The shocks won’t end with the summer
The world’s stock markets have had a pretty gruesome August. Listen to most of the financial press and you might think the reasons for this are hideously complicated. Not so. It boils down to the simple truth neatly summed up by Tim Price, director of investments at PFP Group: ‘What is unsustainable by definition cannot indefinitely last.’ If there isn’t enough real money around to repay debt, be it Greek, Irish and US sovereign debt or next door’s mortgage, it won’t get paid back. As every day goes by it becomes increasingly obvious to everyone that the West will never be able to generate enough income to service its debts and its welfare promises. It will have to default on its obligations to its creditors or its citizens or both.
Spending cuts and credit freezes aren’t much good for growth, so all this might look likely to drive down prices. But the end game has to be inflationary. Conventional debt default, refusing to pay up, doesn’t work for the governments of complicated economies. So they try to wriggle out of it another way: print more money, which reduces the value of their currency and, of course, the value of their debt. Either way it is bad for markets.
What should an investor do in the face of this ghastly macroeconomic environment? Hold gold. It has gone up a lot in price — now over $1,900 an ounce, up from $275 when Gordon Brown sold Britain’s reserves ten years ago. But given that it is the only insurance most of us can get against long-term inflation, that doesn’t make it expensive. Hold some cash. Then when equities get properly cheap you can buy lots of them. Finally, hold the kind of funds that have proven they can protect your capital in bad times as well as good. I’d go for a few investment trusts — Personal Assets Trust (PAT), which holds cash, gold and good quality international stocks, and BH Macro, which is fully invested in a defensive US hedge fund, would be a good start.
If it acts like a tax, it’s a tax
Few groups in Britain have been hit harder by the cuts than undergraduates, who are now facing a trebling of tuition fees. Nick Clegg has been at pains to point out that this is accompanied by a new loans system. When I recently argued in the Financial Times that this looks more like a tax, not everyone agreed. Several readers wrote in to argue that the student loan is really no different to a mortgage: it is taken out voluntarily, and has interest-bearing repayments. And, indeed, the only real difference is a good one: that those who are relatively unsuccessful never have to pay the loan back.
I don’t buy it. Let’s look at how the new system works. From next year, all student tuition fees will be automatically paid by the Student Loans Company. When they graduate and are earning more than £21,000, the students will start to pay 9 per cent of their income over to the Student Loans Company via their pay packets. The total amount payable will increase every year, at first in line with RPI inflation, rising steadily as you earn more. For those earning £41,000, the interest will be RPI inflation plus 3 per cent. Most people will end up paying the same percentage, via the taxman, every year for 30 years— regardless of the size of the original loan.
This isn’t a bit like a mortgage. For starters, while some degrees are clearly voluntary, the important ones aren’t. If you want to be a lawyer, a doctor or an engineer you will have to have a degree and you will have to pay the 9 per cent interest. People can rent a house when they need one. You can’t rent an education — it has to be paid for, in full, up-front.
Next, the interest on your mortgage doesn’t go up as you earn more — mortgage payments are absolute, not relative to income. Finally, the fact that the relatively unsuccessful never have to pay a penny towards their tuition is a vital part of the puzzle. I’d go so far as to say that it’s the clincher in defining these charges as a graduate tax rather than a student loan. I have never yet heard of a case in which a mortgage lender has written off the value of the loan because a homeowner is not doing as well as everyone else in their office.
But that is exactly how a progressive tax system works. Misfortune (or failure) is subsidised, success is penalised. The government is proposing a charge on graduates, enforced by the law and extracted via the income tax system. There is no way out of it. There are elements of loan in here, but for most people the repayments are going to feel more like a tax. And for those who end up paying it for the full 30 years, a pretty high one at that.
From 2015, graduates earning more than £21,000 — about the national average salary — will end up paying a marginal income tax rate of 41 per cent. Those earning over £42,475 will end up paying 51 per cent. This may not matter: after all, what is the alternative? But it does explain why there is such a scrum to get into university this year.
We are just back from our rainy summer holidays in Shetland. Our house there is now heated by a wind turbine. We are thrilled with it. But it does come with a downside: you never know whether you will be warm or not. You go to bed toasty when the wind is blowing but wake up shivering at 3 a.m. because it has stopped. You have to open all the windows on a hot, windy day (you can’t turn wind-powered radiators off) but shiver around an old-fashioned peat fire on a cold, still one. We don’t mind this (on the average Scottish island, some heating is always better than no heating). But I’m not sure it would suit those used to conventional heating or indeed the nation as a whole. Something for anyone who thinks wind power alone can solve our energy needs to bear in mind.