It has been an interesting week for the Bank of England. On the one hand the main footstool of its monetary policy saw a major reverse last night as the Forward Guidance promises of Janet Yellen and the US Federal Reserve turned to dust yet again. how long before everybody realises that this particular Emperor or Empress has no clothes? Also those who took Governor Mark Carney’s advice to remortgage will not be smiling if the fall in gilt yields – the 5 year has fallen 0.1% to 1.28% – leads to lower mortgage rates rather than the higher ones his Forward Guidance predicted.
Mind you the Quantitative Easing (QE) bond buyers of the Bank of England may be popping the champagne corks as the Gilt market surges and the £8.4 billion they bought earlier this week and last turns quite a profit. Thanks Janet! Oh and let me set a type of brainteaser which is that if you take a Richard Murphy ( architect of Corbynomics) view of QE can you ever have a profit on the Gilts? It gets harder if you think that the sellers of the Gilts do have an opportunity cost loss.
Also if you take my view that the Bank of England does not actually want to raise interest-rates then it will welcome the 3 cent or so rise in the UK Pound £ which has taken place since the middle of this week. A new rate above US $1.56 tightens policy again and reminds me that the period since March 2013 has been the equivalent of a 3.5% rise in Bank Rate.
The Bank Underground
No not the place which was my commuting stop for many years! There is a Bank of England blog with some interesting things to say on debt and its human lifecycle. So before it gets redacted let us sing along with the Jam and take a look.
But I want nothing this society’s got
I’m going underground (going underground)
Well, let the brass bands play and feet start to pound
Going underground (going underground).
The lifecycle of debt in the UK
Firstly we get a confirmation of my theme that house price rises are inflation for first time buyers and indeed any buyer of net housing equity.
They (most young Britons) may tell you about their struggle to get on the ladder, or how they’ve had to make ever larger concessions such as moving to the fringes of town.
Then we get a confession about one of the campaigns in the war of the generations which is that the young face “debt,debt,debt” as they look forwards.
This post empirically underpins what has been anecdotally obvious for some time: that the burden of debt is disproportionately falling on the young, and much more so than any other time in the last 20 years.
Let us take a look at the pattern of debt over time.
What does this tell us?
Let’s start with debt. First, the difference between each cohort and its immediate predecessor is widening. There is hardly any difference between the 1941 and 1931 cohorts, but the differences between the 1951, 1961, and 1971 cohorts are staggering.
Let me ram this home and the emphasis is mine.
It seems that secured debt is rising super-fast for the young.
At this point it feels that the author is trolling Max Keiser does it not? But there is more to the analysis and again the emphasis is mine.
The younger cohorts have much more distinctive inverted-U humps than older cohorts which remain elevated for much longer. It is possible to imagine a world where younger households will reach 65 and still have debt.
So we have them with debt and if I may make a sweeping generalisation the older generation with housing equity wealth gains. This leaves us with the thought that in overall terms the debt of the young is paying for the wealth effects of the older generation.
What about incomes?
The affordability of debt depends to a large extent on incomes so if everybody was earning more then the situation would look different. Regular readers of this blog who follow my analysis of real wage trends will be fearing the worst and this point and wondering if or maybe how the Bank of England will sugar this pill.
Turning to income, the differences across cohorts are much more subdued…….Taking the charts together, one can conclude that income growth has been unable to keep up with the pace of house price inflation.
Also it is willing to point out that this appears to be a relatively recent phenomenon.
In fact, the 1981-1990 cohort are practically earning the same as those born between 1971-1980
This has a consequence.
This spectacular divergence between income and debt for younger groups is worrying.
Will we see intergenerational mortgages in another outbreak of the Turning Japanese influence of these times?
Superficially, the charts suggest that it might become routine for younger cohorts to retire with mortgages—something unprecedented for the UK.
What about the wealth effects?
Central bankers love wealth effects as frankly they are one of the few areas where they can even try to claim success in the credit crunch era. In a way the chart below illustrates that but the real issue is the shape of the curve.
Whilst the young have the debt it is the older generation who have the wealth. If we note that the data was based on 20 years of a survey from 1992 to 2102 and that since 2012 there has been a house price boom we can conclude that it has got worse! Some of the young will have got on the housing ladder in time to gain but existing home owners have got something of a free lunch. Many others will have missed out.
Excellent stuff and i will forgive the lapse into central banker speak where we get a very Orwellian style of “debt is good” below.
Or is that a reflection of a world where the lucky few have incredibly high levels of debt while the unlucky young have no debt at all?
Central bankers do live in one of the alternate universes that physicists speculate about don’t they? Indeed physicists may get some support for their theories view this route.
I welcome this very much and note that if we widen the debate it seems that the younger generation faces a housing market which is ever more expensive however they try to play it. This is from Your Move today.
On an annual basis rents are now 5.5% higher than in August 2014
Actually that is better than the 6.8% of July but is way ahead of even the new improved wage rises levels that I analysed on Wednesday. So if they try to avoid an apparent lifetime of debt slavery it gets ever more expensive too. If we think of other debt we know that student loan debt is surging too and we wonder if perhaps the young are behind the rise in unsecured debt too. That may be the reason why more recently there has been a turn in the level of mortgage debt for the younger generation which may be for the simple reason that it is out of reach.
In some ways to read this in a Bank of England blog is pure dynamite.
It seems that the widening gap between the haves and the have-nots isn’t just across income or socioeconomic categories—as some have been (correctly) arguing —but also across generations.
It seems that even official bodies may be trolling us on here now. But much more importantly the younger generation will be singing along with Jay-Z and the musical Annie and maybe for a very long time.
It’s the hard knock life (uh-huh) for us
It’s the hard knock life, for us!!
Steada treated, we get tricked
Steada kisses, we get kicked
It’s the hard knock life!!
Oh and I do hope that the author of the blog May Rostom is not posted to a dark airless room which the Bank of England tea trolley never reaches.
Now how much of this has the Bank of England and its central planners caused?