Last week I wrote about some of those harebrained schemes to try to snap the economy out of its funk. And just this weekend, another one was revealed!
This time it was Nick Clegg announcing yet another debt-fuelled 'get rich quick' scheme for the young. What we have here is another house-price ramp. And this time it puts at risk the pension funds of not only those that sign up for it, but also those of family members – parents and grandparents – willing to put their life savings on the line too...
In case you missed this, what’s being suggested is a housing loan. And that loan is to be collateralised (guaranteed) by a pension.
This has got to be worth a look!
Putting your life’s work on the line
In last Monday’s Right Side, I pointed out that all these initiatives to spike the economy have one thing in common. They’re all based on creating more debt – ie, credit growth. And in Friday’s article, I floated the idea that the authorities may well be eyeing up all those fat pension funds, just sitting there doing nothing: Protect your money from these 'big picture' threats.
So now, some smart alec has put the two together!
As I explained last week, our economy is based on debt. Money is created when borrowers take on loans. And money growth helps economic growth. That’s why the authorities are hell bent on stimulating debt.
But in order to get the debt ball rolling, you sometimes need a little bit of collateral first. In the case of a first-time buyer – many of whom are incidentally loaded up with student debt before they even attempt to get into the workplace – they need to find a deposit.
If they can find, say £20,000, then they may be able to get a mortgage for around £200,000. Basically, £180,000 is created (through debt) and injected right into the heart of the economy. And that’s fantastic news for the economy – and more specifically, the politicians.
Growing the economy is a vote winner... whatever the long-term costs.
Now, Clegg’s team have obviously been scratching their heads over this one. Where is that £20,000 deposit going to come from? Many families are left practically broke after the costs of raising their young. Those that could help their young onto the proverbial first rung, probably already have.
Now it’s up to the government to find a way of encouraging those who can’t. Enter Mr Clegg…
That’s where the money is
Debt effectively brings forward tomorrow’s spending to today. It’s why the politicians love it. They want to roll on with tomorrow’s good times today – well, while they’re in office anyway. So it’s little wonder they want to bring pension funds into play.
American bank robber 'Slick Willie' Sutton was supposedly asked “Why do you rob banks?” His answer:
“Because that’s where the money is!”
And this is exactly why the government wants to free up (rob) your pension too. That’s where the money is.
The problem is, pension funds are (quite rightly) tightly regulated. The only way of releasing their economic power is by changing the law. And, of course, that’s something the government can help with...
You see, when you retire, you can draw down 25% of your whole pension pot as a cash sum – and it’s tax free. Many people use this cash to help pay off the mortgage, or in some other way set themselves up for a comfy retirement.
As I understand it (the details are still quite vague), it’s this cash that the government wants to bring into play. They want to encourage individuals with private pensions to use this future lump sum to effectively create a mortgage deposit today.
This is how it could work...
An exclusive report from The Right Side
The bank will lend £200,000 to a first-time buyer on the proviso that the first £20,000 is covered by the borrower’s deposit. But currently, the borrower hasn’t got the cash, and the victim (the parent) can’t get at it either. So the bank says “no” to the mortgage application.
Now, along comes the helpful government: “What if we change the rules so that you (the bank) put a mortgage on the doting parent’s £20,000 sitting in his pension? If something goes wrong with the borrower’s ability to pay, you get the house back (as normal), and you can grab the parent’s cash-pot when he retires.”
Ah, now... this is beautiful. The full £200,000 can now be magicked into the economy. There isn’t even the need for a pesky deposit!
How long can it all go on?
It never ceases to amaze me how far this debt-based financial system can be stretched. In order to keep the economy from going into reverse, new debt has to be continually created. And the authorities are adept at finding ways of allowing and encouraging debt formation.
I’ve no doubt that this will end badly. After all, debt-fuelled economies always crash. But it strikes me that it’s a mug's game to try to put a precise date on when things will start to seriously unravel.
Many I speak to have cashed in a lot of their stocks and bunkered down, fearing the worst.
Some have even taken out short positions to try to cash in when the market falls. But, to my mind, this is dangerous. I feel uncomfortable putting down open-ended short positions in a world where money is simply created at the drop of a hat.
No, as far as I’m concerned, we need to carry on investing. I guess half the battle is finding the right investments during these testing times. But the other half is staying out of stupid ones. And we need to spread risk by using different asset classes, as I explained on Friday. That’s what The Right Side is about anyway.
To my mind, this weekend’s announcement is a stupid and dangerous scheme. The aim of it is to sucker in as many victims as possible. It’s a stealthy attack that puts at risk the pension funds of those least able to afford it.
I also have big concerns about the property market. Specifically, how rising interest rates could pummel prices. And rising interest rates will affect the whole of your portfolio too.
On Wednesday, I’ll take an in-depth look at the property market and how I think it should be considered within a portfolio mix. Most financial planners ignore housing, but I think they’re wrong. If there’s debt involved, then we’re very much within the sphere of finance.
So make sure you read Wednesday’s issue. I know Right Side readers have strong views about property. So I think we’ll end up with a fantastic debate!
Until then, here’s something new you should take a look at.
Watch this expert’s opinion on how to play gold
Remember I told you about a colleague who’s invested over 50% of his life savings in one niche area of the gold market? Well his idea has sparked such an interest that he’s gone on camera to explain it.
I’d like to imagine Right Siders have followed my relentless recommendations to get exposure to commodities over the past two and a half years. But I suspect that there are a good number of readers who just haven’t done so. Many people just seem to prefer stocks!
Well, the great thing about Simon Popple’s idea is that it combines the two. He focuses on a special kind of stock that he believes could hand you an excellent geared play on gold, the king of commodities. If gold sets off on the next leg of its epic bull run (very likely given how this debt bubble is growing), these stocks have the potential to do well.
Simon’s presentation is pretty short. But you’ll quickly see what a compelling idea this is. And at the end, he shows you how to get the names of his top “supply king” gold stocks.
If you’ve missed out on the gold rally so far – or if you’re ready to top up or diversify your exposure – you should take a look. It’s a great watch.
Click here to watch Simon’s on-camera report.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Metals & Miners is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is an unregulated product published by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do