The Pensions H-bomb
I once did some work for the London think-tank Demos in the late 1990s and I remember that they had a young researcher devoted entirely to pensions. I think he may have apologised for how boring pensions were, but he told me that one day pensions would be very important, though not for good reasons. On and off ever since then, I have wondered how on Earth the pensions system could keep going in its current form – it has always looked like a mad system to me, a bit like a drunk man ever running forwards trying not to fall over. One day he is surely going to fall; or perhaps spontaneously combust like the alcoholic rag dealer in Dickens’ Bleak House.
We have seen in Britain in the last few weeks how important pensions have become; it was in order to stop a pension funds ‘crisis’ or ‘meltdown’ that the Bank of England (aka BoE) intervened to start buying bonds – in other words, yet another corporate bailout – just a week after the BoE were supposed to be selling bonds to unwind more than a decade of QE or quantitative easing, a gargantuan bailout, effectively a reward, for the banks that had caused the Global Financial Collapse of 2008. The use by some in the media of terms like crisis and meltdown have no technical or explanatory meaning, so what does crisis or meltdown mean in this context?
The problem was that pension funds were in danger of not being able to pay sudden extra collateral charges to LDI (Liability-Driven Investment) issuers after the Conservatives’ absurd and appalling give-to-the-rich budget of September 23rd alarmed market operators, even though at first, many rich and powerful people were delighted by it. Some financial analysts and economists have said that for the pension funds the collateral matter was a liquidity problem, and thus short term, not a solvency problem, where an entity doesn’t have enough assets to cover its outgoings in the long term. Others are still saying that it was an insolvency matter, and thus an existential threat. LDIs are a kind of dangerous derivative that is supposed to be a hedging technique used by pension funds to reduce their risk exposure, but as in 2008 when derivatives – and rampant greed – caused financial catastrophe, it turns out that LDIs only work during the good times.
As soon as something dramatic happens, such as a sudden leap in bond yields, which means that the value of your bond holdings goes down, and thus your collateral goes down, suddenly you (the pension fund) have to make up the difference in order to meet the terms of your contract and then there is big trouble when it turns out you don’t have the cash on hand to do it and have to start selling your gilts (UK government bonds) – at the very same time as all the other pension funds. This obviously further drives down the bonds’ value in a vicious spiral that can destroy the fund.
Except of course, that as usual, the central bank comes to the rescue and pays for yet another mess that a greedy and feckless financial institution has made. This rescue is ultimately and always paid for with other people’s money, ordinary people who aren’t rich and powerful, but who are often desperately just trying to feed and educate their families, keep them healthy and stay warm. The subsequent fall-out most often results in the cutting of vital services like health and education. Instead of being treated like the radioactive mess that it really is, the years of pain for the poor are modestly labelled austerity. It ought at least to be labelled torture and those responsible for it dealt with under a suitable Geneva Convention.
As almost no-one with conventional or orthodox economics training is willing to say out loud that the entire pensions system is broken (as we have just seen) and indeed that the entire financial system is destructive, rotten, corrupt, and often criminal, it is left to ordinary people to point out that the system not only has no clothes, but has a suicide H-bomb strapped to its chest.
The privatised pension system cannot be reformed. This is clearly an opinion, but one grounded in the fact that too many well off middle-class people make too much money out of it and the wider financial system, to allow it to be changed in the direction of sanity or safety or helping ordinary people (and at least harming nature a bit less). This is true of the rest of the financial system too – it is part of the engine of the kamikaze market system that is hurtling towards its doom. The trouble is, it will take the livelihoods of millions, if not billions, of people with it as well as large swathes of nature.
Though it might require an almost impossible leap of imagination, just suppose a world could exist where financiers and politicians and corporate executives actually gave a damn about humanity and the planet. In that utopian world (‘utopia’ means nowhere in Ancient Greek be it noted) MMT (modern monetary theory – a very different and careful way of controlling the money supply) tied to UBI (universal basic income – a bit like a modest state pension for everyone) is the only system that I have seen that makes any sense regarding pensions and much else in the economy.
UBI is being tried in some places at least, but not, as far as I know, tied to MMT, which is generally derided by all orthodox economists and financial operators. Heliocentrism was also derided by the powers that be, and indeed its most famous proponent (though certainly not its inventor), Galileo was banned from teaching it by the Inquisition in 1616, and eventually, in 1633, was tried for what amounted to heresy and imprisoned in his own house where he died.
Even though markets and those that make their millions in them won’t allow it to happen, MMT and UBI not only make good sense, but if, as I see happening, the system continues to collapse, then I cannot see any alternative unless nations wish to see open revolution, possibly French or Soviet style.
One of the problems for people in power is that they have no idea how ghastly life is for the millions of us trapped at the bottom of the heap. Obviously some of those in power with a bent towards Schadenfreude (one of the most powerful forces in Britain) enjoy seeing the poor suffer and live miserable lives. Russia proved that such systems can endure for centuries, but even with massive levels of repression and coercion, they don’t always last forever, though usually the poor and powerless do get crushed in the end. The main lesson of the last ten thousand years is that the rich and powerful usually win.
However, system collapse is happening; the Truss disaster was not an accident, but merely a sign that the whole socio-economic system is breaking down. It must and will do so because it is a self-destroying system; of course the trouble is that, as already noted, it is also an omni-destructive system. It is not easy to tell what the relative proportions of the drivers are, but they include diminishing EROI (energy returned on investment), a horrifyingly destroyed natural world on which we all depend (the latest dreadful reports of the destruction and havoc humans are wreaking on nature suggest that we have wiped out almost seventy percent of all other animals in just fifty years), climate change (caused by the energy system of fossil fuels which powers all wasteful, consumerist economies), and at the root of it all, a human population that is vastly in excess of anything the planet can cope with: somewhere between one and three orders of magnitude too large seems like a reasonable guesstimate. In other words, about ten to one thousand times too big.
I would like to live to see the day when this understanding was widely accepted, as I would know then that my son might have a chance of living in a world that won’t be alternately scorched, deluged, parched, and over-run by violence and monstrosities that even I can hardly imagine. It is crystal clear that omni-destruction is, however, the direction we are heading in. Yes, I know this is standard catastrophism, but catastrophes do happen and they are happening more and more.
About the only thing the UK still has going for it is that it has its own currency (and the wind blows hard in Scotland) and so we could, at least theory, try MMT. I was going to say that the UK controls its own currency, but I am not so sure about that. What happens in the eurozone is another question. About twenty years ago I interviewed one of the architects of the euro, but I fear my questions were very naive. And anyway, at the time I was somewhat enamoured of the euro, for various reasons.
However, everything I have learned since then suggests that the euro, at least as a single main currency as opposed to a side or secondary currency, is a terrible idea. It has greatly benefited Germany and punished many other hapless ‘peripheral’ countries, but most of all it condemns everyone, except Germany, at best to a straitjacket and at worst to the agonies of the iron maiden.
It is lucky that we, the British, were kicked out of the ERM in 1992 (technically we withdrew), even though no doubt it unfortunately helped fuel anti-EU feeling, goosed on, of course, by libertarian, right-wing, nationalistic attack dogs like the Daily Mail, Telegraph, Sun and their poisonous ilk.
If you are in the eurozone the only way to try MMT would be as a local currency. That is definitely a possibility and it may be one of the only ways that poorer, peripheral countries can escape a grisly fate. It could also be tried regionally in Britain, and indeed, given that there are dangers with any monetary system, that might be the best thing to do, especially for locally grown food and locally made products, even though there is a sad and worrying lack of both.
And yet, back in the world of money as it is now, one might say, like a stubborn flat-earther or geocentrist, the markets have just kept going up and up into the stratosphere, taking pension funds with them for the ride. For instance, even after the ‘correction’ of 2008, the S&P 500 is nearly double what it was at its previous high, just before the ‘dot bomb’ which hit around the turn of the millennium. If this continued buoyancy is because of QE (quantitative easing – the bizarre bootstrap trick of central banks buying colossal quantities of government bonds) and near zero interest rates, then as those two factors are waning, with rates rising fast and central banks generally trying to sell their bonds (notwithstanding the UK’s recent volte-face), then surely a massive adjustment or ‘correction’ is bound to occur.
Whether it will be of H-bomb proportions or merely artillery scale remains to be seen, but with the UK’s dangerous and unstable pension funds worth approaching £2 trillion alone (UK GDP in 2021 was £2.2 trillion) and apparently quite capable of destabilising the world financial system on their own, then along with many other pension systems which are equally unserviceable in the longer term (when they will become insolvent), thermonuclear looks more likely than mere dynamite.
Reference article:
Will Bank of England have to step in again to mop up market mess?
Kalyeena Makortoff – Banking correspondent, Fri 14 Oct 2022