Dear Karl,
We might want to give some thought to the secondary effects of lower interest rates.
Falling interest rates are dragging down annuity rates. Just to make the point, the annuity rates determine how much you gat each month from your pension.
So we have a situation arising where the population living on retirement income is set to rise dramatically (the Boomers are reaching retirement age), just as the amount they can live off hits all time lows.
Net result – low income pensioners for decades to come. That’s bound to have an impact on the ‘relief of poverty’ charities.
Best wishes,
Stephen
As the real economy moves into recession, we can now see how governments around the world are responding to the crisis. In general, there has been a bail out of the banking sector around the world. This has been coupled to a loosening of monetary policy as interest rates have been aggressively reduced, along with the announcements of relatively large fiscal stimuli. We have yet to see whether this action alone will be enough to mitigate the worst effects of the incipient recession. While we wait for the unfolding of events, we might be usefully engaged in giving some consideration to the longer term impact of these policy changes.
Most attention in the UK has been directed at the size of the fiscal stimulus. Two factors dominate the conversation – the amount that needs to be borrowed and how will it be paid back. Indeed, there is currently a very public row between the UK and German governments about the wisdom of such large borrowings, which, in turn, is feeding into the domestic political agenda. The more critical reviews of policy estimate borrowing to be in the region of £1 trillion (see article). This is highly unlikely to happen and represents more of a political calculation rather than a financial one.
We ran some scenarios based upon the recent Pre-Budget Report, and we estimate borrowing to be in the region of £355 billion over the next 8 years. Interestingly enough, Barclays Capital estimates total borrowing at about £370n billion over the next 7 years. This suggests a more reasonable order of magnitude. Of course, all estimates are, at the present, quite speculative. The duration and severity of the incipient recession will have a greater role to pay on the actual outcome, and, at present, this factor is a critical unknown.
The estimates presume that the economy will continue into recession until the middle of 2009, with unemployment peaking at about 2.25 million. If the recovery is delayed until 2010, or if unemployment rises appreciably beyond the forecast levels, then the automatic stabilisers (lower tax receipts and higher unemployment benefit payments) will push the borrowing requirement beyond the current projections. Of course, if the base assumptions turn out to be unduly pessimistic, then the opposite will occur. At present, the pressure valve to the economy is the Sterling exchange rate, which has been allowed to fall with something of a public outcry, but without too great a policy response. This gives rise to hopes for exports playing a role in the recovery.
Irrespective of whether the estimate for PSBR is higher or lower in the coming years, the point remains that the government will undertake record levels of borrowing, which will have to be repaid. This raises the question of where the money will come from to repay the debt. We feel that the situation is not as bad as has been painted. The government has bailed out the banking sector to the tune of £37 billion (with borrowed money). The bailout has been implemented by taking 12% preference shares in the UK banks. We like the horizon of 8 years because, in that horizon, at 12% return, the £37 billion will have been repaid in the form of a preference dividend. You should note that these figures are averages – a holding that averages at 8 years in duration and which pays an average of 12%. However, on this reckoning, the original loan taken out by the government more or less can be repaid from income, leaving the Treasury holding 12% preference shares that cost £37 billion.
How much are these preference shares likely to be worth in 2017? Supposing that Base Rate normalises in 8 years at an average of around 4%, then the CAPM valuation model would suggest that the capital value of UK Financial Investments Ltd (the vehicle through which the Treasury owns the preference shares) would be in the region of £110 billion to £120 billion. This was the basis of our view that UK Financial Investments Ltd should become a Sovereign Wealth Fund (see note). However, as this sum represents about a third of the additional PSBR, one can see that the Kid’s Inheritance could well be spent upon repaying the new borrowing.
Furthermore, in a previous post (see post) we speculated that the New Normal would lead to greater supervision of the banking sector. One way in which this supervision will manifest itself is through tighter capital adequacy rules and tighter liquidity requirements. As a consequence of this, the banking sector will be required to hold a greater percentage of their asset base in gilts. The Financial Times estimates the additional gilt requirement for the UK banking sector to be in the region of £90 billion to £350 billion (see article), which raises the oddity of the Government lending the banks the money which they banks use to lend to the Government. Either way, this represents a further chunk of the additional PSBR being covered.
Finally, as equity markets fall across the world and as the global economy heads into recession, pension fund managers will be worrying about their long term commitments to pay a steady stream of income. One technique to allay those fears is to switch from the volatile income stream associated with equities into the more certain income stream associated with gilts. Of course, this gives rise to the perverse situation of pension funds selling equities at the bottom of the market and purchasing gilts as they become relatively dear. However, in terms of PSBR, this will put further demand into the gilts market. We are currently unable to estimate the extent of this demand – it depends upon how bad the equity markets become – but we could expect the figure to be in tens of billions of pounds.
Already we can start to see how the additional PSBR will be funded. Most of it will be funded by the banking sector as a consequence of greater state supervision and involvement in the sector. Politically, this is a good message that can be given to voters. The banks – who many hold responsible for causing the economic turndown – will have to pay to clean up their own mess.
The UK case has wider significance for two reasons. First, the UK government feels that it has been something of a thought leader in the G8 on how to respond to the current turmoil. There is something to this claim. The US, who ordinarily would take the lead, has been unable to do so because of the political paralysis caused by a change of President. In many respects, President Elect Obama, when he assumes office in January, will be playing catch up to the rest of the world. If the forecasts of the recovery starting in mid-2009 are correct, then the US is unlikely to gain the initiative in combating the recession. The resulting institutional structures could well have a distinct European feel about them. Perhaps Mark Leonard is right? (See Reference).
The second point to note is that we are discussing the response to the recession unwinding over the next decade or so. We are now only coming to realise that the immediate planning future has changed, and that a New Normal is emerging for the coming decade. This has yet to permeate into corporate planning structures, and when it does we might see a different approach to business emerging.
The impact of the credit crunch is likely to be with us for some years to come. Let us hope that, in dealing with it, we do not have to spend the Kid’s Inheritance.
This post was reproduced fromThe Futuristthe Blog of The European Futures Observatory (www.eufo.blogspot.com)
There are these charities which are really businesses. I look forward to the application of the ‘public benefit’ rules to public schools.
If the public schools were to lose their charitable status (no appreciable public benefit), not only would Corporation Tax become an issue, but also VAT may be liable on their fees.
What would happen if this were to have a more general impact on the charity sector?
I wonder if the Third Sector is ready for the Long Tail? The Long Tail is all about disintermediation – cutting out the middleman (or woman). In a world in which the Internet enables donors to deal directly with beneficiaries, what is the compelling rationale behind the charity business model?
I would be happy to chair a roundtable on this if any others are interested.
This is quite predictable a movement. The migration cycle is about 3 to 4 years. In this time, about 85% of newcomers have achieved their financial objectives and return to their place of origin. Interestingly, there is usually a recycling of jobs, as the outgoing workers turn over their jobs to friends and relatives at ‘home’. This recycling process may be retarded in the current economic downturn, as the UK exports its unemployment abroad.
This post is just to alert members of our free weekly update.
Each week, we circulate a review that places a current topic into a wider futures perspective. We normally look deeper than the news coverage to discern the underlying trends.
Recent topics have examined the price of oil (stimulated by a thought piece that we did for the National Trust), the New Nationalism (and how that is likely to play to the flow of people), and how climate change means that Christmas might come more than once a year.
If you would like to go onto the distribution list, just e-mail me at stephena@eufo.org and I will add you to the list.
We do not make the distribution list available to third parties and we only use it for the circulation of the Weekly Update.
What is the output of a futures exercise? Some people say that a set of scenarios might be the output that you can expect, but I think that the answer is different. I feel that a good futures project will deliver a set of questions, and those questions will relate to the critical uncertainties.
In our futures projects, we aim to devote 50% of the project to finding the right questions and then about 50% of the time to looking at where we might find the answers to those questions.
In looking for critical uncertainties, if none stand out as clear favourites, then you need to either examine further the assumptions underlying the differing points of view or widen the set of stakeholders present. You might not get the right questions because you are not asking the right people.
Finally, the 2×2 scenario project is the most commonly encountered, but they are n-dimensional. Our last big scenario project (250 people over 4 years) had a 6×5x2 scenario set, generating just under 650 alternative scenarios framed around a single question – admittedly with two halves! The point is that scenarios can be as complex as the time and budget allows them to be, and yet is all boils down to one factor – to ask the right question.
Most “official” statistics operate on an annual cycle (April to March, normally), whilst migration flows operate on a three to four year cycle.
If we view the Polish flow from this perspective, then, in 2004 when full accession to the EU came into play, there would be an apparent rush of people from Poland. However, once the population had stabilised, it would become more of a cyclical flow.
The Times report merely states that we are now in the replacement phase of the cycle, which has a strong historical base.
Looking to the future, we can reasonably expect something similar when Romania and Bulgaria achieve full accession, and the same again should Turkey gain full accession to the EU.
I’m sorry I can’t make the seminar on migration, but I will be presenting a paper at the World Future Society conference on globalisation in July, if anyone is interested.
I found the meeting a bit insular (an inward focus on the UK that didn’t take in the European context) and a bit one dimensional (no real consideration of how citizenship might change if the UK loosens a bit further into devolved areas).
However, I had a good time, met some interesting people, and it gave me an interesting reality check from the real world.
I am quite pessimistic about the prospect of taking sufficient action to avoid catastrophic climate change. In terms of this discussion, we are nowhere near the tipping point.
I went to a briefing by Nick Stern on the issue of climate change and what needs to be done (see review). It left me feeling that the job is just too big.
Just suppose that The Enlightenment has ended, and that we are entering a new era. What would that look like?
We would be nostalgic about the old paradigm (democratic government, freedom of the individual, repect for private property), but increasingly aware that it is no longer relevant. If the basic building block of The Enlightenment – the nation-state – were to be dissolving, then what would replace it?
One answer is the post-modern supra-national institution, such as the EU. However, people have a need to belong something more intimate, which is why we are likely to see the parallel development of communities.
To me, the big question is how those communities ought to be organised. One view – a view that I have some sympathy for – is the regionally based community that is grouped around a city attractor.
If so, then the voluntary sector has much to offer in this world as it is already community based rather than institutionally based.
Stephen
Dear Karl,
We might want to give some thought to the secondary effects of lower interest rates.
Falling interest rates are dragging down annuity rates. Just to make the point, the annuity rates determine how much you gat each month from your pension.
So we have a situation arising where the population living on retirement income is set to rise dramatically (the Boomers are reaching retirement age), just as the amount they can live off hits all time lows.
Net result – low income pensioners for decades to come. That’s bound to have an impact on the ‘relief of poverty’ charities.
Best wishes,
Stephen
Stephen
As the real economy moves into recession, we can now see how governments around the world are responding to the crisis. In general, there has been a bail out of the banking sector around the world. This has been coupled to a loosening of monetary policy as interest rates have been aggressively reduced, along with the announcements of relatively large fiscal stimuli. We have yet to see whether this action alone will be enough to mitigate the worst effects of the incipient recession. While we wait for the unfolding of events, we might be usefully engaged in giving some consideration to the longer term impact of these policy changes.
Most attention in the UK has been directed at the size of the fiscal stimulus. Two factors dominate the conversation – the amount that needs to be borrowed and how will it be paid back. Indeed, there is currently a very public row between the UK and German governments about the wisdom of such large borrowings, which, in turn, is feeding into the domestic political agenda. The more critical reviews of policy estimate borrowing to be in the region of £1 trillion (see article). This is highly unlikely to happen and represents more of a political calculation rather than a financial one.
We ran some scenarios based upon the recent Pre-Budget Report, and we estimate borrowing to be in the region of £355 billion over the next 8 years. Interestingly enough, Barclays Capital estimates total borrowing at about £370n billion over the next 7 years. This suggests a more reasonable order of magnitude. Of course, all estimates are, at the present, quite speculative. The duration and severity of the incipient recession will have a greater role to pay on the actual outcome, and, at present, this factor is a critical unknown.
The estimates presume that the economy will continue into recession until the middle of 2009, with unemployment peaking at about 2.25 million. If the recovery is delayed until 2010, or if unemployment rises appreciably beyond the forecast levels, then the automatic stabilisers (lower tax receipts and higher unemployment benefit payments) will push the borrowing requirement beyond the current projections. Of course, if the base assumptions turn out to be unduly pessimistic, then the opposite will occur. At present, the pressure valve to the economy is the Sterling exchange rate, which has been allowed to fall with something of a public outcry, but without too great a policy response. This gives rise to hopes for exports playing a role in the recovery.
Irrespective of whether the estimate for PSBR is higher or lower in the coming years, the point remains that the government will undertake record levels of borrowing, which will have to be repaid. This raises the question of where the money will come from to repay the debt. We feel that the situation is not as bad as has been painted. The government has bailed out the banking sector to the tune of £37 billion (with borrowed money). The bailout has been implemented by taking 12% preference shares in the UK banks. We like the horizon of 8 years because, in that horizon, at 12% return, the £37 billion will have been repaid in the form of a preference dividend. You should note that these figures are averages – a holding that averages at 8 years in duration and which pays an average of 12%. However, on this reckoning, the original loan taken out by the government more or less can be repaid from income, leaving the Treasury holding 12% preference shares that cost £37 billion.
How much are these preference shares likely to be worth in 2017? Supposing that Base Rate normalises in 8 years at an average of around 4%, then the CAPM valuation model would suggest that the capital value of UK Financial Investments Ltd (the vehicle through which the Treasury owns the preference shares) would be in the region of £110 billion to £120 billion. This was the basis of our view that UK Financial Investments Ltd should become a Sovereign Wealth Fund (see note). However, as this sum represents about a third of the additional PSBR, one can see that the Kid’s Inheritance could well be spent upon repaying the new borrowing.
Furthermore, in a previous post (see post) we speculated that the New Normal would lead to greater supervision of the banking sector. One way in which this supervision will manifest itself is through tighter capital adequacy rules and tighter liquidity requirements. As a consequence of this, the banking sector will be required to hold a greater percentage of their asset base in gilts. The Financial Times estimates the additional gilt requirement for the UK banking sector to be in the region of £90 billion to £350 billion (see article), which raises the oddity of the Government lending the banks the money which they banks use to lend to the Government. Either way, this represents a further chunk of the additional PSBR being covered.
Finally, as equity markets fall across the world and as the global economy heads into recession, pension fund managers will be worrying about their long term commitments to pay a steady stream of income. One technique to allay those fears is to switch from the volatile income stream associated with equities into the more certain income stream associated with gilts. Of course, this gives rise to the perverse situation of pension funds selling equities at the bottom of the market and purchasing gilts as they become relatively dear. However, in terms of PSBR, this will put further demand into the gilts market. We are currently unable to estimate the extent of this demand – it depends upon how bad the equity markets become – but we could expect the figure to be in tens of billions of pounds.
Already we can start to see how the additional PSBR will be funded. Most of it will be funded by the banking sector as a consequence of greater state supervision and involvement in the sector. Politically, this is a good message that can be given to voters. The banks – who many hold responsible for causing the economic turndown – will have to pay to clean up their own mess.
The UK case has wider significance for two reasons. First, the UK government feels that it has been something of a thought leader in the G8 on how to respond to the current turmoil. There is something to this claim. The US, who ordinarily would take the lead, has been unable to do so because of the political paralysis caused by a change of President. In many respects, President Elect Obama, when he assumes office in January, will be playing catch up to the rest of the world. If the forecasts of the recovery starting in mid-2009 are correct, then the US is unlikely to gain the initiative in combating the recession. The resulting institutional structures could well have a distinct European feel about them. Perhaps Mark Leonard is right? (See Reference).
The second point to note is that we are discussing the response to the recession unwinding over the next decade or so. We are now only coming to realise that the immediate planning future has changed, and that a New Normal is emerging for the coming decade. This has yet to permeate into corporate planning structures, and when it does we might see a different approach to business emerging.
The impact of the credit crunch is likely to be with us for some years to come. Let us hope that, in dealing with it, we do not have to spend the Kid’s Inheritance.
This post was reproduced from The Futurist the Blog of The European Futures Observatory (www.eufo.blogspot.com)
Stephen
AND …
There are these charities which are really businesses. I look forward to the application of the ‘public benefit’ rules to public schools.
If the public schools were to lose their charitable status (no appreciable public benefit), not only would Corporation Tax become an issue, but also VAT may be liable on their fees.
What would happen if this were to have a more general impact on the charity sector?
Stephen
I wonder if the Third Sector is ready for the Long Tail? The Long Tail is all about disintermediation – cutting out the middleman (or woman). In a world in which the Internet enables donors to deal directly with beneficiaries, what is the compelling rationale behind the charity business model?
I would be happy to chair a roundtable on this if any others are interested.
Stephen
This is quite predictable a movement. The migration cycle is about 3 to 4 years. In this time, about 85% of newcomers have achieved their financial objectives and return to their place of origin. Interestingly, there is usually a recycling of jobs, as the outgoing workers turn over their jobs to friends and relatives at ‘home’. This recycling process may be retarded in the current economic downturn, as the UK exports its unemployment abroad.
Stephen
This post is just to alert members of our free weekly update.
Each week, we circulate a review that places a current topic into a wider futures perspective. We normally look deeper than the news coverage to discern the underlying trends.
Recent topics have examined the price of oil (stimulated by a thought piece that we did for the National Trust), the New Nationalism (and how that is likely to play to the flow of people), and how climate change means that Christmas might come more than once a year.
If you would like to go onto the distribution list, just e-mail me at stephena@eufo.org and I will add you to the list.
We do not make the distribution list available to third parties and we only use it for the circulation of the Weekly Update.
Stephen
Dear Natalie,
What is the output of a futures exercise? Some people say that a set of scenarios might be the output that you can expect, but I think that the answer is different. I feel that a good futures project will deliver a set of questions, and those questions will relate to the critical uncertainties.
In our futures projects, we aim to devote 50% of the project to finding the right questions and then about 50% of the time to looking at where we might find the answers to those questions.
In looking for critical uncertainties, if none stand out as clear favourites, then you need to either examine further the assumptions underlying the differing points of view or widen the set of stakeholders present. You might not get the right questions because you are not asking the right people.
Finally, the 2×2 scenario project is the most commonly encountered, but they are n-dimensional. Our last big scenario project (250 people over 4 years) had a 6×5x2 scenario set, generating just under 650 alternative scenarios framed around a single question – admittedly with two halves! The point is that scenarios can be as complex as the time and budget allows them to be, and yet is all boils down to one factor – to ask the right question.
With best wishes,
Stephen
Stephen
Dear Megan,
Have you thought about developing a 3S4 Group on Linked-In (oir an NVCO Group)?
With best wishes,
Stephen
Stephen
Dear Natalie,
This is a story of time and space.
Most “official” statistics operate on an annual cycle (April to March, normally), whilst migration flows operate on a three to four year cycle.
If we view the Polish flow from this perspective, then, in 2004 when full accession to the EU came into play, there would be an apparent rush of people from Poland. However, once the population had stabilised, it would become more of a cyclical flow.
The Times report merely states that we are now in the replacement phase of the cycle, which has a strong historical base.
Looking to the future, we can reasonably expect something similar when Romania and Bulgaria achieve full accession, and the same again should Turkey gain full accession to the EU.
I’m sorry I can’t make the seminar on migration, but I will be presenting a paper at the World Future Society conference on globalisation in July, if anyone is interested.
With best wishes,
Stephen
Stephen
We also posted a meeting report on this meeting. It can be found at http://eufo.blogspot.com/2008/02/future-of-citizenship.html.
I found the meeting a bit insular (an inward focus on the UK that didn’t take in the European context) and a bit one dimensional (no real consideration of how citizenship might change if the UK loosens a bit further into devolved areas).
However, I had a good time, met some interesting people, and it gave me an interesting reality check from the real world.
Stephen
I am quite pessimistic about the prospect of taking sufficient action to avoid catastrophic climate change. In terms of this discussion, we are nowhere near the tipping point.
I went to a briefing by Nick Stern on the issue of climate change and what needs to be done (see review). It left me feeling that the job is just too big.
Stephen
Just suppose that The Enlightenment has ended, and that we are entering a new era. What would that look like?
We would be nostalgic about the old paradigm (democratic government, freedom of the individual, repect for private property), but increasingly aware that it is no longer relevant. If the basic building block of The Enlightenment – the nation-state – were to be dissolving, then what would replace it?
One answer is the post-modern supra-national institution, such as the EU. However, people have a need to belong something more intimate, which is why we are likely to see the parallel development of communities.
To me, the big question is how those communities ought to be organised. One view – a view that I have some sympathy for – is the regionally based community that is grouped around a city attractor.
If so, then the voluntary sector has much to offer in this world as it is already community based rather than institutionally based.