Vague ramblings

A Jesuit fable: get ready for Generation Debt

Posted in Business, Musing by Ian Cundell on 2 October, 2013

Isn’t that just typical? You wait ages for someone outside the halls of academia to reference the Phillips Curve and then two come along at once.

Almost as my last blog auto-posted, the new issue of Property Week landed on my doormat and there was Peter Pereira Gray, managing director of the investment division at Wellcome Trust – I think we can agree, a pretty damned respectable organisation – nodding to Phillips. It is an interesting article and well worth tracking down, if you don’t take Property Week (27-1-13, p27). It raises reasonable questions about the effectiveness of Governor of the Bank of England Mark Carney’s reliance on unemployment as a policy indicator, suggesting that commercial property (and, as it happens my thesis in this short series of blogs) had better hope he is right.

I say “as it happens” because my interest in Carney’s stance is from a different angle.

I think Carney’s choice to use unemployment is because he knows that there is next to no inflation in the economy, rendering it pretty useless as an indicator. I should caveat that: no inflation that is susceptible to domestic control. Put simply, fuel and commodities priced outside the UK are the main drivers of inflation, not excess demand(1). It was failure to spot this that led former governor, Mervyn King, to catastrophically delay cutting interest rates as the credit crunch unfolded, hammering the ability of hard-pressed businesses to service debt, for the fat end of nine months.

“Give me the boy until he is seven,” said the Jesuit axiom, “and I will give you the man”.

I can riff on that.

Pereira Gray raises legitimate questions about whether Carney’s approach will work out well for commercial property, but what about the ground we have been tramping this past week? Time for another graph.

Real terms performance of investments, 1992-2013 1992 prices

Real terms performance of investments, 1992-2013
– 1992 prices

We’ve had the the baby-boomers and the hippies, we’ve had the punks and the new romantics and now it’s time for The Next Generation (are we on X ,Y or Z?). This graph is based on 1992 prices for the fairly simple reason that this is when the generation currently halfway through university was born. “Give me the boy until he is seven,” said the Jesuit axiom, “and I will give you the man”. I can riff on that.

While people older than me shaped the world as it is, and people my age – or even (very slightly) younger – are running it, the 90s-born is the generation that will – rather sooner than any of us care to admit – inherit it. How will they see things?

Well, for one thing, if they think about it at all they think that inflation at 5% is high inflation, if only because the media says so. It is hard to resist a quick “Awwww, bless!”, isn’t it?

Also, other than the inevitable cadre of Junior Dragon’s Den geeks, they have no idea what a house price boom is. Nationwide may tell us house prices are rising, but the real terms graph begs to differ (outside the bizarre hotspot of central London, another case of externally driven inflation).

And the more attentive might have noticed that for much of the 21st century stocks and shares have performed about the same as savings (that is, not spectacularly).

Meanwhile, the things they use – the iPhones and laptops, the games consoles and Kindles – are falling in price or, at the very least, improving in price performance.

Oh, and there’s one more thing.  They know that they are going to be in a boatload of debt.

It is a perfectly logical posit that models based on inflationary expectations must have a reasonable expectation of inflation. It is hard to see, under the conditions likely to be faced by today’s young, where the inflationary pressure will come from. Concern about staying employed, on the other hand, could be very much on their minds.

entire generations can have their outlook shaped not by events, but by instinctive understanding of what their money is worth.

It is hardly a shock – although I wish economists would be more candid about it – that in the manner of battle plans, the best models survive only until first contact with the real world. What Nicholas Taleb calls the “Ludic Fallacy” (mistaking the model for the world) is one of our most deceitful enemies.

I have not dealt with the niceties of portfolio management, or capital asset pricing. There are no fancy-dan formulas. There are none of the Kuznets Waves – or K-Waves, as they get called these days – so beloved of City analysts. (Again? Seriously guys give it up, because as John Swire noted in his comment on my first blog, a house in 1960 is not the same as a house today).

You see, while it remains an empirical truism – shown by all of the graphs in these three posts – that different parts of the economy will surge and wash to their own rhythms and cadence, these blogs have dealt with the broad sweep of history. How entire generations can have their outlook shaped not by events, but by instinctive understanding of what their money is worth. It is not always precise, but I suspect this instinct is pretty accurate.

And it is my considered opinion that in – and for – the reasonably foreseeable future, people will be less concerned about rising prices, but much more concerned with getting enough work to deal with debt – in a world where inflation may not bail them out.


1. Having said that, I am more than a little relieved that Carney seems to have called a halt to quantitative easing – or printing money, as it is more honestly called – since that just creates inflation a few years down the road (as per Anthony Barber and Nigel Lawson).

(The views expressed here are not in any way advice and are subject to change in the face of new evidence)


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