Jill Kerby

NO MAGIC BULLET FOR MAKING MONEY…NOT IN THIS ECONOMY

 

“I think I need to make some real money this year,” my friend said over our first New Year cup of coffee. “We’ve got €20,000 in savings sitting in the bank and we’ve got two kids who we hope will go to university some day. It isn’t going to be enough.”

Timing is everything, and that is certainly true for ambitious parents and children who end up short of both cash and time. 

Unfortunately, that sense of urgency has been the cause of so many people actually losing their money. (Especially if they leave education and pension planning too late.)

The investment industry knows this too and they take advantage of this failing by convincing desperate people that they have magic insights in order to get them to sign over their money and then, hey presto, reap the whirlwind of cash from their trading genius.

It’s easy to say and promise anything when you are trading other people’s money in the knowledge that no matter how the investment performs, you will still maximise your own remuneration by way of frequent and generous commissions and fees.

The financial markets are ruthlessly manipulated by just about everyone associated with them, something that ordinary punters are finally cottoning onto: existing regulation and the lack thereof, allows for the most appalling misselling of unsuitable products and services, the payment of huge opaque fees and charges. In Ireland, regulations even protect bad practise by imposing a six year statute of limitations on official complaints about products to the regulator: in other words, the bad guys get off scot free unless you can afford to take them to court.

The ultimate manipulator of the financial markets – and much business activity now – are governments and their creatures, the central banks which have a monopoly on the control, flow and price of the money that fuels all these distorted markets. When it is the state, and not a free market that ends up setting the price of anything, how can anyone tell if it is genuine good value or not?

The economic crash has exposed both the shortcomings of the markets – they are neither free nor fair – and the insider institutions that facilitate and uphold those shortcomings. (Like huge global institutions avoiding corporate income tax.) It’s hardly a secret anymore that nearly five years of monetary, fiscal and political interventions to save private banks, the cost to individual taxpayers burdened by their debts has been nothing short of catastrophic.

Nevertheless the profits, pay and bonuses being reported in the financial service industries at the end of 2012 now exceed the obscene payments that they collected before the great crash. It certainly confirms the old adage, if you want to make money from Wall Street, get a job on Wall Street.

Of course it shouldn’t be this way. All commerce, all financial and social interaction, should amount to noting more than two willing participants – a buyer and a seller – coming together to agree an honest price. You want the bread that I baked. I want the pair of shoes that you made.  How much bread/footwear can we offer each other to reach a fair and satisfactory deal?

If only it were so easy. 

My friend was right to think that she has to start thinking differently about wealth creation, if she has any chance of beating the system. It was a long cup of coffee, but here was the bullet point list of do’s and don’ts I suggest she consider in order to both make the most of that €20,000 education fund: 

1)    Making money requires knowledge.  Get educated.  This means finding out how stock markets and investment asset options work and then decide which route is suitable for you.  Start with Rory Gillen’s new book, 3 Steps to Investment Success.

2)    The investment route you take should be determined by the time frame in question; the target growth you want; the amount of risk you are prepared to take, the fees, charges and taxes that must be paid.  If you only have five or six years before you need the money, and you need it to double in value, you can’t leave it in deposit account. Realistically, money earning a 7% (!) net return will only double in value after 10 years. 

3)    Be realistic. There’s no quick or easy way to achieve high returns unless you are incredibly knowledgeable, lucky and/or you are an insider who makes the rules and have first go at ‘stimulus’ funds printed by the government or taxpayer’s money. (The tourist industry, says the government are the biggest recipients of the 0.6% of pension savings it confiscates every year from private sector workers.)

4)     Don’t travel with the herd, which is exactly what the financial industry count on in order for it to make their eyewatering fees and commissions. The herd is offered the lowest common denominator – pooled investment funds that are designed first, to make them lots of money, and hopefully not leave you with only losses. The idea of sharing losses with clients is unheard of and small retail clients are so used to poor returns that they are ridiculously grateful if they at least get their original money back when a fund matures.

5)    Follow the money.  Successful professional investors seldom invest their own money in pooled mutual funds targeted at the masses. They identify high quality assets, whether individual shares or large collections of shares (pooled in low cost Exchange Traded Fund vehicles, for example), and at beaten down prices.  They often have a personal ‘style’ of investing: they may be contrarians, attracted to unloved shares (with good track records, lots of cash on hand, low debt) that have fallen out of public favour.  Or they are trend followers – buying and selling shares based on their real-time performance.  Others only buy shares or funds of shares they understand, ignoring the market ‘noise’ about how wonderful this exciting new business or sector may appear to be. (Remember the dot.coms?)

6)    Speculating is not a dirty word. It isn’t ‘investing’ in the conventional sense of buying a quality asset to keep forever for its dividends or capital growth. (The Warren Buffet method, except that Buffet gets special purchase deals no ordinary buyer could ever achieve.)

Speculating isn’t the same as gambling – speculators learn to anticipate events (like massive money printing causing the price of gold to go up for 12 straight years) and to take advantage of all the poor or dodgy regulatory decisions and special tax treatments that favour certain industries to the inevitable disadvantage of others. These ‘edges’ give those companies competitive advantages and they make more money.  The speculators make money too.

7)    Learn how and when to take profits.

 

“So much for a straightforward answer,” my friend laughed.

“Sorry, but making money is never simple,” I replied.  “You asked what you could do to try and beat the unprofitable returns that deposits offer. This is how you do it. But there are no guarantees of success. Losses are a possibility.”

Unfortunately, my friend is not an entrepreneur. She positively blanched when I suggested that one of other way to make her €20,000 outperform a deposit account is to start a business and not automatically hand over 33%-36% of any interest or dividend to the state. (37%-40% from 2014 when a 4% PRSI charge is added)

I left her with this idea:  “You can take a risk and hand this €20,000 to a fund manager – a perfect stranger – in the hope that they’ll grow and return your money over the next decade, after they and the state take their cut first.

“Or you can go out and find a real person who you can meet and get to know who is already building a good company and would sell you a little share of it for your €20,000.  Every great company started exactly this way, raising capital from friends and family, many of whom became very wealthy indeed.”

Small acorns. Big trees.  Maybe even a doctor in the family some day. 

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Anything but Barney…and joint bank accounts

 

“Sharing is caring, mummy” The Child used to say to me in his sing-song little three year old voice.  He picked the phrase up from Barney, that hideous, purple, US children’s TV fur-bag that had a cult following amongst the under 5’s back in the 1990s and naughties. 

I couldn’t bear the sight of him or the chirpy American kids that were clearly pretending to be his playmates. They had to be in it only for the money. So I would encourage Jack to abandon Barney for just about any other programme, including his other favourite, unsuitable viewing  - Judge Judy - which he watched three afternoons a week with his beloved minder, Joanie. 

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I was reminded of the ‘sharing-is-caring’ episode twice recently when asked my views about the merits of married couples having joint current and savings accounts and credit cards.  (Co-habiting couples don’t usually have such accounts, at least not right away.)

Marriage, of course, is all about sharing things: a life, a home, negative equity in that home. Respective families.  A big bed. And the children that often arrive after sharing that bed for long enough.  

Yet there are plenty of things married couples don’t usually share, quite correctly, like toothbrushes. And certain hygiene products. Nights out with the girls/boys. And the minutiae of menstruation and car engines.

Why then would you want to share a current account, or a credit card? 

I appreciate that free banking isn’t what it used to be – the only bank that provides a semblance of nil charges is Ulster Bank and I’m not sure that’s much of an advertisement for them anymore. But if you choose your bank account carefully and do most or all of your business on-line, then the fees are minimal and hardly an issue.

It never dawned on me, more than half a lifetime ago, to share a bank account with my husband.

We both worked. We both had periodic bank loans and overdrafts. We knew we had joint living expenses, like the rent (later the mortgage), food, utilities, our one one car and its expenses and all important holiday costs.

Separately, we had our own personal expenses, like clothes, healthcare, hobbies that we didn’t share (he doesn’t go to the opera or musicals; I don’t go to football or Leinster rugby matches). We don’t usually mix with each other’s work colleagues.

We do buy prodigious numbers of books and DVDs and in the days when we used to eat out a lot (pre-Barney years), who picked up the tab was often determined by who suggested the meal/take-away that night and the choice of restaurant.

Without making a huge song and dance of it, we worked out the cost of all the joint essential and discretionary expenses, like holiday/family anniversary spending. We could do this because we always knew how much money we collectively earned and the state of each other’s finances.

And there’s the rub.

Too many couples never bother to find this out.  I have known newly married couples that didn’t have a proper handle of what each other earned – let alone the size or their car loan or overdraft – until after the wedding.

Credit cards?  Sure, we all have them. But one groom was shocked to inadvertently discover - after he and his new wife got back from their honeymoon, that not only was the credit card he knew about, completely maxed out, but so were her other two - surprise! – cards.  She had total outstanding credit card debt of nearly €10,000 with c18% annual interest.

Detached

It isn’t just newlyweds who are stumble around each other in the financial dark.

Long time marrieds’ – usually the ones with the joint bank accounts – can often end up with one spouse being more detached than the other in their stewardship of the joint or family finances. 

Again, my experience is that couples who keep their banking arrangements separate, pay joint bills proportionately to their incomes (think golf handicaps) but have full regular reckoning of accounts, tend to experience fewer unwelcome surprises than those who leave their money matters almost exclusively to the main earner.

A professional couple, earning decent money with no children and each partner taking personal responsibility for their individual and joint expenses is always going to be able to cope best in this ‘sharing is caring’ experience.  Money, is literally, no object.

But they can have their pear-shaped moments too if latent stingy or spend-thrift impulses start appearing too often.

I once knew a couple where the husband decided that business/first-class travel was now essential every time he travelled when before, steerage was acceptable. She thought it was an extravagance that should only be reserved for really long haul, once-off sorts of flight.  It turned into a big row, but it was really a sign of a shaky marriage than about their joint finances or the difficult compromises about money that every couple – even well-off ones - experience now and again.

Having children, or a period of unemployment is where the pro-joint bank account argument needs careful teasing out. Women – mostly – are the ones who stop working at their jobs when a couple’s children arrive. She suddenly goes from having her own income to receiving a monthly €140 child benefit payment that she may feel guilty about spending on herself.

This is when the joint account really comes into its own, insist its supporters. 

“When you have a joint account or credit card, nothing changes when the baby arrives. The stay-at-home mum just continues to use that account, just like she did when she had an income and it was paid into the joint account,” I’ve been told.

Yeah, yeah. Except it doesn’t always work that way.

Husbands who are already feeling a bit neglected by the baby’s insatiable demands on his wife, adult meals that are very much on-the-go, or don’t happen at all; the sleep deprivation and dearth of sex can take it’s too. Now he’s seeing that there’s not a lot of money left in what he’d always treated, naturally, as his bank account as well as ‘their’ account once all the usual bills, the new baby’s bills and now his wife’s personal spending, is accounted for.  

Some husbands – normally the sweetest of blokes - have been known to question the size of grocery bill that she is running up – groceries that she still buys, loads into the car with the baby, unloads and cooks with.

I think if the joint account is to work, it should be opened only when the baby arrives and it is agreed that a direct debit is set up with an amount transferred every months into the stay-at-home spouse’s own account for their personal expenses.

That way, there is no debate abut how much or why they spent X-amount in a particular department store that he never frequents and no chance – ever - of her wondering if “the housekeeping” money in the joint account can possibly stretch to a new jumper (that doesn’t smell of baby sick) or a decent haircut.

Run Away Money

Every woman also needs ‘run away’ money. 

Once upon a time, in another century, the farmer’s wife kept hens and the pennies she got for selling the surplus eggs was ‘her’ money, that she kept in a biscuit tin or in the post office.

Those were the days when marriages were even more unequal than they are today and when the husband legally owned the farm, the farmhouse and pretty much everything in it. Wives were pretty much chattel and if they didn’t have their own money, in the hidden biscuit tin or post office account, there was no chance of ever running away.

Marriage is not a zero sum contract anymore. Every woman needs her own bank account. She needs her pension fund. A joint account with a spouse is just fine, but it’s a discretionary convenience. 

This is really about being your own person as well as being part of a couple. 

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THE PROPERTY MERRY-GO-ROUND THAT JUST WON'T COME TO A HALT  

 

“I was just in Ireland and was amazed at how people believed that the worst was over and that a rebound in the real estate sector is now. The Irish economy is years away from bottoming out – as long as the country insists on paying off corrupt creditors instead of simply defaulting.”- Max Keiser

Sometimes you really need to listen to outsiders.  Outsiders, that is, who don’t have an axe to grind, like our ‘friends’ in Europe, or at the IMF. 

Keiser’s apocalyptic prediction was made in the same week in April that the first distressed auction of over 80 repossessed properties took place at the Shelbourne Hotel. 

You may recall the picture that appeared in the papers the next day:  crowds of people jostling on the Shelbourne’s steps as the Bail Out Troika boys from the IMF, EU and ECB were walking past from their gig at the Department of Finance.

Anyway, April was an eventful month, just like the previous 30, since that fateful night in September 2008 when the property-imploding bankers and the government set in train the process of bankrupting the state. 

Max Keiser (of Keiser Report fame on RT.com) was just the latest international pundit/journalist/broadcaster to pay us a visit and declare what is resoundingly obvious:  the Irish state is broke and should admit it. 

Meanwhile, he isn’t the first outsider to scratch his head about our continuing obsession with property. 

After addressing his many Irish fans at a public seminar that evening, the exuberant, irreverent Keiser (who is a big hit on Al Jazeera after calling for a fatwah on ex Goldman Sachs chairman and US Treasury secretary Hank Poulson), Keiser appeared on Tonight with Vincent Browne.

He was clearly unfamiliar with how the contrary Vincent is a national treasure who is supposed to instill fear in all who sit before him. Keiser, who described our failed bankers and regulators as crooks that we should have clapped in irons long ago, couldn’t believe his ears as Browne defended their right to their good names prior to appropriate legal action.  (At that point one of the other panelists should have explained to Max about the ‘best boy in the class’ syndrome from which we suffer.)

The Shelbourne auction was just another display of how delusional we remain about property, how easily we fall for scams.  It was astonishing to me – and no doubt to Ajai Chopra and his sidekicks that all those people who packed into the Shelbourne and who bid up nearly every property to as much as 30% over the reserve prices, were convinced they were getting bargains. 

They simply couldn’t wait to be parted from their money. 

Did any of them wonder if the 8%, 9%, 10% rental yields that some of those apartments and houses boasted would hold up when their capital values fall another 10% or 20%? Or when a real property tax is introduced?  When interest rates keep rising? When it dawns on the market that strict lending conditions become the norm?  These are not the circumstances by which one makes much of a capital gain. 

From a strictly investment perspective, property will be worth buying again in this country when absolutely no one wants to and when the idea of home ownership becomes so repulsive (because of all the above) that we all suffer from buyer’s regret. 

The gullible, the stupid, the clueless, the optimists, the carpet baggers and the deranged will by then have all thrown in the towel.  The newspaper property pages (such as they are) will have turned into a property column. 

That is the how a true bubble-inspired economic bust finally ends, and only then does Mr Market realize that the bottom has been reached and the asset class – property really is truly cheap, represents good value and is worth buying. 

That clearly hasn’t happened yet, not when some people think that the first repossession auction itself is ‘bottom’ signal.  You should know that the opposite is true when estate agents and mortgage brokers are jumping up and down again suggesting that first time buyers should now be confident about snagging their bargain dream house. 

This is a compendium of some of the remarks I’ve heard or read:  “These discounts show just what great bargains are out there”;  “These are ‘real’ prices and don’t forget, stamp duty is just 1%’’; “Yields on property are fantastic”; “There’s a shortage of property in Dublin and as these bargains are snapped up, future auction prices might not remain this low”.  

And the grand-daddy of all quotes:  “Negative equity doesn’t matter so long as this is your long term home”.
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It has been suggested that the majority of the auction buyers last April were cash-rich culchie farmers and fat cat professionals from Dublin’s leafy suburbs.   

Who knows, but let’s hope for their sake that their pockets really were stuffed with wads of euro and that if they were financing these so called bargains with mortgages that they fixed their rates.  Inflation, at least will help whittle away their debt. 

The collapse of property prices in Ireland isn’t over.  You buy into this market as an investor at your peril. You must buy into it as an owner-occupier in the clear realization that unless you make a substantial downpayment you will be in negative equity and will find it difficult to sell up, switch lenders or borrow more for many years. 

In a country as burdened by debt as ours, you’d really, really have to be besotted by the look and location of any house to actually slap down hard earned savings and brave a mortgage. Given how taxes, interest rates and the cost of living are all going up – but wages are not – this is a love affair that had better last.

That said, even uber-bear Max Keiser would probably agree that Irish property will someday be worth buying and owning again.  Bricks and mortar have a long track record in every western country, notwithstanding periodic bubbles and inflation-adjusted depreciation, of modest, capital growth.  

Someday, when our economic depression finally burns itself out, when the property overhang has been cleared or bulldozed, when NAMA is long gone and no longer distorting the market and when, someday, genuine demand returns for nice houses and apartments …then it will be worth investing in and owning property again.

Someday.  Just not right now. 

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We have stuff…or we have stuff and kids and husbands.  Just no pensions.  

 

Still no pension?  Join the club. Fewer than half of adult working women in this country have an occupational or private pension. Thousands won’t even qualify for a contributory state pension.  We have stuff…or we have stuff and kids and husbands.  Just no pensions.  

Financial advisors I know – even the good ones who take their work seriously and charge appropriate fees for their time and expertise and genuinely care that their clients don’t get ripped off – say that ‘pensions’ is a hard sell no matter how well or badly the economy is doing. 

It’s especially impossible to get younger people to think about them, said one, rather nostalgically, “though clearly when you have extra dosh in your pockets and you’re liable to higher rate tax and PRSI, dangling the tax deduction carrot in front of people can, well, used to, secure a sale.”

The biggest problem isn’t even the lousy fund performance racked up by the vast majority of Irish managed pension funds – near zero over ten years, or less than zero when adjusted for inflation.  Instead it is the idea that you need to lock away 15%, 20%, 30% or more of your monthly salary for 30 or 40 years with no access to this money and no guarantee that you’ll end up with an investment fund that represents anything near the 5% or 6% projection growth rates that are used to illustrate how your new pension fund might perform once the 30 or 40 years worth of charges, fees and commissions to all the salesmen, middle men, administrators, actuaries, fund managers and regulators get paid off first. (Yes, even the regulators – in our case the Pensions Board get a tiny slice of your pension contributions via a levy the industry must pay them.)

The c 47% tax relief certainly helps (41% higher rate tax and 6% worth of PRSI contributions) but it now only represents a part of the tax that higher earners pay when the income and tax levies are included. But even the tax advantages of a pension are being clawed back as the Government roots around for ways to keep its fiscal head above water and the IMF from the door. 

Taxing ‘the rich’ – including the so-called middle class ‘rich’ with incomes over €36,400 who are amongst the largest contributors to private pensions – is their preferred solution rather than cutting their own wasteful spending, shifting public servants off unaffordable defined benefit pensions (though they say this will happen, eventually) and widening the tax pool to include everyone who uses or benefits from public services and programmes and earns an income.

Already there are caps on the amount that can be saved into a private pension, on the maximum retirement income and on the amount that can be claimed as part of the tax-free part of your final pension fund.  (Ask your advisor for the details – and fund accordingly.)

Frankly, the details are no longer all that important in the wider picture.

Pensions are becoming a luxury in this country, for the old age pensioner living on €230 a week who can’t live on such a small sum and needs to supplement it, to the young person out of work or the one working for an employer who needs to cut her cost-base; for the young family living on less money (thanks to levies, wage reductions and stealth taxes) and with massive negative equity in their home; to the established worker who is now being told by their employer that they need to stump up more every month to - just about - ensure that their pension will actually be there when they come to retire in five or 10 years.

If I’m painting a depressing picture about pensions – and I am a strong proponent for putting away money, lots of money, to fund retirement – it is because it is a depressing picture.

Pension funds have not delivered what the people who invested in them expected of them. 

Why?  Because in the case of the final salary, defined benefit occupational model, that model no longer works.  Not only are scheme members living far too long, but the investment decisions that were made were shown for what they were when the great 25 year bull market finally ended around 2000 and the level of contributions need were seen to be inadequate for both the company and worker.

For members of defined contribution pensions, which rely on contributions from employer and employee and the pot luck of investment markets to produce the final pension fund, and so can’t project the actual size of the income in retirement, the problems are not much different. 

Bad investment choices in the form of doing what every other investment manager did (which in Ireland was to buy too many Irish shares and property), increasing longevity and too high charges, fees and commissions have done their dirty work.  Ironically, the rare fund manager who did nothing but leave the workers’ money in the post office for the past 10 years would have outperformed every Irish fund manager over the same period.  (Ironically, there are pension funds that take such a risk-free route – mostly in bonds and cash – but they operate, successfully, but mostly on the continent.)

The only people who have emerged from the past 10 years to date, and especially the last three years with positive pension funds, are those few who were lucky enough to have invested in widely diversified, low cost pension funds or who had either the great good luck to be world-class asset pickers or just had great good luck.  Mostly, all over the world, but especially in the indebted west, pension fund holders have lost their shirts and skirts. 

So what do you do?

As someone who only lost half a skirt on her pension, and who has taken professional, independent, fund management advice for over 25 years… you need to take even better professional, independent, fund management advice.

A comfortable retirement isn’t going to happen unless, a) you have very little debt as your approach the typical pension age of 65 or 60, b) you have maximum service, ideally in a big, strong, solvent company with a solvent defined benefit, final-salary pension. (That doesn’t describe about 98% of Irish DB pension funds, by the way.)  And c) if you have other assets – a paid off property, shares that produce income, lots of cash, etc.

I say this because without some or all of the above in place you are probably instead going to be relying on the state pension, currently €230 a week (plus the rest of the social welfare package for pensioners that includes free travel, fuel and electricity allowances, etc) or a combination of state pension and personal savings.  And if you thought your home or perhaps more correctly, your mortgaged home would be your pension, that was never very realistic and certainly isn’t going to happen until the property market recovers to even a point where it can be sold, if needs be.

Before you try and find a decent advisor, not an easy task in itself if you don’t even have sufficient information about pensions to know what to ask them, the best thing you could do is to go onto the Pensions Board website and download all their brochures – a sort of ‘Everything you need to know about pensions but were terrified to ask’.

Then go on their pension calculator (http://www.pensionsboard.ie/index.asp?locID=458&docID=500 ) and fill in your details:  if you’re 35, earning €50,000 a year and haven’t started a pension yet, but hope to retire at 65 on 60% of your salary (using today’s figure for ease of illustration) you’ll need to start saving €833 gross a month right now for the next 30 years. 

That’s right, every month for 30 years. This will produce a private pension (only if your fund performance achieves a steady 5% per annum) of €18,024 and the state pension of €11,976, which will then be taxed at the highest rate of tax, currently 52% (and 56% for some higher earning self-employed.)

Yes, I know that doesn’t make much sense even if with the 47% tax rate is still available (which reduced the net monthly contribution to a more palatable €492.)  How long higher rate tax relief is going to last is another question that will only be answered when the government gets around to issuing its long delayed White Paper on pension reform. 

The danger is that political pressure will result in the creation of a standard 33% (give or take a few percentage points) tax relief to everyone.  If that happens, higher taxpayers will have to rethink their pension plans altogether…or get used to the idea of living off the state pension, ideally in a warmer, sunnier, lower cost jurisdiction.

Now where are those Spanish property brochures…

 

 

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WHERE’S THAT CRYSTAL BALL WHEN YOU NEED IT?

 

What I wouldn’t give for a genuine, functioning crystal ball. 

I’d love to see how 2011 evolves:  after all the tax hikes and spending cuts, will it be enough to restore bank lending, consumer confidence, jobs growth?  Will there be a global trade war?  Will the dollar and sterling keep devaluing? Where is gold going?

The economists at the Department of Finance, the ESRI, various stockbroking firms and the world’s central banks all claim to have crystal balls, hence their endless forecasting.  But either they’re telling more porkies or there is a mass malfunctioning of crystals. What other explanation could there be for how every prediction they’ve made has turned out wrong?

No, I’d just like one of the old-fashioned crystal balls, like the wicked Witch of the West had in The Wizard of Oz, or the ‘Red Eye’ that Sauron kept at his lair in The Lord of the Rings.  Each of them churned with stormy, sulphurous clouds that eventually cleared to show exactly where Dorothy and her companions were on the Yellow Brick Road, or where Frodo and Sam were hiding from the Ringwraiths on their journey to Mount Doom.

Since no one seems to have any genuine route map to get us from here to the end of our perilous economic journey, a crystal ball would be such a help.  Or, come to think of it, maybe all we need is a pair of ruby slippers or a gold ring.

Now there’s an interesting thought.  The good Witch of the North, Glinda, gave Dorothy the ruby slippers to protect her from the evil witch, but, unbeknownst to Dorothy, they were always her means to getting home, so long as they stayed on her feet.

Gandalf, the good wizard, gave Frodo the last gold ring forged by the elves and he too would be lost if he parted from it, no matter how heavy the burden became.   These were rare, precious things and when in the possession of ‘good’, innocent wearers or bearers, they became instruments not just of their personal salvation, but of those they loved.  

As pop philosophy goes, this isn’t bad stuff.  I’m a sentimental old movie fan so Dorothy’s ruby slippers and Frodo’s gold ring appeals to me a lot more than the X-Factor or National Lottery school of salvation that so many of our young adhere to and the IMF one that some cynical, older people, who should know better, favour.

Even without a crystal ball, it’s clear to me that this country’s salvation lies in only one direction and along one path:  debt repayment/forgiveness, hard work, self-sacrifice, prodigious amounts of saving, investing and risk-taking (as opposed to borrowing, spending and speculating) and an acknowledgment of personal, not just collective responsibility for every decision taken.

Where mistakes were made, they must be corrected, even if it means the dismantling of every state institution, every line of our flawed tax code and the monolithic welfare state that permits and rewards indigence and a universal sense of ‘entitlement’. It also means reforming our peculiar form of democracy, which encourages and highly rewards otherwise stupid, unsuccessful people to achieve public office, while entirely discouraging intelligent achievers in the private sector from ever considering a period of public service.

I could go on for hours here, but try to imagine a government run like a really great business with a product of essential services that people both at home and abroad voluntarily want to buy or use, with a tight group of well trained and rewarded staff who enjoy their jobs.  Because we are still talking about government, this service is unlikely to ever produce a profit – it still requires the collection and redistribution of a portion of the people’s earnings - but ideally, it won’t generate layers of losses either.  Meanwhile, the people who own this great company of state, get to keep the vast bulk of their own money to spend as they wish, not as the company of state dictates. 

Since none of the above has any chance of happening -  the vested interests are just too great and voter intelligence just too small -  I am going to guess (for that is all any of us can do regarding the future) that the year 2011 will end up looking pretty much like 2010, and 2009…only worse. 

Where does that leave us?  The vested interests are still everywhere and include the political morons we keep electing; the-overpaid, over-pensioned civil servants that prop them up to keep their own rice bowls full; the super-rich and rich whose government-gifted privileges, like 183 days worth of non-residence status and most of the quangos they run, are still with us too. 

Let’s not forget the last bastions of the corrupt Social Partnership process.  The wage-setting cartels – the employer groups and trade unions and their labour sector agreements - are still in place. So are the ‘entitled’ recipients of the great welfare state, from the third generation unemployed teenagers happily collecting their dole, to working parents getting child benefit, to wealthy pensioners who will fight to keep every state entitlement, even at the cost of losing productive younger workers already indebted by the massive transfer of wealth (in higher property values and pensions) that happened during the so-called ‘boom’ years. 

 

Benefits may have been reduced, but the entitlement mindset remains, even as the state continues to go broke. 

I love a happy ending.  Dorothy clicks her heels three times and finds herself back in Kansas.  Things are not perfect back home on the farm, but the tornado is gone, the sun is streaming through her bedroom window and she has survived her great adventure in Oz. 

Our adventure continues.  Like Dorothy and Frodo, we will need love, courage and intelligence, represented by our families, friends and communities to get us through the worst times. 

And ruby slippers… and a gold ring.

 

BUILD AN ARK IN 2011

Those of you running your own businesses know what you have to do to keep trading. On the personal front you should be building an Ark for yourself and your family as well this year: 

-       Try to reduce personal debt.  So long as the country is tied to EU debt requirements that raise personal taxation and cut services the domestic Irish economy will remain depressed. This means asset values and incomes will continue to fall.  Your capital debts remain the same but servicing those debts could rise. 

-       Prepare for price inflation.  The massive escalation of the global money supply and debt and rising demand for commodities in developing countries that are not indebted, means that we will see more price inflation here, especially for those goods that are oil-based or are foodstuffs.

-       If you have savings or investments, review them now. Don’t leave all your personal wealth in a single asset class.  Diversify.  Consider a mixture of cash, precious metals (‘real money’), value equities, bonds (some of which should be inflation-linked), commodities and property. Use the services of a good, independent, fee-based advisor.

 Ensure your personal savings is in a secure deposit account in a solvent bank.  These days it pays to think not just about what kind of return you can get on your money, but also the return of your money.

-       Keep in mind the effect that rising DIRT rates and inflation could have on your cash holdings.

-       Learn about emerging investment markets in developing countries.  Invest in them for the long term. Start teaching your children Chinese, Hindi, Malay, Spanish and Portuguese. 

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RECOVERY?  WHAT RECOVERY?

 

So, how was the recession for you? A few bank recapitalisations here, and some spending cutbacks there, and hey, presto, all gone. Just like all the previous recessions.

No really.  The nation’s senior politicians and economists, with the exception of a certain red-headed one, are all falling over themselves these days to say the recession is over, and so it must be.  The ones on the government payroll are even in agreement with the ones on the payroll of banks, stockbroker and insurance companies’ payrolls.  So they must be right. Right?

We all know how awful the ex-recession was:  it started in 2007 (but only became ‘official’ in late 2008) after interest rates rose and people, especially young people, stopped spending borrowed money on new houses, and on the stuff that goes into, onto and around new houses.  Then their parsimony spread to electrical stuff, clothes stuff, reading stuff and even foodstuff. 

This anti-spending and anti-borrowing madness then spread to the rest of us:  we stopped spending on investment property and new cars and private golf and gym memberships, dining out and then even private school fees. Hell, some people – even employed ones - stopped spending on their life and health insurance, despite still being among the living and unhealthy; on car insurance, despite still being drivers, and on their house insurance, despite the continuing risk of fire, flood and theft.  

Some people even stopped paying their underwater mortgages!

The consequence of all this non-spending and inability to pay off debt – aside from bankrupting the banks and their biggest clients - was that the companies that produced all these goods and services had to lay off workers they could no longer afford to employ.

Then they sold their inventory at cut-down prices.  Then they cut their remaining workers’ wages and benefits, amended or abandoned their pension schemes and even lobbied for, and in some cases, got, government handouts to keep selling their already cut-down priced goods (like cars).  A lot of companies still went bust.

The recession-that-was, was hard on people working in retail, but devastating to those in the construction and property-related trades and services.  Thank goodness it’s over and all those workers will be back at work again building and selling us lovely new apartments and houses.

The recession-that-was also made the government do the silliest things:  it set up a giant property company called NAMA to take over all the bad loans of all the developers and their bankers.  (But they did it for our own good.)

It then raised taxes and levies, cut public sector wages, pensions, public spending on schools, hospitals, social welfare payments and infrastructure. The politicians even took a pay cut themselves!  How drastic a reaction was that to a recession that is now over?

Anyway.  Happy days.  The recession is dead.  Long live the out-of-recession!  (From a personal perspective it means that I can stop being “so melodramatic” as one reader described me, by constantly referring to ‘The Great Recession’, or even to ‘The Depression’.)

And so, we move to ‘the recovery’.  No wait, I stand corrected – again.  We move to a ‘jobless recovery’.  This, say the nation’s economists, is a sort of economic recovery in which most businesses (except big exporters or multinationals) don’t hire any new workers because there isn’t very much demand for their goods because people are still paying off their debts and not spending.

No new goods to sell at full price, means no new profits. No profits mean the business does not grow and does not generate any new tax revenue for the state.

Jobless recovery, indeed.

*                                *                                  *

“Ha ha. Very funny. But what is your point,” asked my husband as he hovered over my shoulder, reading (uninvited) the above. “Your sarcasm is utterly transparent.”

Gee, that hurt. 

But he’s right.

I doubt that any of you haven’t seen through the mendatious, mealy-mouthed spoutings of the economists and politicians who say the recession is over and dare to suggest that we are now on Recovery Road.

As a nation, I think we are on Bankruptcy Road, along with all the other countries that can no longer pay the interest on their soaring national debt, without more borrowings.  With a €20 billion budget shortfall, we can’t meet the state payroll, let alone free education and health care, unemployment and social welfare payments plus state pensions for increasingly long retirements.

Nevertheless, I am a pessimistic optimistic.

This ex-recession may have some years to run in the guise of a Great Recession, and maybe even as a Depression, but it will end some day. 

Until then, try to ignore the politicians and economists.  The vast majority of them have never had to meet a payroll in their lives, or negotiated a line of credit at the bank or struggled to replace a broken machine part in the middle of a production run.  I doubt if any of them would know where to buy a loaf of bread let alone know the price of one.  Juggling groceries and car insurance, school uniforms and doctor’s bills – are for the little people.

However, the controversial decisions they’ve taken - to recapitalise the banks and to set up NAMA in particular, but to also keep borrowing nearly €400 million a week to meet the budget tax shortfall could just prolong, not shorten the Great Recession. 

My guess – and that’s all it is – is that there is no ‘solution’ to our economic woes.  During the boom years all that cheap money that became available in the western world mistakenly drove up prices beyond any reasonable level. We borrowed too much and spent too much and in the case of the government, also made too many long term spending commitments based on what they thought would be a never-ending stream of property related taxes. 

Now that the cheap cash has stopped flowing, the value of all the stuff we bought and invested in during the boom years are all deflating. Deflating and devaluing.  With 450,000 out of work, our inflated wages and incomes still have some way to fall.

Some recessions just need to run their course.  The ones in which the creative destruction process is interrupted and manipulated by government – say, by pouring all the available capital into insolvent banks – will take rather a longer time to end. Just ask the Japanese.

But as for a genuine recovery…well, you won’t need an official announcement when it happens.  It will be right there, staring you in the face, on your bottom line.         

*                          *                       *

 

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THE NEW NORMAL - GET USED TO IT 

 

“I guess this is the ‘new normal’,” said my friend as we had a €5.95 soup and sandwich lunch combo at the counter of a little deli in town. I know what she means, but I didn’t mind.  The soup was delicious. The sambo was not plastic ham and cheese.

We are still some way away from that proverbial light at the end of the economic tunnel, but there’s no turning back, and no return – in my lifetime at least – to the extravagant borrowing and spending of the 2001-2008 boom.  It just makes good sense to start adjusting to what we do have, and put behind what we’ve lost.

With 440,000 people still out of work, house prices and income tax revenue still falling, and not much sign of bank credit for SMEs, that is easier said than done, you might say; especially if you’ve lost your job, your business or have only taken a large cut in income. Tougher still, is if you also find yourself in property limbo – living with horrific negative equity or arrears on a property that you now lament buying back at the peak of the market in 2006.

Lamenting and coping are very different things, though and the longer that we deny the ‘new normal’, and instead hark back to the days of easy credit or even expect those days to return in the near future, the less coping and the more regretting we will do.

It’s a trap the Government fell into by not acting at least a year sooner to contain our spiralling deficit and address the fact that the nation’s income halved but spending didn’t. The EU has failed to recognise that reality as well: has a single penny been cut from monstrous EU Commission budgets or the cost of its octopus-like bureaucracy?

So long as the EU central planners persist in believing that the more they permit weak link members like Greece, Ireland, Portugal, Spain and Italy (GIPSI’s sounds better than PIIGS, don’t you think?) to allow their budget deficits to spiral completely out of control by bailing them out with below cost money, the weaker the euro will become. 

There’s nothing the international debt markets crave more than a steady diet of fresh road-kill, and Greece is the first dumb EU rabbit to get knocked down.  The ECB chiefs are kidding themselves if they think the bond dealers are unaware that unemployment continues to rise (or does not abate) in the eurozone; tax revenue continue to fall; the cost of servicing this debt is a multiple of annual growth (GDP) and the euro continues to weaken against an inherently weakened dollar.

If doesn’t take a genius to see that adding the burden of a €30 billion bail-out for a puny member state like Greece – with the other laggers hanging around waiting for their turn - is hardly going to strengthen the euro experiment. 

It looked at one stage as if the German Chancellor, the once formidable Angela Merkel was going to stand firm – but she didn’t - first against quantitative easing (effectively the printing of money) and now the Greek bail-out.  She knows very well - what German chancellor doesn’t - that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”.*

But since the dye is now cast, and all the decision-making is being taken by politicians, central bankers and their paid creatures, the Keynesian economists, who persist in believing that they can correctly manipulate the economies of 15 to 25 individual countries and know better the individual financial aspirations and needs of the over half a billion real people who live in those countries, the bail-outs will continue, no matter the cost. 

The mind boggles – but that is our ‘new normal’.  Hey ho.  C’est la vie. Und aus! 

I think the €5.95 soup and sandwich offer is a good start.  What were we thinking putting €60 lunches on the credit card?  Or €800 handbags and €200 haircuts?  We were clearly out of our minds borrowing seven and eight times our gross salaries to buy way-out-of-the-way-starter-homes and rabbit hutch buy-to-lets (especially in Benidorm, Budapest and Bratislava). 

So a proper audit of what you have, what you need, what you don’t need, what you want and what you really, really want, is the way to move on. 

When I suggested recently to my friend that we do a ‘stuff’ audit, she thought that was a great idea.  We live near enough that this is going to be a ‘sort and skip’ project:  the stuff worth passing onto the charity shops gets sorted; the stuff that’s only fit for the dump gets skipped.

From there we intend to de-clutter the wardrobes, our bookcases, the shelves of CDs and DVDs and useless kitchen appliances, garden tools and redundant kids toys.

For anyone who has been hit by income and pension cutbacks and levies, an audit of the big-ticket stuff should also certainly be considered – of the cost of the mortgage and car and the family food bill.

The new normal means negotiating an affordable mortgage repayment schedule that your children hopefully won’t have to inherit along with the house.  It means driving one ordinary car or riding a bike and switching back and forth between energy suppliers for the best tariffs and the same for the mobile phones…for now. 

It means rediscovering the library and local park and taking Irish holidays (maybe even on Irish caravan-sites) with funny old relatives again, and telling your kids to get a part-time job to pay for all the stuff they’ve ‘gotta, ‘gotta have.  It means learning how to cook food instead of processing (or ordering) it.

It means learning to live below your means – perhaps for many years - while you clear the credit card bills and personal loans.

The ‘because I’m worth it, or because little Conor or Chloe is worth it’ spending was never a pretty sight; we got sucked into the high maintenance glamour routines and spa sessions, the must-have granite worktops and designer sun-glasses and the fee-based privatisation of our children’s play-time (aka private music, drama, sports, computer, language lessons) because we completely lost the run of ourselves and were able to fund it all with debt that the likes of Seanie Fitzpatrick, Michael Fingleton, Brian Goggin, Eugene Sheehy and the other bankers couldn’t wait to lend us. 

(Please dear God, let us also see the end soon of the cocktail dress wearing slappers who enter Ladies Day competitions at racetracks – the only place, incidentally, throughout Ireland’s bubble époque, that a day’s gambling – and losses – were never described as an “investment” or that your losses were someone else’s fault.)

 If these past two pretty awful years teach us anything, it is that the mountain of things we’ve accumulated – from the killer mortgages and ghost estates, to the closets full of clothes and electronic equipment - will also be the keys to our liberation when we pay them off …or write them off.

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YOUR 2010 PENSION TO-DO LIST:

 

-       If you belong to a company that offers you pension fund membership, and makes a contribution, take it. The self-employed can never match this kind of funding.

 

-       Pay a fee rather than commission to an advisor, even if it is to only try and get you into a lower cost, but steady performance, no frills, highly diversified fund.

 

-       Get your existing pension fund reviewed.  Find out the size of your losses in both percentage and cash terms.  Ask your trustee (if you belong to a company scheme) what went wrong and what they are doing about it.

 

-       Try to balance your pension assets according to your age and risk profile: the younger you are the higher your stock holdings could be was the old rule of thumb, but you need to also know exactly what companies, sectors you are holding in your fund. Too many fund managers bought too many risky shares in their effort to produce higher returns, not good, safe returns. Remind them that this is a pension you have asked them to manage, not your dream of owning a red Ferrari some day. (Part of the problem is that this was their dream too.)

 

-       Find out exactly what impact charges and fees have had on your occupational or private pension. This is called the ‘RIY’ or reduction in yield. Then try and reduce this impact. Aim for low cost annual management fees of under 1% at the least – check out ETFs – Exchange Traded Funds and other low cost index funds.  Demand that 100% of your money is invested in the account – that means, no more 5% bid-offer spreads.

 

-       Watch out for PRSAs.  While the personal retirement savings accounts are very flexible and suit women pension fund investors because they allow you to stop and start contributions without penalty, the charges on Standard PRSAs are simply too high at up to 5% of your contributions and up to 1% annual management fees.  Consider a discount broker or a good, fee-based one that charges a reasonable Standard PRSA fee, or better still a transparent, low cost non-standard one. 

 

-       Get married to someone with a good income. Have lots of daughters and be very nice to them. 

 

You think I’m joking?  It’s a whole lot easier and far less stressful to fund a pension when there are two incomes coming in, and even if there is only one income, you can rely on the other person’s retirement income as well as your own in your old age.

 

As for having lots of daughters, they might be your best pension plan of all.

 

In all the years that I have been writing and speaking publicly about personal finance and pensions, I have never met a (nice) older person or couple who was genuinely worried about their old age when they had a bevy of daughters, who they knew they could rely upon to help them achieve a modicum of comfort and joy in their old age.

 

If you really do have time on your side…planning for a baby pension (triplet girls is what you should be aiming for) sounds a whole lot more pleasurable and promising than trying to find €800 a month for a pension fund, though doing both might give you an optimum return.  

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Women Mean Business – January 2010

 

How you approach your personal finances this year, I expect, will have a lot to do with how you’ve coped with the economic turmoil of the past year.

 

Some people say they’ve never been better prepared for the New Year, having cut up their credit cards and eliminated “shopping” as their family’s main past-time after TV watching; reduced their food bills by 25% (mainly by shopping at Lidl and Aldi, eating less meat, cooking more and cutting down on food waste) and hired a good broker to cut the cost of car, home, health and life insurances.  Dropping the foreign holiday usually means a three or four thousand euro automatic savings too.

 

“This ‘thrift and frugal’ double act could catch on,” a friend of mine remarked recently. “Ending up with a 15% pay cut between us isn’t something I particularly enjoy, especially since we’re paying an extra 10% extra tax [between the levies and more PRSI] but you know, we managed on a lot less in days gone by.” 

 

Mind you, a moment later, she acknowledged that low mortgage rates had insulated the family income in 2009, bluntly noting, “Of course if interest rates go up, we are probably screwed.”

 

Will rates go up?  Undoubtedly.  European exports to the US and UK are getting hammered and the question for the euro-bankers is, can the exporting super tanker shift quickly enough from western to eastern markets to offset the jobs losses and business closures that are the main consequence of the Great Recession in the rest of Europe?   Higher interest rates are not only stifling export business, say commentators, but attract too much foreign money into the euro, which in turn props up the high value of the currency. 

 

All this macro-economics, “is the latest trigger for my migraines” my sister Ann told me recently.  She’s right.  There’s little enough that you and I can do to influence finance ministers and their creatures who run their central banks whose policies have run the western global economy into the ground.

 

So let’s stick with how to position ourselves this year to at least not add to our wider personal finance headaches.

 

The following isn’t necessarily a definitive list of personal finance do’s or don’ts for 2010, but you might look upon them as a sort of fiscal flu vaccine for the immune impaired:  they won’t guarantee that you won’t catch the next bug that’s working it’s way through the system, but they might help you dodge the worst effect of the current illness.

 

 

1)    Review your taxes.  2009 was a year in which not only did income taxes soar, but some reliefs (like mortgage interest, medical and dental expense relief) were reduced.  This process continues this year with the considerable changes announced in the December budget.  Check with a professional tax advisor to see if there are any previous claims that you have not made in the past four years and whether there are any actions you can take now to offset any of the latest announcements. This is a good time to also review your will, any inheritance or succession arrangements you should make.

 

2)    Sit down with your spouse or partner and set out a proper family budget. This involves working out exactly what income is coming into the house, and the level of expenditure.  Divide your budget sheet into two major headings:  essential spending and discretionary spending. Only by knowing exactly how much you earn and how much you spend can you get your finances under control.

 

 

3)    Earn more money -   from your business, from your savings, investments, even from your income-earning children.  This is not the year to let teenagers and older employed (but no longer in college) children enjoy a free ride.  If they live at home and have a salary, they should be paying you rent and a contribution for their upkeep.  This is the Great Recession, not just the downward phase of a business cycle.  Remind them how much it would cost them if they had their own flat and needed to heat it, light it, pay for a broadband/digital telly contract and keep the fridge stocked with beer.

 

 

4)    Review your big ticket purchases and costs:  if you are one of few mortgage holders totally in the black and can switch your variable rate loan to a better provider, especially a cheap fixed rate, do so.  Use a good broker to find you cheaper motor, home, health and life insurance policies. Successive studies show that about half the population has no life insurance whatsoever, while the other half who does, is woefully under-insured.  This is not a good time to leave your family in penury if you were to die suddenly. You need to work out how much it will cost to replace your net salary should you die.

 

 

5)    Reduce your debt, including your mortgage.  Low interest rates and even the fall in the cost of livingt may be a great boost for cash strapped families, but it isn’t offsetting the huge fall in house values.  The debt you carry is not reducing and is a growing burden relative to incomes that have been devastated by higher taxation and in many cases, actual cuts and loss of overtime, bonuses and commissions.  Do your best to reduce other debt this year too, starting with the most expensive, like credit cards, hire purchase and personal loans.  Anyone in serious debt should get a copy of Eddie Hobbs’ book, Debtbusters, which sets out a series of worked solutions for a number of debt scenarios, including those experienced by small business operators. Seek help as well from your local MABS office.   Be wary of professional debt consultants whose primary interest is in making as much money as possible from your debt problem.

 

 

6)    Review your savings, investments and pensions.  If you don’t feel confident about doing this yourself, this is the year to invest in a proper, professional, fee-based financial review.  It will probably cost you at least one to two thousand euro, but if done properly could save you a fortune going forward, especially if all you’ve ever done about your retirement is to depend on your business, house or disjointed pension contributions to somehow produce an income of some kind at 60 or 65.  Some say you might as well have been taking the euro notes out of your pocket and just burned them every month.

 

 

7)    Start a family contingency fund.  Everyone should throw their spare change into a jar every night; earners should set up direct debits into which they put €10, €20, €50, €100 – whatever sounds practicable – into an account that is there to pay for emergencies:  car trouble, burst pipes, illnesses, even redundancy.  For those of us still in work, it can be the small things that can still push you over the financial abyss.

 

8)    Keep shopping around. And then shop around some more.  Your customers and doing it, and so should you.  With the government now taking such a huge proportion of our personal and business earnings between higher income tax, PRSI, VAT, road taxes, local authority charges, health levies and cutsbacks in services, you have little choice this year but to treat every euro as if it could be your last one.  Remind your children of this too.

 

 

9)    Never sign a financial contract you don’t understand, especially new investment ones. Make 2010 the year you take back control of your personal finance from the so called professionals who have lost so much of it last year on your behalf – the bankers and investment managers.  If you can, take an investment course (check out www.investRcentre.ie) and open your own low-cost trading account – see www.tdwaterhouse.ie - the new on-line trading facility from the Toronto Dominion Bank.

 

10)Finally, aim for 2010 to be the year that money wasn’t the all-engrossing, overwhelming issue that it seems to have become in this country. 

 

 

Easier said than done, you may be thinking.   But you’ll only know for sure if you give it your best shot.

 

 

 

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“All credit expansions eventually end in credit contractions. All bubbles pop. All asset prices go down as well as up. And all paper money, sooner or later, ends up as decoration.”

                         - Bill Bonner, The Daily Reckoning

 

It’s nearly a generation since price and wage inflation was the scourge of our country. But with the cost of living falling at a rate of nearly -5%, surely it can’t happen again, asks Jill Kerby.

 

Are the indebted economies of the world, led by America and Britain, with us tagging along at their heels, facing a decade of asset price and wage deflation – like Japan has been battling since 1990 – or the reverse – a period of brutal price inflation?  

 

The commentators that I subscribe to, who write mainly for UK and American specialist newsletters, magazines and newspapers and are followers of the Austrian School of Economics (see www.mises.org) believe foremost in the notion of ‘sound money’, and due to the massive inflating of the global money supply in the past year, they mostly fall into the inflation camp.

 

But just not yet. 

 

Some predict hyper-inflation Argentina-style, others dare to suggest it could even be a la Zimbabwe.   They all believe that ultimately, fiat currencies that can be printed on demand, unlike pre-1971 currencies that were nominally restricted in their production by a nation’s gold or silver reserves, have an increasingly limited shelf life. 

 

What I really like about the late, great ‘Austrians’ - Joseph Schumpeter, Ludwig von Mises, Friedrich Hayek, and the American Murray Rothbard -  who accurately predicted the last Great Depression, is that they don’t make nonsensical predictions – like how recovery from this Great Recession, “will begin in the second half of 2011”.  

 

If economists and politicians really believe this, they’d personally be loading up on construction, bank, retail and airline shares knowing they’d be fabulously wealthy by 2012.  Yes, the markets have had a great six month bull run, but look closer and you see the hand of government in the form of trillion dollar bail-outs and subsidies, and the massive cost cutting programmes that companies have embarked on.  This is what the traders are taking advantage of, for there is no sign of genuine, growth based recovery. 

 

What the Austrians are sure of, is that the inevitable consequence of yet more debt and credit being spent to try and prevent a depression caused by too much debt and credit, is the catastrophic devaluation of the currencies involved, specifically the US dollar as the reserve currency of the world. 

 

Argentina is an interesting example, they say, of how bad things can get.  Argentina’s most recent state debt default in 2002 involved the hyper-inflation of the peso, then prices and wages inflation, and eventually, a run on the banks. Once they re-opened, the currency was devalued and for the second time in two decades (the first default was 1982), the middle classes were wiped out. 

 

Back here in Ireland, the price of many goods and services (and wages) is falling and probably will for some time, but we’re not alone; it’s happening in other heavily indebted countries that succumbed to the lure of cheap credit during the noughties. 

 

Less consumer spending equals less demand. Less demand results in the production of fewer goods and the need for fewer workers.  Spending falls, savings increase. It’s a vicious downward spiral and the bigger the debt problem (like ours, and the USA’s), the bigger it gets. It’s what puts the ‘Great’ in the ‘Great Recession’. 

The only way to break the spiral, say the Austrians, is to let the correction happen and start again.  Insolvent banks and other companies receiving taxpayer’s support and loans are taken off life support. They go bust. Ordinary people, who also made poor borrowing and investing decisions (to buy the glut of houses that were built only because of the availability of artificially cheap credit) also have to face the reality that their debts need to be paid off or written off.  Too many will lose their homes, maybe even their jobs, but eventually capital – created through savings - and labour is redirected into sustainable enterprise where there is genuine demand.   

Since all of this unwinding of bad, leveraged debt involves considerable, immediate pain, lower living standards and loss of global power (where the world’s greatest indebted nation is concerned), it isn’t too surprised that the Americans have decided to turn up their dollar printing presses instead. (Even we’ve decided to “solve” our indebted banking and national insolvency crisis with yet more debt and credit.) 

This time, however the credit catastrophe is hundreds of times greater than the one in the 1930s and it isn’t just a few countries in dire straits – it’s a global phenomena.   So far, however, the trillions that have been manufactured or borrowed to recapitalise the insolvent banks, industries, municipalities and individuals, hasn’t found its way as purchasing power in the wider marketplace.  

Try as they might to inflate away their nations’ debts with more credit and cash, it hasn’t been enough to stop asset prices falling. 

When will it happen?  No one knows the exact date.  Sooner?  Later? 

When it happens, savers and anyone living on fixed incomes will suffer.  The value of your pension fund might soar, if it’s exposed to equities, but term life insurance contracts won’t be worth much if they get paid out. 

The only winners from a surge in inflation are debtors: some cynics suggest that a huge mortgage, fixed at a low rate for 20 years could be one of the best long term investments ever.  That’s assuming you’re able to keep up the repayments.

But can a small business, unable to pass on rapidly rising prices to its customers survive such a bout of inflation?  About as well as they, themselves, will be able to pay for the rising cost of groceries, heat and fuel, doctors bills and other essential requirements.  

The US Federal Reserve Chairman Ben Bernanke, who once said that if worse came to worse (like now) and deflation in the United States looked to go the way of Japan, he would resort to throwing out bundles of cash from an open helicopter.  “Helicopter Ben” – as he is known – is now at the controls and the doors have been open for months. 

Zero percent interest rates and trillion dollar bail-outs haven’t worked to restore the US economy to pre-2008 GDP and employment levels. There are hints that they may have to resort to stimulus package Mark II or Mark III.  They may have to start charging negative interest rates on savings in an effort to stop the hoarding of cash and force consumers to spend. (That’s when the price of gold will really soar.)

I’ve no idea when this Japan-like, deflation phase will end  - it’s 18 years and counting for the Japanese who also tried to spend their way out of a property induced recession - but I’ve decided to hedge my bets.  With all my debts paid, I’m aiming over the next year or so to have my pension fund stuffed full of index-linked bonds and cash and defensive, value shares that pay decent dividends.  These companies produce goods that people need regardless of which way the hands on the ‘flation clock turn.  And in anticipation - over the longer term – that the worst offending fiat currencies like the US dollar could end up as a form of wallpaper, I’m also going to add some precious metals, oil, arable land or agriculture commodities to the mix. 

You know, precious, scarce stuff, that politicians and their creatures in their central banks can’t just print out of thin air. 

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