The retirement trap – are people saving too much?

In his article “Revenge of the Glut”, Paul Bernanke points out that WW people are saving lots of money which they try to secure in “safe” countries like US or the big European countries. Thus these countries especially the USA are flooded with cheap money creating a huge trade deficit.  A good example of “saving countries” are Japan, China or Germany, where people are traditionally saving a large part of their earnings to be prepared for hard times. In good old days this money was used by farmers, entrepreneurs and large companies to finance profitable investments. Today even large excellent companies like IBM don’t have lots of ideas how they could create profitable new business. Most of the IBM profits was spent in 2007 on share repurchase ($ 18.8b share repurchase versus $6.2b for R&D) . As a result IBM much like other big businesses did not grow as analysts expected in the 1990s.  Developing countries could absorb huge investments. However, they do not have to infrastructure to invest and maintain the assets providing reliable return to the investors. USA is still one of the most interesting targets when people want to secure money for the future although US was consuming much of the incoming capital flow in the past.  However, people do not believe anymore that they will get their money back when they need it e.g. for their retirement. In addition the amount of money people need for retirement is growing fast because people live longer, healthcare cost are exploding and companies do not provide pension plans (financed out of cash flow) for their employees anymore.  This is one major reason why people gave their money to banksters promising high revenue.

Now even middle class people must realize that they will not be able to make enough secure investments to maintain their lifestyle during 25 + years of retirement. The only viable solution is probably to scale back much like our grandfathers and grandmothers did.  You must not be a member of a expensive golf club, you don’t need an expensive house in an affluent area, youd don’t need expensive vacations etc.  I even think that our ancestors were happier with their modest style of living growing their vegetables in the backyard than today’s retiree’s. Unfortunately this attitude will decrease the GNP because consumer spending in an aging population will decline. Is there any reason why a wealthy country should not be able to manage such a change?   The answer is probably – yes. we can.

Health Insurance – Clinton vs Obama

The lack of reliable health care for everybody is the biggest problem for the poor but also for the middle class in US. Without reliable and affordable health care people cannot plan for the future. Mr. Obama thinks the problem can be solved by providing low cost service through private insurance companies whereas Ms Clinton proposes mandatory basic insurance for everybody. The experience from European countries shows, that voluntary insurance does not work. Young people (with low health risk) and rich people (which have to pay high premiums) find all kind of tricks not to participate in the cost of health insurance to the poor. In case of problems (when they get older and the health risk is higher) they enjoy the public system as  nice fall back solution. Everybody must share the cost of public health care otherwise the premiums will be too high for the low and middle class. With mandatory health care, the pressure by the public (and the rich) to manage cost of the health care system will be higher than with a voluntary system. 

It is obvious that Ms Clinton and her advisors have learned from previous experience with the US health care system. She is also right to install government controlled insurance to compete with private insurance companies. In Germany, private insurance companies must offer “public health” level insurance to their customers. However, no private insurance company offers this type of plan for less money than the public, non-profit insurance institutions! 

Mr Obama seems to prefer a soft “no position” in order to win the election. But he will not win the battle of health care with this approach.              

Homeland Security in London

Homeland security means for travellers long lines, sometimes taking your shoes off three times before you pass the control  and almost certainly no significant findings. However,  commercial trucks enter the airport area with almost no control at the backgates. Security systems are very complex, need a lot of thinking and good control. Perfect security cannot be achieved. Therefore the question is how to get the biggest improvement in  security with a limited set of people and money. 

When you visit London you will realize with surprise that there is no garbage in any subway station. A friendly voice from the loudspeaker will remind you not to throw away any garbage but to hand it over to a garbage assistant. Thus the threat by bombs hidden in garbage cans or litter is significantly reduced and the public enjoys a clean public transportation system. This could be a nice model for New York too.        

My home is my Bank’s castle

When a good Swiss friend bought a very expensive apartment with a nice view on Zurich Lake I wondered where he got the money to buy this property. “You don’t buy your home in Switzerland!” he said and explained the Swiss system to me. Although Switzerland is considered the #1 country in the world about 60% of the population does not own a house or an appartment. Rich Swiss people don’t trust their banks too much when it comes to secure their retirement income. They rather prefer solid rental revenue from houses in Switzerland (hard to carry away).  Even when you buy a home you do it with a high loan from the bank – you are not supposed to pay back the loan! You pay a little interest and  you are committed to keep your (the bank’s) property in good shape. Swiss banks must back up their capital partially with real property in Switzerland. Therefore they are interested in raising prices of houses and commercial buildings in order to grow their business. 

You can see a similiar trend in the US. Pension funds and hedge funds are trying to get “real” assets in order to give their clients a good feeling after they lost billions of dollars of your pension money with good old solid companies like GM. The Blackstone – EOPT deal is certainly the tip of the real asset iceberg.  But don’t forget – even very large icebergs are melting nowadays with a little help from the GM gas guzzlers.