With the election now out of the way (for now) it is perhaps worth reflecting on a theme that emerged from the results. There were many reasons for the slightly unholy mess we ended up with but one seems to be that the young turned out (having perhaps learnt the lesson of the 2016 referendum) and voted for the opposition. This was probably as much about protesting about the incumbent party as it was a response to the Labour manifesto containing as it did a promise to scrap tuition fees but also a promise to retain the triple lock on pensions but it highlighted what we thought from the Brexit result – the generations are politically split like never before.
It reminded me of an argument I had with my mother a decade or so ago when she was complaining about how good my generation had it. She knew what I was earning and to her this was a king’s ransom compared with what she and my father had earnt when at work.
Now we at Altor always hold the position that most human behaviour is irrational but we thought that we would try to look at whether there is any good reason why a young person should be cross with a middle aged person and whether they had any right to be cross with the retired generation.
Whilst researching this topic we were speaking to one of our favourite fund managers (who is out of work at the moment but hoping to be the first to offer fixed fees) and his take was very enlightening. He is of the opinion that capital has destroyed income and that this disproportionately affects the young.
The last decade of super governmental/state intervention in markets has probably accelerated the capital monster even more. In essence, fearing a global recession, central banks and governments embarked on a policy of printing money, then buying back government debt and even more recently buying back corporate debt. This policy has prevented a recession that looked otherwise likely to hit (and was probably a natural mean reversion event that might even have been healthy) but it has had consequences. The first is that additional money in the economy has to go somewhere and this time around it seems to have flowed into real assets; so stockmarkets, property etc which has inflated prices further, possibly unsustainably. It has also helped keep inflation low. The problem with this is that the value of the assets of those that already have capital (typically older people) has grown without much to support the growth and incomes (typically younger people) have stagnated.
As there is only ever a set wealth that we have (with an elastic number attached to it) then expansion means that those that already have end up with a bigger proportion. This is a huge transfer of wealth from those without assets to homeowners and those with investments. You might ask how can you lose value when you don’t have any to start with and here is the invisible bit. The younger generations are rapidly accruing a negative sign by their wealth number to support the transfer of wealth to the older generations.
A state policy of increasing the national debt to stave off recession grows each of our individual share of the debt. Government debt is seen by many people as an abstract economic issue but we each own a share of the national debt and so it is very personal. In this way those with capital already are not as wealthy as they think (the government should send us the electorate an annual wealth statement) because they have an invisible debit line but those without capital are in an even worse position. Of course the older you are, the added benefit is that you have less time to repay this debt and it gets passed on to the next generation when you die.
The younger generations have several things piling up in their debit column; their share of national debt, student loans, mortgages to buy inflated houses, future state pension liabilities, future final salary pension liabilities, the costs of environmental changes, the list goes on. The baby boomers have been living a good life but on a deferred payment plan.
Now at this point I can hear many of our clients (who tend to be disproportionately likely to be older and wealthier) say well it doesn’t matter because they will get it all from me at some point anyway and yes this is true to a point. One of the problems of the effect of capital destroying income is that not only does it concentrate wealth in the hands of the older generations it also concentrates wealth in a few of this generations and therefore the trickle-down effect is concentrated also and this breeds inequality which is bad for society and leads even more young people to vote as an opposition bloc.
Back to my mum, she enjoys the benefit of a final salary pension that she did not fund, she enjoys my father’s final salary pension that he didn’t fund, they live in a house that they didn’t fund, have driven around for decades on cheap fuel and she can’t work out that inflation counts for some of the gap between our earnings. She will not be persuaded though, which is natural because no one ever told her that she was drawing down on a mortgage on her grandchildren’s future. It is this that will make younger people angry with politicians, that they argued about the minor details of difference between them and never stood up and told the electorate that there were some big global problems that needed some consensus from everyone about how we tackled them.
So in short:
Capital has destroyed income.
Government debt is a deficit for all of us.
You are not as wealthy as you think.
But on the upside if you have capital you can make a difference to your children, grandchildren and the causes that you care about that the state might start withdrawing funding from as it runs out of money.
Thomas Piketty is excellent on this subject although not always right.
For a shorter read this blog summarises his conclusions nicely.
Shiv Malik has a longer list of betrayals here.