.

If the slowdown in household income growth isn’t temporary and the Bank of England raise rates to try to control household debt growth, the blue line gets a double-whammy. The following projection shows the path of the breakeven primary surplus in an environment where household disposable income growth continues at the sluggish pace of the last year and three rate rises over the next three quarters:


Actual household consumption would have to drop consumption pretty darn quickly to stabilise debt levels. And I can see households interpreting this as monetary policymakers arguing that the beatings will continue until morale improves.

Where does this leave the idea that an understanding of the ERR should take into account debt growth? I’m still scratching my head on this, but it seems to introduce some qualifications at the least.
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* Given the importance of this question for all sorts of things, it is frankly weird that there hasn’t been more research on it. I feel pretty confident that it might be advanced by some awesome econometricians who have experience in mining large panels of ONS household data, but is there anything to say on the matter before then?

** In the wake of the GFC, Ken Rogoff and Carmen Reinhart’s empirical work on debt at a sovereign level attracted sufficient policymaker attention to get them cited as the intellectual handmaidens of austerity. Indeed, ex-UK Chancellor George Osborne cited their work directly ahead of the fact as the rationale supporting austerity. But since the aspects of the R&R work looking for debt optimality has been shown to be uncharacteristically error-strewn.

*** Simply d[(r-g)/(1+g)]=pb, where d = debt/ disposable income; r = effective household interest rate; g = annual growth in household disposable income, and; pb = household net acquisition of financial liabilities minus interest payments as a percentage of household disposable income.

How to think about debt?

I attended Gertjan Vlieghe’s speech yesterday at the Society of Business Economists annual conference in London. The speech had a market impact because it challenged the consensus perception of Vlieghe as an uber-dove. It had an impact on me for another reason.

But first, a bit of context.

Back in May I was reflecting that many people seem to have become either really cross that monetary policy is way too tight (looking at low levels of inflation), or really cross that monetary policy is way too loose (reflecting either historical anchoring, or looking to debt growth). For a sample of this crossness, you could do worse than look at my compendium of tl;dr versions of submissions to the Treasury Select Committee’s inquiry into the effectiveness and impact if post-2008 UK monetary policy.

Anyway, I drew the following chart, to try to understand this bad-temperedness. 


It shows for each calendar year since 1983 the pace of US inflation (y-axis), the change in US private nonfinancial credit to GDP ratio, and then the bubble size relates to the real interest rate (blue is positive, white is negative; large is large, small is small). I can see that the debt folk (I’ve labelled as Austrians, but this is probably unfair) probably reckon that anywhere right of the y-axis means that rates have been too low, while inflation folk see anything below the x-axis as evidence that rates have been too high. In the top right and bottom left quadrants, debt and inflation folk would probably get on okay at a drinks party without coming to blows. The top left and bottom right quadrants are, by contrast, times when these folk are likely to spend most of the time either talking past – or slinging abuse – at one another. You will notice that we’ve spent a good deal of time in the bottom right quadrant in recent years: inflation has been scarce, but real interest rates low and increased leverage forthcoming.

Claudio Borio, Head of the Monetary and Economic Department of the Bank of International Settlements, wrote an interesting paper in 2013 arguing that the idea of the output gap had kind of gone astray. Typically, monetary policymakers seek to identify potential economic growth with reference to non-inflationary economic growth. Borio argued that this is, if not bogus, too restrictive: the pace of economic growth may be unsustainably strong, and the economy operating beyond capacity, if financial imbalances (aka leverage) are building up. In other words, Borio argues that changes in the price level (inflation) and changes in the stock of private nonfinancial credit (leverage) are each important in determining the sustainable pace of economic growth.

I’ve got some sympathy with Borio. If this sounds a bit abstract think of China today: inflation is not a problem, but credit growth is rampant,  perhaps to the extent that it might point to faster growth than is ultimately sustainable. Central bank mandates in many – perhaps most – developed economies are meaningfully oriented towards delivering low levels of price inflation, variously defined. Why? Because inflation is a form of monetary instability. And preventing monetary instability so that people can get on with their lives rather than obsess over the nature of money  – via the creation and execution of an inflation-targeting mandate – seems a pretty reasonable thing for a monetary sovereign to do.

But, as the Global Financial Crisis made baldly evident, inflation is not the only form of monetary instability. During the GFC, Central Banks resurrected their age-old response to this episodic type of monetary instability: by acting as Lenders of Last Resort and clearing up *after the fact* with super-easy monetary policy.

Whether central banks should act *before the fact* and ‘lean against the wind’ so preventing the build up of bubbles has been a live and heated debate probably for as long as they have acted as Lenders of Last Resort. There are good arguments on both sides, simplifying as:

  1. Pro-leaning: bubbles are dumb (aka lead to capital misallocation), and big bubbles bursting hurts (aka deliver large loss of welfare, can be associated with financial and monetary instability etc). If your whole job is to maintain monetary stability, going on and on about how hard it is to lean against the wind is a bad look.
  2. Anti-leaning: By definition, people won’t agree that something is a bubble until after it bursts. Furthermore, while bubbles might hurt a few people a lot, tightening monetary policy more than would otherwise be called for comes at a real cost for many (fewer jobs, slower investment, etc). Better to clear up after the event with some ultra-easy policy response if necessary. In other words, it might be really important to stop bubbles, but it’s also both practically impossible and trying to do do is likely to be pretty damaging. 

The Global Financial Crisis did highlight the arguments of the pro-leaners, but didn’t really challenged the arguments of the anti-leaners. I see Vlieghe’s speech as an elegant take on this debate: maybe even a way to square the circle.

In the speech Vlieghe introduced what he called the Finance Theory of the Equilibrium Real Rate (ERR). At it’s simplest it is an intuition that interest rates are low and the risk premia attached to equities are high when the world is risky. Few would disagree. ‘Risky’ in this context means consumption growth has a lot of volatility, and (importantly) negative skew and kurtosis. The intuition is demonstrated with an historical econometric analysis of a couple of hundred years of UK data, and different regimes are identified – some with a high ERR and some with a low ERR. The different regimes have some shared characteristics of credit growth, realised equity risk premia, realised nominal rates and inflation, as well as distributions of consumption growth (expressed in terms of mean, standard deviation, skewness and kurtosis). I would urge you to read it and make up your own mind whether it says more than real policy rates are very low and equity returns are very strong in periods following economic busts. I think that it does.

How is this linked to thinking about the current state of monetary policy? Importantly, Vlieghe’s Finance Theory of the ERR doesn’t actually help define where the ERR might be, ex ante. But one of the things he associates with high or low ERR regimes is the change in the stock of household credit. If households are deleveraging, chances are that you are in a low ERR regime, and even an ultra-low nominal Bank Rate might not be very far below the ERR. But if households are releveraging, maybe you’re moving *out* of a low ERR regime, and Bank Rate might be very far below the ERR. Over the past year or so, UK households have been releveraging, so a question is introduced as to whether the UK is moving out of a low ERR regime and into a higher ERR. Through this lens monetary policy in the UK may be becoming ever-easier unless Bank Rate is raised. And so Vlieghe argues, without a hint of Austrianism, that the easiness of a given monetary policy becomes defined by changes in the price level (inflation) and changes in the stock of private nonfinancial credit (leverage).

Vlieghe’s Financial Theory of the ERR, like Borio’s Financial Theory of Sustainable Economic Growth (OK, I made up that name), doesn’t argue ‘sure, inflation is important – but there’s this other thing too called financial stability/ leverage to worry about’. It isn’t a new target variable to chuck into your optimisation. Instead, it is a variable that reconfigures other terms in the optimisation process in a potentially unknown and whacky way.

If this understanding is right (and, to be fair, I would be surprised if Vlieghe even recognised it as such) I am left with some questions:

1. The circularity question.

Isn’t inter-temporal substitution supposed to be a pretty major transmission mechanism? And doesn’t this manifest in changes to credit stock? Maybe I should reread James Cloyne’s awesome 2016 paper that finds the transmission mechanism isn’t all about intertemporal transfers, but also about transfers between households. 

2. The reversion to *which* mean question.

But if we target stable debt to GDP, are we stabilising at a level that is above or below equilibrium level of debt at a whole economy level? What is equilibrium level of private non-financial sector debt-to-GDP? Is the equilibrium level of debt conditional upon the term structure of interest rates available to, and the whole shape of the prospective distribution of economic growth as experienced by, each debt-bearing demographically-unique cohort? Do we have confidence that we know what this is for any economy?

3. The FPC question.

The whole point of the FPC was supposed to be to a means of exerting control over stuff like leverage growth. This was a sort of nod to the Leaners (without actually going the whole way and saying that rates should be changed to lean against the wind). Is Vlieghe saying the whole project is just a bit rubbish? Or, to put it as a meme:


4. The globalisation question.

Isn’t the location of all those dots in the bottom right quadrant of the chart more easily explained by the idea that there is global overcapacity in labour owing to a global labour glut that will turn as Chinese governance-adjusted unit labour costs reach developed market governance-adjusted unit labour costs? This dovetails into the @rajakorman question (simply put, is @rajakorman right that the whole thing can be put to bed by adding an international flows dimension).

I didn’t really expect a really impactful speech. I was dead wrong.

20 years in

It was twenty years ago today that I began working in fund management. 
What advice would I offer someone starting out in the industry, based on my experience? I’ve spent a good few tube journeys pondering this question, and this is my best effort.

1. Treat the job as if you are lucky to have it, because you are.

    There are many wonderful people with brilliant minds who will never get the opportunity to sit in your seat. Somehow, you’re sitting here. This is an amazingly fabulous opportunity. Do something with it, and don’t waste it.

    2. You can never truly *know* the mixture of luck and judgement attached to your results. 

    As @xkcd puts it:

    This is a big big deal, and will likely gnaw away at your insides if you are at all reflective, no matter how successful you are. (If it doesn’t, check that you haven’t got Dunning-Kruger syndrome.) Use this doubt to humble you, especially when things are going very well. Make sure that you do a really good job on the things that are absolutely within your control (the careful implementation of your investment process; well-prepared, respectful and unpatronising interactions with, and attitudes towards, clients; strong risk management, etc). And read this piece by @ericlonners.

    3. Despite #2, learn quickly that Every Job is a Sales Job.

    This was an absolute shock to me on leaving university. Nicely expressed in this thread.

    But also worth recalling one of my boss’s mantras here: 90% of life is about managing expectations. You live with the consequences of your sale (to others and to yourself); by over-selling you raise the bar that you must clear in order to not fail.

    4. Pick a good boss.

    This is hard when you’re starting out and literally know nothing about your boss and know nothing about what makes a good boss. So while your first boss will be a bit pot luck, choose your second carefully. Think about the values you have and how these are reflected in your boss; think about the way your boss succeeds or doesn’t succeed. You absolutely don’t need to share the same political, social or religious views, but you must be able to respect them professionally. If your boss doesn’t get some *core* stuff (personal integrity, centrality of the client etc) then change your boss. 

    5. Don’t (over)-job hop.

    You need a really good reason to not stick out your first job for at least two years. It is possible that you will be given mindlessly basic grunt work for two years. No biggie. You are being paid to learn: take every opportunity to do so.

    You may find an earnings or opportunity jump occurs each time you do change firms, but your ability to jump diminishes over time. No one will want to employ someone who has a history of not sticking around. Try moving internally rather than externally if it’s a role thing. (Once you’ve spent a long stretch with one firm this doesn’t apply so much.)

    6. When you have worked out what you think, make sure that you take enough risk on your view.

    You have the potential to lose your job with every decision* that you make, but it helps no-one if you make good judgements and their impact is insufficient to really make much difference.

    *(Don’t worry, you won’t be allowed to make many decisions until that time when you are competent to make them if you have a half-decent boss.)

    7. There is a part of you that will *become* your job/ profession.

    We don’t come out of the womb as accountants, psychiatrists, fund managers, journalists, etc. And we spend our formative years building an identity which may not ‘fit’ with our target profession. But after years of pretending to be the sort of person who is a finance professional you will find that you aren’t pretending anymore. If you can make peace with this early, you will have a better time of things. Incidentally, Hashi Mohamed did an awesome Radio 4 documentary on social mobility which I thought was a masterclass on extreme adaptability. Listen to it here

    8. Never Ever say that we live in unprecedented times.

    Stuff happens all the time. And the incidence of stuff is no excuse for doing a bad job for your clients; in fact it is the successful navigation of these that will add value to your clients. In my 20 years the following stand out: the Asian crisis, the Russian default, LTCM, Brazilian depeg, Dotcom boom/ bust, Argentina crisis, 9/11 and War on Terror, Brazilian electoral crisis, Worldcom/ Enron/ Anderson client crisis, Gulf War, all that stuff that is generally wrapped up into the Global Financial Crisis, the European sovereign debt crisis, Commodity meltdown/ deflation, Anglo-Saxon populist electoral wave. Each of these (and many others) felt like they could be fairly existential for markets on which I was professionally focused. Each was heralded as unprecedented. And each was. But navigating frequent unprecedented events is … er … the job. I don’t buy that the last twenty years is particularly challenging in the broader sweep of history. If a particular couple of decades further back in time look relatively calm I would suggest that this probably signals a lack of curiosity of the past.

    9. Read books.

    My job involves reading a lot of documents. Downtime consists in reasonable part of reading documents that I don’t have time to read during work time but feel I should read, or think might be useful to read. I could fill every hour of every day doing this and not read all that I think I should read. The idea of squeezing in time to read some professionally irrelevant book is not always appealing. (In fact, there seems to be no time.) But make room for books. Books get inside your head, and great books will touch on themes that are recurrently relevant. There are people way more professionally successful than I will ever be who find time to fit in reading a book or two a week. I read at least twelve a year. It’s a start.

    10. Don’t stop asking silly (but relevant) questions.

    The more you know, the more you know you don’t know, as the saying goes. But try to work out where you can get away with asking them.

    And finally, some advice I would offer, not based on experience? Learn to code.

    Tl;dr for the TSC

    A few months back the UK Parliament’s Treasury Select Committee (TSC) invited anyone and everyone to submit in 3,000 words their views about post-crisis monetary policy. I can imagine that TSC members’ junior researchers must have been thrilled by the prospect of reading all the submissions for their political masters on the 16 open-ended essay questions set in the terms of reference.

    I read all thirty four of the written submissions and post the tl;dr for each below so you wouldn’t have to. Thirty four. I hope that the authors who see each of their 3,000+ word missives so ruthlessly and flippantly précised (with potential misreading) take this in the good spirit in which it is done.

    Why did I do this? Erm… It seemed like a better idea at the start than it did by the end?

    Actually, three reasons. First, political support for Bank operational independence has been sagging. The Prime Minister has been drawing attention to distributional inequitiesassociated with QE. The Chancellor had to make a statement to Parliament in support of QE after City rumours of private briefings in which he inferred that backing for further rounds of QE would no longer be forthcoming. Senior Conservative politicians have publicly attacked the Bank (for example, here or here). And the Labour front bench have been airing prospective reforms that would remove operational independence. It was in this political context that the TSC, which holds the Bank to account, launched its inquiry into post-2008 monetary policy. I wanted to get a sense as to what the submissions said.

    Second, I read a lot of policymakers, academics and investment bank stuff about QE. Much of it is very good. But this is a genuine free for all from bloggers, academics, finance professionals, think tanks, former policymakers and private unaffiliated individuals who could be bothered to express a view. I found in the submissions some perspectives that were genuinely new and interesting to me. Reading them has sparked a bunch of thoughts.

    Third, I submitted myself, and so was interested as to where my views sat within the body of submissions.

    I also learned during the course of reading these about the Cobden Centre, which appears to have done a decent job of making its presence felt rather firmly. The Centre which appears to campaign for an end to fiat money was founded by Steve Baker MP, a member of the TSC, who used to work in IT at Lehman Brothers before turning to politics. Affiliates of the Centre submitted five of the thirty four written testimonies and gave one of the three oral testimonies. I have no sense as to whether these submissions were coordinated or not, but thought it striking that only one of the five written submissions mentioned their affiliation in their self-description.  Four of these written submissions can probably be summed up with the words ‘buy gold’; the fifth was fascinating. I have put these together at the end.

    The summaries are in the order shown on the Parliamentary website, but grouped into policymakers, academics, finance folk, think tank, unaffiliated, and Cobden; I include Twitter handle where I could find it. They start long and get shorter…

     

    Current and former MPC members

    Ben Broadbent, Deputy Governor Monetary Policy, Bank of England

    Monetary policy can affect nominal quantities, but not real ones over the long term. Real bond yields are set globally, diverging due to local risk premia or the market’s currency expectations. As a small open economy, our real rates are imported and low policy rates are a symptom, not a cause. Target saving can’t be a thing if savings rate falling. QE works. DB pension deficit not our fault, but probably haven’t hit growth much. Precautionary hiking to lean against the wind of financial imbalances appropriate only if macropru unavailable; BoE has FPC. Distributional impact analysis shouldn’t leave out impact of looser policy on overall income of both savers and borrowers (Cloyne 2016). Low productivity leads to low rates, not vice-versa. When QE is unwound BoE balance sheet will, nevertheless, need to be pretty big given regulations and banks’ demands for reserves.

    Professor David Miles, ex-MPC member

    Like @moyeenislam, reckons post-QE will still see huge reserve balances for banks, but QE need for duration will be absent. So BoE should own UKTBs to limit capital risk.*

    *But he knows there aren’t enough T-Bills and so is flagging that the UK government needs to change its debt profile and shift it much shorter as QE unwinds. It could also be interpreted as an area for monetary-fiscal collaboration that saw the BoE signal that it will be a steady holder of short-term financing instruments for HMT and so HMT can benefit from lower debt service costs (if term premia proves to be positive).

    Andrew Sentance, PWC and former member of the MPC (October 2006 – May 2011) @asentance

    Rate cuts and QE were appropriate responses to crisis but ushered in generally above-target inflation but not stronger growth. Much of the time the BoE was ‘looking through’ ‘one-offs’, but this looks a little silly over a decade. Adverse consequences from post-08 monetary policy felt in housing (boosting prices), pensions (elevating deficits), savings (incentivising people to spend or buy risky assets) and productivity (zombies and service sector getting trade boost from GBP weakness that made it unnecessary to invest). Hike rates.

    There is also an oral testimony that you can watch here from Charlie Bean and David Miles,as well as Detlev Schlichter – a guy from (you guessed it) the Cobden Centre.

     

    Academics

    Professor Huw Dixon, Cardiff Business School @Econdixon

    Policy of financial repression is being pursued and is mistaken given economic output and employment are around ‘natural’ levels, hurting savers and retail banks and helps hedge funds and investment banks. Inequality a problem but not one for monetary policymakers. Hiking rates to 3-4% will boost confidence. Doesn’t seem to understand basic monetary economics double-entry book-keeping.

    Professor Emeritus Sheila Dow, University of Stirling, and former special advisor on monetary policy to the Treasury Select Committee (2001-10) @sheilacdow

    Distributional effects of monetary policy changes should be analysed ex ante as they impact effectiveness of policy transmission. Also, in concerning itself with aggregates rather than distribution, a value judgement is made that market processes ensure a just distributional outcome (wages and salaries reflect worth, etc). Distributional impact of monetary policy can create social problems that require fiscal spend to fix. Bank-HMT cmte should form to discuss interdependencies.

    Professor Richard A. Werner, D.Phil. (Oxon), Chair in International Banking, University of Southampton who invented the term Quantitative Easing as a recommended policy for Japan in 1995 @ProfessorWerner

    Interest rates are not a useful tool of monetary policy but should rise. BoE should desist QE, try to steepen the curve, and pressure UK banks to lend to non-financial SMEs. Bank credit creation determines nominal GDP growth. HMT should stop issuing bonds and borrow from banks.

    Isaac T. Tabner, PhD, CFA, DipPFs, Senior Lecturer in Finance, University of Stirling Management School @IsaacTabner

    Lower interest rates make house prices rise, absent generalised deflation.

    Roger E. A. Farmer, Research Director for Macroeconomics, NIESR @farmerrf

    There is no NAIRU or natural rate of interest. If inflation doesn’t rise, BoE should hike rates while either HMT does coordinated fiscal easing or BoE buys lots of equities. FPC can and should maintain a price for the average value of publicly traded equities that is consistent with full employment.

    Lord Skidelsky, cross-bencher and Keynes biographer @RSkidelsky

    Near-ZIRP & QE have probably helped at the margin but the distributional impact has been counterproductive and adverse, threatening independence. Fiscal is better. British Investment Bank. People’s QE.

    Tony Yates, Professor of Economics, University of Birmingham @T0nyyates

    QE was necessary (although not flawlessly executed); Forward Guidance was pants; inflation target should be raised to 4%; MPC should declare expected rate path; and an institutional architecture should be prepared for large-scale private asset market intervention, technocratic fiscal coordination, and introduction of helicopter money.

    Professor Philip Haynes, University of Brighton @profpdh

    QE boosted asset prices, including house prices. Rents too. And wealth inequality. Monetary policy should target credit at productive investment, working with the Chancellor.

    Professor Mariana Mazzucato @MazzucatoM and research fellow Matteo Deleidi, University of London

    Lower rates boost household demand for housing and goods, pushing debt higher; corporates investment intentions don’t respond to changing price of debt. Fiscal expansion would’ve been better than QE.

    Eric J. Levin, Reader in Economics (Retired), University of Stirling and Robert E. Wright, Professor of Economics, University of Strathclyde

    Viscous loop in play: demographics forcing up savings rates, pushing down demand and interest rates, wrecking pensions funding and boosting demand for bonds.

    Professor Francis Breedon, Queen Mary’s University of London

    QE could have been £2bn cheaper if executed via HMT issuing directly to BEAPFF (although this would have been illegal under Art 123 of Lisbon Treaty).

     

    Finance folk

    Association of British Insurers (although written by NIESR) @BritishInsurers

    QE has increased DB pension deficits and lowered annuity rates. Under Solvency II, lower interest rates increase both the value of liabilities and the quantity of capital that insurers need to hold to insure their non-market risk, creating a trade-off between the fund’s valuation and its solvency. The highly sensitive nature of these movements to interest rates can generate volatility, which is a challenge to manage, dis-incentivises the insuring of longevity risk, and acts pro-cyclically. 50bp rate change moves Risk Margin by 20%.

    Robin Churchouse (Finance Director) and Andrew McPhillips (Chief Economist), Yorkshire Building Society @Yorkshire_BS

    Savers hit by QE, and markets have grown dependent on central bank support. Target saving not really observed, but nor have low rates reduced saving. Distribution is a matter for HMT.

    Professor Mark Blyth, Brown University, @MkBlyth and Eric Lonergan, fund manager at M&G @ericlonners

    QE1 was good, less so later versions. Success of policy 1980-2008 maybe dependent on coming from starting position of anachronistically high real rates. Monetary policy largely out of road; heli-money to households is the way the BoE should best respond to a downturn, should it come before rates are high enough to be cut in response.

    Toby Nangle, Global Co-Head of Multi Asset, Columbia Threadneedle Investments @toby_n

    Target saving a thing, but jury out on how big. QE sorta worked by boosting asset prices but houses are assets too. Death of DB pension system accelerated by QE, but regs and global environment too; low rates an opportunity for HMT. Nangle-Goodhart. Awesome charts.

    Building Societies Association @BSABuildingSocs

    QE was necessary, but further rate cuts, and in particular negative rates, could be counterproductive. Target savers abound, their number boosted by rising house prices and falling rates. Brexit will hit investment and economic growth.

    Peter Dixon, senior economist at Commerzbank AG @commerzbank

    Monetary policy is overburdened in the UK but the BoE has done a decent job. Target saving is a thing.

    Neil Smith, Altus Investments & Plymouth University @NelsonSmythe

    QE is bad unless it’s People’s QE. Abba Lerner was right and the UK should embrace Functional Finance.

     

    Think tanks

    Tomorrow’s Company, think tank @Tomorrows_co

    QE sort of worked by boosting asset prices and household wealth (unsustainably), but a shame it was needed. Sectoral flows approach taken and monetary toolbox empty, absent overt monetary financing. Companies never reduced their hurdle rates so diminished monetary transmission. BoE chat kept GBP firm, undermining international rebalancing.

    Positive Money, think tank @PositiveMoneyUK

    Banks don’t really lend to businesses any more so low rates & QE just boosts asset prices (incl housing) and heighten inequality, especially between generations. People’s QE.

    New Economics Foundation, think tank @NEF

    Loans make deposits. QE1 stopped a liquidity crunch but made the rich richer. Bank lending overwhelmingly secured on property so property cycle key. BoE should target inflation, finl stability, inequality, house price inflation and employment at a regional level, public and trade deficits and ecological considerations. And a pony.

    Jubilee Centre, a Christian think tank @JubileeCentre

    The system is broken. Move to 100% reserve-based banking, complete household deleveraging, and abolish LOLR as well as tax breaks associated with incurring debt.

    pH report

    The UK population is ageing. We can prove it. Also, monetary policy isn’t set up to deal with this.

     

    Unaffiliated

    Michael R Garrard, a straight-talking autodidact

    This man has been successively ripped off, is rightly pissed off, and is articulate. Reckons MPC is not in control: private companies are.

    Richard Simmons studied as an economist and has worked in businesses

    QE should fund big venture capital funds that can equity-finance early, mid, late-stage projects or infrastructure, with spin-out privatisations profiting the state.

    Ralph Musgrave, economics blogger and unsuccessful British National Party PPC in the 2010 General Election @RalphMus

    Today’s regime is a dog’s dinner! People’s QE.

     

    Cobden Centre @CobdenCentre

    I thought it best to group all the affiliates of the Cobden Centre together (where affiliates are defined as people described by the Cobden Centre on their website as their authors, founding fellows, directors etc). The Cobden Centre campaigns for an end to fiat money and was co-founded by Steve Baker MP who sits on the TSC.

    Toby Baxendale, former vendor of wet fish and co-founder of The Cobden Centre @TobyBaxendale; Max Rangeley, founder of ReboundTAG @NotesfromMax

    QE is immoral; shift to 100% reserve banking and a low tax regime should happen. The global liberal elite should be worried. Things will end badly.

    Alasdair Macleod, Head of Research at Goldmoney @MacleodFinance

    Buy gold. We need a policy of sound money to build solid foundations for economic growth, and a gold standard works deliver sound money. Buy gold.

    Vishal Wilde, student who ‘devote[s] his life to fighting for Freedom and Justice because he believes God’s Will is a Free and Just Will’ and has written for the Adam Smith Institute

    Multiple monies in circulation and free banking would be great.

    Keith Weiner, founder of the Gold Standard Institute USA @kweiner01

    Whatever the question, gold is the answer.

    Anthony J. Evans, ESCP Europe Business School and IEA @anthonyjevans

    BoE should target nominal income rather than inflation. Policy is too loose and has generated malinvestment. Markets provide better answers than policymakers. Some nice framing of epistemological questions.

     

    –Fin–

    Podcast

    A quick post to say that I was lucky enough to be invited onto the Odd Lots podcast by Joe Weisenthal and Tracy Alloway to talk about money and my kids savings.

    Joe and Tracy managed to weave the chat such that we covered the establishment of the Nangle Household Bank, and the evolution of its monetary policy, the basics around inside and outside money, and the complications that target saving poses to monetary policy (where interest rate elasticity of demand has the potential to become small or perversely negative). And they did this in a way that is still fun to listen to, which is quite an achievement! If you are into podcasts and like this blog, it may be of interest.

    We didn’t quite get on to the nature of money Venn that I trialled on Twitter the other day (below), but that’s probably good because I have had to rethink the whole Moon thing (with help from Twitter).

    And if you want a more worky outline of all of the above, here is a document I wrote a while back that tries to pull it together.

    Saving up

    The deadline for written submissions to the Treasury Select Committee’s inquiry into the effectiveness and impact of post-2008 monetary policy is on Sunday. They put out a call for thoughts a few months ago with a very long list of very open-ended questions some time ago, and the very first one on the list is really interesting.

    Their first question concerns “the effectiveness of holding Bank rate near zero and whether extremely low rates can encourage more, rather than less, saving”.

    My first thought was that the UK parliament is contemplating following Turkish President Erdogan into the realms of neo-Fisherism. This would be quite a thing.

    My second thought was the IPSOS cross-country survey that ING commissioned and analysed a little over a year ago about attitudes to saving in a low or negative rate environment. I found this pretty fascinating stuff. And even if it didn’t deliver a knock-out blow to the conventional notion that lower interest rates discourage rather than encourage savings in aggregate , it did find a considerable minority (14.5%) of UK consumers saved more in response to falling interest rates (although this proportion was much lower than the 27% who indicated that they had reduced saving in response to lower rates). The sample size is small, it lacks a time-series, is democratically rather than plutocratically-weighted. As such it is hard to draw from it sufficient inference to overturn the notion that lower rates would reduce saving/ increase borrowing or the inverse. But still.

     

    My third thought though was my kids. I have blogged about the Nangle household bank twice before. My 7 year old ‘target saves’ for big ticket items, using compound interest to his advantage. If I cut rates would he save more or less? As I was on a train I put out a quick ten minute Twitter poll (to test your views on the matter). This is what I got back:

    (Although Lorcan did also advise me to ditch this idea altogether.)

    Most of the tiny sample of people replying reckoned lower rates = lower saving. This is how stuff tends to work in the real world, right? Lower rates encourage borrowing over saving. But my kids can’t borrow at an interest rate; they can only save at one. They literally ‘save up’ for things rather than debt-finance their spending ambitions. And the interesting thing is that they are not the only ones. In fact, I reckon that I could make the case that the group of people ‘saving up’ in the UK is bigger than it has ever been. And almost all of them are, like my 7 year old, are target savers, accruing savings for a big ticket item.

    Two distinct and pretty large cohorts of people who are engaged in saving-up spring to mind.

    The first cohort consists of those for whom credit is unavailable by design. This cohort includes highly creditworthy agents seeking to purchase items for which credit is not available (eg, housing, vehicles, plant) due to the lending appetite of lenders, and the macroprudential environment. If you’re a Millennial a few years out of university working in even a highly paid job and like the idea of buying a flat, you are probably in this category. Also in this category are people deemed so uncreditworthy by all lenders that no one will lend to them. Lower rates seem likely to increase savings and reduce borrowing for these agents as they are forced to save up rather than access finance.

    Macroprudential regulation has the effect of changing the size of this cohort of agents for whom lower rates means more saving up rather than more consumption. As house prices have risen (partly due to low rates) and macroprudential policy has impeded mortgages from being advanced at ever-higher multiples of salaries, so prospective home-purchasers (first time-buyers and those moving up the housing chain) will be required to save up to a greater extent than in previous times. The chart below from @resi_analyst  shows the level of first time buyer deposit required as a proportion of their disposable income, calculated using the Council of Mortgage Lenders median loan to value and median loan-to-income ratios. It’s an amazing chart. Saving up is clearly a more central aspect today than it may have been in previous times among aspiring homeowners.

    First time buyer deposits required as a proportion of disposable income

    first-time-depo

    The second cohort is those for whom credit will never be available no matter the macro prudential environment owing to the thing for which they are saving up. This cohort consists of people who want to generate a specific retirement income that they can look forward to spending. With the private sector defined benefit system a shadow of its former self, and retirement *the biggest lifetime purchase, bigger than a house* this cohort is probably large and growing.

    This isn’t market failure, it’s just a thing. No lender is going to lend money to someone on an uncollateralized basis specifically so that the borrower can stop working (forever) and go spend their borrowed money  (although there is a market for heavily-over-collateralized lending designed to be repaid upon death). And so, for these folks, lower rates (and associated bond, dividend and rental yields that come from higher asset prices), will likely increase savings and reduce borrowing. Bottom line: these folks are forced to save up more than they would otherwise as rates fall to generate the same target retirement income. Or they could alternatively invest in riskier assets in the hope of getting higher returns, or adjust down their retirement ambitions through some combination of less time spent in retirement or lower income in retirement.

    Savings rates tend to be higher amongst those in the two decades before retirement, in preparation for retirement. This cohort is better paid and so outsized economic influence per individual, and is larger in relation to the general population than it has been. Furthermore, the defined benefit pension system is meaningfully less-inclusive than it has been in previous periods, potentially leading to a change in savings behaviours. As such, we can speculate that the impact of lower rates in forcing higher levels of saving in this cohort is higher today than it would have been in previous times. The chart below is an elementary effort to capture the changing saving habits required over time to purchase a private pension income equivalent to 40% of median salary over time. As interest rates have fallen so required savings rates for ‘saver-uppers’ have increased, and at an economy-wide level the level of saving up is further boosted by the ageing demography.

    Level of target savings required to deliver private income of 40% of median income in retirement[1]

    saving-up

    There is in addition a third group that is large and unstable in the form of defined benefit pension scheme sponsors, some of which sit in the camp of ‘saver-uppers’ who must save more as rates fall, and some of which sit in the camp of agents that can access borrowing who can save less as rates fall. The potential requirement of a pension fund-sponsor to ‘save-up’ for the retirement of its workers is contingent upon the market’s perception of its expected longevity. Businesses with a long-expected life can borrow from future profits to fund the retirement needs of past and current workers. Businesses with an uncertain life-expectancy will be unable to borrow to fund the short-fall at attractive rates, and will need to increase saving – and increasingly so in a lower rate environment. The shift towards a lower rate environment itself, given the unavoidable system-wide mismatch of pension fund assets and liabilities from an actuarial and accounting perspective, has increased the number of institutions sponsoring defined benefit pension schemes in deficit, a proportion of which have an uncertain life-expectancy.

    So where does this leave me? With more questions than answers I’m afraid. How large and important are these different groups in the UK financial landscape, and to what extent are their actions swamped by the opposite actions of others? If they are important, what is the relative importance of: a) the combination of high house prices and macro prudential policy caution; b) the decline of the private sector defined benefit pension system; c) the demographic bulge working its way through the UK’s population pyramid. Is this all just another way of calling long-dated bonds a Giffen Good?

    And my 7 year old? What did he do when I cut the Nangle household bank rate? Well in the end I didn’t. In matters of parenthood, as in matters of Eurosystem financial plumbing, it’s worth listening to what Lorcan says.

     

    [1] This required level of saving is based on an age-indiscriminate savings rate, that savings are into annuity-purchase products, and that that inflation-linked annuity rates can be proxied by nominal long-dated Gilt yields.

    A Bad Week in the UK

    I was shown a really interesting App (Explain Everything) when looking around a school today. The classroom seems to be ahead of the boardroom as far as interactive technology goes.

    I thought I would play around with it on my phone and test it to give my personal view of things going on in the UK this past week.

    This is a corrected version after the first one erroneously said that Marine Le Pen had tweeted in approval of Theresa May’s conference address. Like the Huffington Post, I had been fooled by a supporter’s account.

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