What’s the size of the government debt all about?
I like to put very big numbers in perspective. So the news says that the government borrowed £16bn in August, and £65bn year to date. What does that mean?
Well, apparently, there are still 29 million people working in the UK, so in August, the government borrowed £555 for every working person. At £65 bn year to date, the yearly run rate is £3,448 for every working person.
Total government debt is just over £800 bn, or £27,500 for every working person in the UK.
That is probably the size of a student debt after four years at university.
Is this a problem, and should we be worried? Debt now stands at 57.5% of GDP. it's the highest level since the 1970s, but before the 1970s, it was higher than this between 1915 and 1970,. peaking at over 200% after the second world war.
UK National Debt As Percent Of GDP for United Kingdom 1900-2010 - Central Government Local Authorities
And how does this compare to other countries?
https://www.cia.gov/library/publicat.../2186rank.html
Japan 178%
Italy 105%
France 64%
Germany 64%
USA 61%
UK 57%
Norway 44%
Syria 26%
Iran 20%
Australia 13%
Russia 7%
Libya 4%
I guess it doesn't seem so ridiculous as a measure of debt when you look at the world stage, does it? Would you rather live in the UK @ 57% or in Libya with 4%?
So if the government intends to spend it , that doesn't bother me. That's their job - to spend when they need to spend.
Back to the beginning. £3,448 per working person this year? Not an enormous amount considering the current financial crisis is, as they say, the worst since 1930.
Much of this supports why the bank base rate has not increased for six months, and is less likely to increase dramatically the longer it stays at this record low. You only have to look to Japan to believe that base rates COULD stay low for an awfully long time.
For property landlords fortunate enough to have reverted to SVRs based on pre-2007 mortgages, they are fortunate temporary recipients of unexpected cash flows.
Personally, I wouldn't care if the government continues to overspend to reach 100% debt as a % of GDP if that means we keep very low interest rates for a decade.
At these low rates, property prices would not have to rise at all to make a successful business out of property investment. Compared with one year ago, most investors are making 4% per year additional net income on the value of their portfolio stock because they are paying 4% per annum less interest than a year ago.
And if that is additional guaranteed income instead of perceived capital growth, I'm happier to take the income NOW instead of the capital growth LATER.
Sunday 18 October 2009
The fifty year wealth strategy in two decades
How does one go about creating the footprint to achieve financial independence within two decades?
Financial independence is, to an extent, a state of mind. I recently talked on the telephone with a friend of some thirty years. In fact he was my first boss after I left university, and though we did not get along too well in that relationship, we met after a decade apart, when I was much more mature, and forged a strong, if distant relationship. My friend had retired at the ripe old age of 54 and went world cruising on a 58 foot Oyster ocean-going sailing boat. He has recently become a land lubber after travelling around the world since the start of the Millenium, where I missed the trans-atlantic crossing to Bermuda for the celebrations. When I explained to my friend that I needed income generating assets of £4M before I was sixty, he retorted “you don’t need anything like that Jerry”. With all my detailed financial planning, I had neglected to account for a few facts like: no kids in private education, no mortgage repayments on the private residence, etc, etc. He was right. I had been calculating net income requirements based on our current personal outgoings, adjusted for inflation over the years, and not realizing that almost fifty percent of our outgoings would disappear within ten years. Stupid really.
I want to fast forward for a moment to exit strategy – how to assure that you have sufficient income in retirement to live within your means, yet preserve the real value of that income stream for the full duration of your retirement. I saw on the news that Harry Patch, the last remaining World War I hero, had died at the age of 111. It reminded me that we have hardly lived half of our lives, and it also reminded me that our plans for perpetual income generation would need to last for between thirty and fifty years. At least one of our presumptions for the last twenty years was correct, and that is that you can’t rely on spending capital as a substitute for income.
That’s applicable to very young investors these days, especially those who found the key to cash back investment in the heady days of big property loans, and what seemed for almost a decade to be unlimited borrowing. That has come to a short, sharp shock ending for most of us property investors who thought we could borrow our way out of an ever increasing debt pile whilst the property price inflation would take care of it all some time in the future. But when?
2009 has become the year of sober thoughts and sober financial planning. For those who remortgaged to fund lifestyle in excess of their net income, it’s become a sober reminder that you can’t always ride the wave of asset price inflation to surpass erosion of capital as a substitute for income. I refer; of course, to using cash back from borrowing more than 100% of the purchase price of property, or remortgaging property assets to more than 100% of original purchase price and spending the proceeds on non-investment activities.
The behaviour of any asset class is, by nature, unpredictable in the short term. But it is a reasonable assumption that, over time, the real value of property will not decrease. Like stock, the total return on investment of a property is the sum of the capital gain (or loss) and the rental income (net of all costs). So a sustainable investment strategy involving real property really has to treat the capital value as a component that keeps up with inflation, and the net income after costs as a component that is short term income and can be spent perpetually. Just how much of that income can be spent without eroding the real value of the asset investment is a subject that requires detailed analysis. Whilst it’s true that great leverage can be applied to residential property investment, the leverage comes at a price. The price is that if medium term cost of letting exceeds income from letting, the property portfolio becomes a liability, not an asset. And as some investors will no doubt experience over the next few years, an uncontrolled and rapid increase in ownership of highly leveraged residential property will result in bankruptcy.
Balancing leverage with ability to cope with short term market fluctuations (from all sources of income) is a subject worthy of further analysis.
Financial independence is, to an extent, a state of mind. I recently talked on the telephone with a friend of some thirty years. In fact he was my first boss after I left university, and though we did not get along too well in that relationship, we met after a decade apart, when I was much more mature, and forged a strong, if distant relationship. My friend had retired at the ripe old age of 54 and went world cruising on a 58 foot Oyster ocean-going sailing boat. He has recently become a land lubber after travelling around the world since the start of the Millenium, where I missed the trans-atlantic crossing to Bermuda for the celebrations. When I explained to my friend that I needed income generating assets of £4M before I was sixty, he retorted “you don’t need anything like that Jerry”. With all my detailed financial planning, I had neglected to account for a few facts like: no kids in private education, no mortgage repayments on the private residence, etc, etc. He was right. I had been calculating net income requirements based on our current personal outgoings, adjusted for inflation over the years, and not realizing that almost fifty percent of our outgoings would disappear within ten years. Stupid really.
I want to fast forward for a moment to exit strategy – how to assure that you have sufficient income in retirement to live within your means, yet preserve the real value of that income stream for the full duration of your retirement. I saw on the news that Harry Patch, the last remaining World War I hero, had died at the age of 111. It reminded me that we have hardly lived half of our lives, and it also reminded me that our plans for perpetual income generation would need to last for between thirty and fifty years. At least one of our presumptions for the last twenty years was correct, and that is that you can’t rely on spending capital as a substitute for income.
That’s applicable to very young investors these days, especially those who found the key to cash back investment in the heady days of big property loans, and what seemed for almost a decade to be unlimited borrowing. That has come to a short, sharp shock ending for most of us property investors who thought we could borrow our way out of an ever increasing debt pile whilst the property price inflation would take care of it all some time in the future. But when?
2009 has become the year of sober thoughts and sober financial planning. For those who remortgaged to fund lifestyle in excess of their net income, it’s become a sober reminder that you can’t always ride the wave of asset price inflation to surpass erosion of capital as a substitute for income. I refer; of course, to using cash back from borrowing more than 100% of the purchase price of property, or remortgaging property assets to more than 100% of original purchase price and spending the proceeds on non-investment activities.
The behaviour of any asset class is, by nature, unpredictable in the short term. But it is a reasonable assumption that, over time, the real value of property will not decrease. Like stock, the total return on investment of a property is the sum of the capital gain (or loss) and the rental income (net of all costs). So a sustainable investment strategy involving real property really has to treat the capital value as a component that keeps up with inflation, and the net income after costs as a component that is short term income and can be spent perpetually. Just how much of that income can be spent without eroding the real value of the asset investment is a subject that requires detailed analysis. Whilst it’s true that great leverage can be applied to residential property investment, the leverage comes at a price. The price is that if medium term cost of letting exceeds income from letting, the property portfolio becomes a liability, not an asset. And as some investors will no doubt experience over the next few years, an uncontrolled and rapid increase in ownership of highly leveraged residential property will result in bankruptcy.
Balancing leverage with ability to cope with short term market fluctuations (from all sources of income) is a subject worthy of further analysis.
Sunday 11 October 2009
What is wealth?
Since the ripe old age of 9 I realized that to have choice in life, you need to have money. By the time I was 17 I realized that having money one week and spending it the next week is like a perpetual motion machine. You keep having to earn it to be able to spend it. By the time I was 22 and in professional work, I realized that an education gives you the opportunity to earn so much more money than without, maybe there is a light at the end of the tunnel. I thought back to my mother who always quoted Mr Micawber from Charles Dickens “Income one pound, expenditure nineteen shillings and sixpence, result happiness. Income one pound, expenditure one pound and sixpence, result misery”. Perhaps what we misunderstood about Mr Micawber’s famous statement was that income does not have to be earned income.
If we add up all the earned income over all our working life, simple arithmetic doesn’t seem to make sense. I know we have accumulated wealth in plain old Pound Sterling terms equivalent to almost all the income we have ever earned. That doesn’t seem fair does it? How can we have accumulated, albeit on paper, a sum of net wealth equal to all the money we have ever earned in our life?
Around 20 years ago, I learned that Jewish people had a philosophy of teaching their children that they should never spend more than 90% of the money they earned. I looked back over the first ten years of my working life, when my net assets were less than zero, and back-calculated what position I would have been in had I saved (invested) exactly 10% of my earned income. Had I just put that money in the bank it would have been about the price of a semi-detached house at the time I would have started saving. However, had I put the first years' saving as a deposit on a house and rented that house out to a tenant, and continued to put 10% of my income into paying off the mortgage of that house, I would have owned that house outright in the first ten years. But the value of that house had just about doubled by that time. So I would have had net assets equivalent to around 20% of all my net income over that 10 years.
I vowed at that time, though still in debt, to make sure that I "saved" (I later corrected that to “invested”) 10% of my net income, in five decades, I would have a net wealth equal to my entire net income over the 50 years. Surely enough to retire on? So how much is enough?
If we add up all the earned income over all our working life, simple arithmetic doesn’t seem to make sense. I know we have accumulated wealth in plain old Pound Sterling terms equivalent to almost all the income we have ever earned. That doesn’t seem fair does it? How can we have accumulated, albeit on paper, a sum of net wealth equal to all the money we have ever earned in our life?
Around 20 years ago, I learned that Jewish people had a philosophy of teaching their children that they should never spend more than 90% of the money they earned. I looked back over the first ten years of my working life, when my net assets were less than zero, and back-calculated what position I would have been in had I saved (invested) exactly 10% of my earned income. Had I just put that money in the bank it would have been about the price of a semi-detached house at the time I would have started saving. However, had I put the first years' saving as a deposit on a house and rented that house out to a tenant, and continued to put 10% of my income into paying off the mortgage of that house, I would have owned that house outright in the first ten years. But the value of that house had just about doubled by that time. So I would have had net assets equivalent to around 20% of all my net income over that 10 years.
I vowed at that time, though still in debt, to make sure that I "saved" (I later corrected that to “invested”) 10% of my net income, in five decades, I would have a net wealth equal to my entire net income over the 50 years. Surely enough to retire on? So how much is enough?
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