I am trying to work out what the hell is going on with the recession, and if any of us are going to have any money ever again.
And then I found something in my brother's shared items: an article written by my Dad a long time ago, which predicted exactly how and why this recession would happen. It was passed around the family quite a lot at the time, and we all giggled at what my brother Rich described as its predictably intemperate style. But the point is, it has incredible foresight. It's a brilliant article. And I can say that because my Dad is now too ill to blow his own trumpet, or indeed do anything. He certainly won't be writing articles like this again. Anyway, I think it's pretty impressive, given that this was written in 1998...
When he sent the article to me years ago, it was called "Angry With Gordon Brown". When he sent it to my brother he said "RB: Expect Errata" - but there really aren't many errors. This was written in 1998, after Brown's first budget.
Anyway. Here's Dad...
"Last month I heard the announcement that pension funds were to lose
their fully-tax-exempt status, hidden quietly in the corporation tax
"reforms". I was very shocked and angry. This plan formed no part of
the Labour Government manifesto. It will hit hardest on the working
men who voted Labour; they can least afford this loss of pension. The
abolition of the pension funds' exemption from the payment of advance
corporation tax amounted to a theft (not manifesto-announced or
electorate-approved) of at least 4.5 billion pounds per annum. This
was 4.5 billion pounds per annum that was to be taken from an industry
that was already weakened by a series of weird and inept legislation
(most of it Conservative).
The consequences began to occur to me, and I am truly shocked. To
begin with no industry or business or country can cope with any
unplanned-for disaster. When it is so huge - and Government-caused -
it seems to me that Brown must be incapable of thinking beyond next
week, incapable of working out what are the logical and inevitable
social and economic consequences of his actions. (Where did he go to
school? Belmarsh?) In contrast, I am thinking of the vicious circle
or inescapable downward spiralling consequences. Further thinking
makes me realise that the results are myriad, intertwined and
self-fuelled. They could amount to the swansong of a once wealthy
nation.
The irony is that this stealth tax will eventually be self-reducing:
the more revenue it raises the more damage it will cause to the goose
(the hybrid goose that is the pension/stock-exchange) until soon it
will stop laying golden eggs.
Beyond the lack of short-term wisdom, the ignorance of common
knowledge is startling. A child could work out that this is "not a
good thing". Only the mad or the very ignorant have not heard about
the demographic changes that everyone (and not just those in the life
and pensions industry) have known about since WWII. Why doesn't Brown
know?
The pension funds theft will cause lower fund yields - which will result in:-
I. Defined benefit schemes will have liquidity problems and face
wind-up. Previous (Tory) legislation penalised schemes which built up
big reserves for lean years. It is just possible, but unrealistic,
that the Tories did so not anticipating such a future degree of
planned destruction.
II. Increase in money purchase membership with smaller benefits:
amounts to a future load on state benefits.
III. More pensioners become state dependent.
IV. Taxation will increase to pay for the above.
V. Less enthusiasm for pension saving.
VI. Thus less new money to invest - will further badly weaken stock market.
VII. Weaker stock market will exacerbate liquidity problems of smaller
schemes. May also adversely affect insurers with strong equity bases.
VIII. Membership withdrawals from schemes - less new money invested,
schemes further weakened, increased apathy (another vicious circle).
IX. Publicly funded defined benefit schemes will overcome shortfalls
(as revealed at their tri-ennial valuations) by increasing costs to
public e.g. local rates will have to increase by several times
inflation.
X. The sort of companies likely to be worst affected would include the
former nationally-run and Government-funded, but now privatised
companies. Often these are nationally important in providing services
and utilities. Traditionally staffed by bolshie loony lefties, these
workers are "hardline" on any changes or reductions in the perks that
they regard as their right. The pension tax will place their new
private employers in an invidious position. They will be unable to
maintain pension fund viability. A strike or national disaster of
some sort is virtually inevitable.
[On the hard-copy he sent me, point X was ringed with an exclamation
mark. It was the Grangemouth strike that had prompted him to dig this
out.]
XI. Will mostly affect poorer ratepayers and poorer future scheme
pensioners who will becomes even more state-dependent (more tax
increases).
XII. Will weaken the insurers and will put financial strains on their
funds' ability to meet pensions in payment - resulting in poorer
annuity rates - resulting in even less enthusiasm to buy pensions
schemes among the young, further weakening the insurers (another
vicious circle).
XIII. People will look elsewhere to invest: one result will be an
increase in buy-to-let house purchases - will further fuel house-price
inflation.
XIV. A potential problem would be the over-enthusiasm of domestic
property investors. The over-taxation of all other legitimate
investment might drive more people to try investing in domestic
housing.
XV. Combined with a political desire to have low inflation (as Joe
Soap will be told, based on the cost of VCRs, candles, 8-track players
and scythes, ignoring the costs of real items used by real people),
most people will see the only way out to be buy-to-let.
XVI. Joe will be encouraged by the lenders. Low borrowing rates will
possibly fuel borrowing on domestic property. Fringe lenders could
see profits based on lending to short-sighted people (starved of
pension fund savings growth) sums of un-repayable money secured
against freehold property which will probably be over-valued by the
lenders living in cloud-cuckoo land.
XVII. Fringe lenders (and usurers) might get fingers burnt, especially
those in the "buy a shit car on finance" market or the "we do dodgy
120% loans on over-valued shoddy houses" type of market.
XVIII. Tinpot lenders, the "fringe", will continue to lend, or
over-lend, on the assumption that inflation will continue as in the
70s and defend that lunacy by over-valuing freeholds, maintaining
their interest rates regardless of LIBOR or UK base rates. Such rates
will become a political ideal but a commercial irrelevance.
XIX. A possibility that the deemed financial inadequacy will cause
minor banks/insurers to fail/merge/de-mutualise, especially those
strong enough now to have such large equity exposure that they cannot
disinvest without causing further damage to their funds. [!]
XX. Financial inadequacy will result in the purchase of fewer equities
leading to more likely failures leading to greater financial
inadequacy.
XXI. Stock exchange may fall by 25-30% and will take many years to
recover to 1996 levels unless a major reversal enacted. Flying pigs
proposed.
All these possibilities are a direct chain of result leading back to
the raid on pension funds. Bless you Gordon. It is an inevitable
downward spiral, typical of 19th century socialist thinking: i.e.,
kill the independent spirit and force people into state dependency and
thus, as paupers, to vote for the lazy man's misery system. Snag is,
how are the wealth creators going to survive in this lunatic system?
It is possible. Having seen it before in the 70s my fears may seem
inevitable. If they bluster enough about "New Labour" it may keep us
immune from fiscal reality and we may have four/five years "growth".
The only winners will be the ultra-rich and the politicians who pay
themselves based on the sort of economics used by [moderately well-known local crook businessman]. Amazing how such a
fraud works over and over again."
Pretty good hey?
