Cut Back but Never Cut Out - Rangel Dangles?

I caught a snippet of president elect Obama talking on Fox Saturday and he said something remarkable. He was talking about the impact the economic downturn was having on government programs that had not proven themselves. Sen. Obama said: 'programs that have proven not to work will have to be cut back.'

Can't anyone in DC learn the small but signifcant difference between "cut back" and "cut out" and the big difference it has in sending the correct message and being the right policy approach. If a program does not work don't cut back its caloric intake just starve the sucker.

Following Obama's remarks was an interview with a young man representing an organization bent on eliminating waste in Government. He mentioned Sen. Obama has selected a man who had written a book about how to cut government waste to be in his administration and that it was no big secret that cutting waste could actually be accomplished. The Fox interviewer pointed out that DC's landscape was littered with corpses of those who had tried and asked what gave him hope this time would be different. The young man had no definitive answer except to reiterate that Obama's new choice at least had written a book about the problem and what to do about it and thus, knew where and what to cut.

It is one thing to write a book. It is another matter to get over 500 porkers to do something about eliminating "essential" programs that help their respective constituents. Again, we have the best Congress money can buy - our money is now worthless and so is Congress.

The more one peers under Rep. Rangel's skirt the more dirt and self dealing becomes evident. Maybe I am wrong about foxy Rangel being able to remain in the hen house. The momentum of his alleged abuses might just make it impossible even for Pelosi to defend him. Has Rangel reached the tipping point of dangling?

Rangel is the current best reason for enacting limited terms. The problem with limited terms is that it strengthens the bureaucracy and does erase some useful knowledge that comes with tenure.

Limited terms is a moot question, however, because no politician will voluntarily cut off his "hominy and grits." It is "we the people" who have that privelege but we seldom exercise it because our Representative and Senator are fine. It's always the other guy's.

DUH! Unions don't get it or don't care to. According to this writer he key is to unionize the right to work workers in America! That way all U.S. car buyers get screwed. (See 1 below.)

Duh again! Newt doesn't get it either. In trying to redeem himself with the Republican core his ideas make me snore. (See 2 below.)

An interesting take on governance style as it relates to Obama's team and Obama himself. An insightful read. (See 3 below.)

The Economist article concludes by repeating a truism - buy when stocks are cheap. This advice has proven wise nine out of ten times. The problem is whether this is the tenth time?

Department stores generally mark prices down once but in the stock market mark downs often occur in multiples.

The article begins by confirming my new definition of liquidity - 'when you open your brokerage statement you pee in your pants.'

You decide if The Economist is right. (See 4 below.)

Dick

1) The Big Three's real union problem: If there is hope for the Big Three and for the UAW, it rests in unionizing the foreign automakers' U.S. plants.
By Jonathan Cutler

The Big Three are a mess, and there is plenty of blame to go around. Washington lawmakers pondering the bailout for Detroit have been grilling executives of General Motors, Ford and Chrysler about their role in the crisis. But sitting by their side Thursday on Capitol Hill was Ron Gettelfinger, president of the United Auto Workers.

Even if a deal for a $15-billion to $17-billion preliminary bailout comes together this weekend to keep carmakers afloat into 2009, they will continue to be dogged by their most significant competitive disadvantage: a high-priced, unionized workforce. After all, hasn't it always been the central goal of labor unions to maximize the per capita wage bill -- including medical and retirement benefits -- paid out to its membership? Maybe the UAW is simply too good at what it does.


It seemed clear from the hearings that to OK any larger bailout plan, Congress was going to insist on cutting labor costs. Already, Gettelfinger has coughed up concessions on job security protections and delayed payment to a retiree healthcare trust and is talking about modifying contracts.

And yet there is nothing inherently unsustainable about employing a high-priced, unionized workforce. The crisis of Detroit's wage bill is entirely relative. Specifically, their labor costs far exceed the low-cost, nonunion American workforce at the U.S.-based, foreign-owned plants of competitors Toyota, Honda, Nissan and Subaru.

If the UAW really is to blame at all, then, it is because of the union's utter failure to unionize any of the transplants. What has the UAW been doing all these years? Isn't it the responsibility of any good union to protect union employers from competitive labor disadvantages by organizing wall to wall, throughout the industry? How could it have left these transplants unorganized?


As is now clear, when the UAW exposed the Big Three to insurmountable competitive disadvantages, it cut its own throat.

Perhaps these accusations seem overly harsh. After all, aren't most of the transplants located in the right-to-work states of the Deep South? Some are, but this hardly explains why the UAW failed to organize the first Honda transplant, located not in Alabama but right in Ohio, the heart of the industrial Midwest.

Is transplant management the difference then? According to the prevailing wisdom, Japanese auto companies neither trust nor understand the American notion of labor unionism. Ah, but there's the rub. The very companies that operate as nonunion transplants in the United States have always confronted a unionized workforce at home, organized by the Japanese Automobile Workers Confederation.

The UAW simply never established any sort of alliance with the Japanese Automobile Workers Confederation. And yet the UAW leadership knew plenty about Japan and the Japanese labor movement. The leader of the Japanese Automobile Workers Confederation was Ichiro Shioji. As David Halberstam noted in his 1986 book, "The Reckoning," Shioji spent a year at Harvard in 1960 and then spent a summer at the UAW headquarters in Detroit, befriending all the major UAW leaders, including Walter Reuther, Leonard Woodcock and Douglas Fraser. Shioji was no stranger to the UAW.

Nor were the UAW leaders unfamiliar with Japan. In 1980, for example, UAW President Fraser (fresh off helping Chrysler secure its 1979 bailout) spent a week there talking with major Japanese car companies about building plants in the United States. Just before embarking on his trip, Fraser told a UAW convention that he would demand "that foreign companies that benefit from our markets contribute to them by building products here." In a gesture of bravado that today seems almost suicidal, Fraser declared that "the U.S. market needs the discipline of foreign competition."

In Japan, when companies were contemplating overseas transplants in the early '80s, Shioji held a de facto right to approve or disapprove the plans. He resisted efforts by Nissan to establish transplants in Britain, for instance, and the Financial Times reported how he could scuttle any deal: "Nissan probably could not go ahead in Britain without Shioji's backing [because] the union would have to approve the transfer to the U.K. of key production staff."

In the end, though, Shioji pushed for establishing Japanese transplants in the United States. It is a question for students of Japanese labor to explain why Shioji refused to protect his own union members from the threat of nonunion labor in the United States. But for students of American labor, the urgent question is whether the UAW even once asked its good friend Shioji to use his leverage in solidarity with American workers.

It is not too late to save the Big Three. But the solution is not to tear down the historic and heroic gains won by prior generations of UAW workers. If there is hope long term -- for the unionized Big Three companies and for the UAW -- it rests in dealing with the unfinished business of the 1980s: unionizing the unorganized transplants.

2) Newt Gingrich Hasn't Gotten The Memo
By Michelle Goldberg

As I was walking out the door yesterday evening, the phone rang. On the line was a woman from something called the National Committee for Faith and Family, contacting people, she said, on behalf of Newt Gingrich. She asked me to hold for a message from the great man, I dutifully agreed, and was treated to a recording of Gingrich hawking a full-length documentary called Rediscovering God in America. Then the woman came back on, saying, "Do you think we need to stop the momentum of anti-God liberals and Obama?" She wanted a donation of $35 to distribute the movie, which claims that the United States was founded on religious principals, and that separation of church and state is a myth fostered by devious subversives.



"There is no attack on American culture more destructive and more historically dishonest than the relentless effort to drive God out of America's public square," Gingrich says in a trailer for the documentary on his website. Among the program's talking heads is David Barton, a former math teacher and Texas fundamentalist who has fashioned a career as a prominent revisionist historian, reinterpreting the American past along theocratic lines. Barton started out on the fringe--in the early '90s, he was a speaker at white supremacist Christian Identity conferences--but in the modern GOP, he's hardly an extremist. Indeed, in 2004, the RNC hired Barton to give get-out-the-vote speeches to groups of clergy nationwide. What's surprising is not that Gingrich would associate with Barton, whose work he's been praising for years. What's surprising is that, at a time of serious collapse on the right, Gingrich is hitching his bid for renewed relevance to the most exhausted culture war tropes.

Gingrich, after all, likes to imagine himself an innovator. And yet, at a time when he seems to be hoping to take advantage of Republican disarray to return to the political fray, he's doing it in the most tired way imaginable. There he was on the O'Reilly Factor a couple of weeks ago, warning of "gay and secular fascism in this country that wants to impose its will on the rest of us." Visitors to his website are asked to sign a petition on behalf of an issue surely disturbing the sleep of a crisis-ridden nation--insufficient references to God in the new Capitol Visitor Center. (South Carolina Senator Jim DeMint is on the case as well, putting out a statement yesterday saying, "The Capitol Visitor Center is designed to tell the history and purpose of our nation's Capitol, but it fails to appropriately honor our religious heritage that has been critical to America's success.")

One has to wonder--is this really all they've got? I've been reporting for a long time on the central role of the religious fundamentalism and sacralized nationalism in the Republican Party--that's how I've ended up on the kind of calling lists used by groups like the National Committee for Faith and Family. Still, I'd have expected some attempt to modulate the message of perpetual kulturkampf in the wake of the election results, the public disaffection of so many prominent conservative intellectuals, and the cascading economic disasters threatening millions of Americans. Perhaps, though, people like Gingrich can't imagine any other way. And so, with the defeat of Republican moderates rendering the rump GOP more right-wing than ever, he apparently sees a path to power in challenging Sarah Palin and Mike Huckabee for leadership of the Elmer Gantry wing of his beaten party. Maybe he's clueless about the future of Republicanism, but if he's right about it, it's hard to see what kind of future Republicanism has.

3) Obama's Approach to Governing
By Theodore Couloumbis and Bill Ahlstrom
Gary Weaver is a co-author

Much has been made in the media about President-elect Barack Obama’s cabinet nominees as a “team of rivals,” echoing Doris Kearns Goodwin’s excellent study of how Abraham Lincoln co-opted his opponents for the 1860 Republican presidential nomination.

A facile characterization, it allows sharp comparisons with the major Bush appointments, which reflected above all a premium on shared viewpoints and personal loyalty.

But it is far too limited an interpretation of the key nominations and White House staff appointments announced so far.

Much more interesting is what Obama’s choices tell us about his approach to governing and to presidential decision-making.

The most effective American cabinets and presidential staffs function like large orchestras with a great maestro, delivering complex symphonies with style and verve. Others are more like collections of strong soloists with no over-all coordination, resulting in cacophonies. The least effective drown out even the few outstanding soloists they may have with their general mediocrity – arguably the fate of Secretary of State Colin Powell.

Presidential decision-making scholars Alexander and Juliette George, while at Stanford University, developed a model of “multiple advocacy” which appears to fit the emerging Obama Administration. In it, a president encourages active policy debate and vigorous advocacy of alternative views within both the cabinet and the White House staff before major domestic or foreign-policy decisions are made. The cabinet is not marginalized and superseded by the White House staff, but is an active participant in defining issues and shaping policy.

The president, in this model, seeks perspectives from multiple sources, provides appropriate forums for discussion and debate, and ultimately decides or creates a synthesis from among the competing views. According to his students, when Obama was a law professor at the University of Chicago, they often left class without a clue about his view on a controversial issue or case. He apparently had a knack for eliciting various viewpoints without revealing his own position.

Broadly speaking, this is the kind of process Obama used during his nearly two-year-long campaign for the nomination. He cast a very wide net, sought out a broad range of opinion from large groups of experts, fostered debate, and decided on his positions. The foreign-policy group, for example, is reported to have included several hundred experts, coordinated by a handful of close aides, with active participation by Obama himself. This is also clearly the Obama approach to the current financial and economic crisis.

Many will recognize this as the decision-making style of President Kennedy, who famously told Clark Clifford, the head of his transition team, about a potential White House advisor who was a Republican: “I don’t care if (he) is a Democrat or on Igorot, I just want the best … I can get for the job.” Kennedy wanted to be surrounded by bright, capable folks who enjoyed the thrust-and-parry of vigorous policy discussions. In this he was following the pattern of Franklin Roosevelt.

When Kennedy met with his newly formed cabinet in early 1961 to consider the Bay of Pigs invasion planned by Eisenhower’s CIA, no one spoke up to say it was a bad idea. Later, Secretary of State Dean Rusk and others claimed they thought it would be a disaster, but they didn’t want to break the cohesiveness of the team.

Psychologist Irving Janis famously labeled this “groupthink,” a very common tendency among groups with a charismatic leader. It is the incredible urge to conform to the perceptions of others even when their views are obviously wrong. But, the key to this phenomenon is unanimity of opinion. If only one person disagrees with the consensus, others who might disagree will usually speak up.

The Kennedy Administration learned a very important lesson from the Bay of Pigs debacle.

In the 1962 Cuban missile crisis, Kennedy relied on his brother Robert to orchestrate the policy debate and ensure broad (people today would say “out-of-the-box”) thinking. JFK wanted to avoid the crisis-management group posturing and prematurely seeking his approval. Robert Kennedy’s role was to play the “devil’s advocate,” presenting and exploring alternative views to elicit other opinions and ideas. One result was the naval “quarantine” of Cuba, so-positioned because a naval “blockade” would have been interpreted as an act of war. Another was effective use of back-channel communication between the Soviet embassy and ABC newsman John Scali.

An advantage to the multiple advocacy model is breadth of perspective and quality of debate, as expertise and experience is mobilized to explore alternative courses of action. The US military has long used this technique, as has the intelligence community from time to time with its “Red Teams” to challenge conventional wisdom.

Heterogeneous groups are least likely to suffer from groupthink and most likely to be creative and synergistic. So far, Obama’s appointments are characterized by broad experience and perspective and strength of convictions. Experienced people are less likely to be conformists, they will speak up, and the diversity of opinion will foster creative problem-solving. Combined with Obama’s own group leadership style, this suggests that there will be significant depth and breadth of opinion presented at White House meetings.

A potential downside is unacceptably delaying a decision or action – especially important in times of crisis. Though the experience of the Cuban missile crisis clearly shows that a well-orchestrated broad debate can still produce timely actions.

Another potential problem is implementation: Diverse groups are usually very good at brain-storming and creative problem-solving, but can have trouble with implementation.

The biggest potential drawback of vigorous multiple advocacy is the potential for the president to become paralyzed and unable, Hamlet-like, to synthesize or choose among the alternatives. For it to work effectively, the process must be orchestrated as Robert Kennedy did with the Cuban crisis. Expertise must be sought and used, regardless of where the expertise may be found. Adequate access and attention must be assured for the key alternatives before the president.

And above all, the president must be self-aware and self-confident enough to make the final choices.

4) When the golden eggs run out


A decade of poor returns and the onset of recession are likely to make investors cautious. That would be understandable, but mistaken
.

IT IS the envelope they dare not open. When this year’s statement from the financial adviser or pension plan lands on the doormat, many people will not want to know the bad news. They would rather put the envelope in a drawer and forget all about it.

This year has been a disaster for savers. The value of stockmarkets around the world has fallen by almost half and is now about $30 trillion below its peak. The prices of corporate bonds and commercial property have plunged. Anyone who diversified into commodities, hedge funds and private equity has also lost out. Even those shrewd enough to stick their money in a savings account have had to worry about the safety of the banks.

Worse still, the value of many people’s main source of wealth—their houses—has fallen sharply, as The Economist’s house-price indicators continue to show. On a quarter-on-quarter basis, residential-property prices are dropping in 23 of the 45 countries surveyed by Knight Frank, an estate agent.

The damage will vary from one person to the next, depending on where they have put their money, so figures on pooled portfolios are pretty much the only way of estimating savers’ pain. The Investment Company Institute, the national association of American mutual funds, says the value of assets in such funds was $9.6 trillion at the end of October, $2.4 trillion less than at the end of 2007. The Congressional Budget Office (CBO) calculated in October that American pension funds had dropped in value by $2 trillion in the previous 18 months. And these American losses are just a portion of the global whole.

By way of comparison, the Bank of England estimates that $2.8 trillion has been lost in credit-related instruments, the devices that dragged the financial system down in the first place. The blow to savers in pooled investments thus easily exceeds the direct damage to the arcane area of the banking system where the crisis began.

Indeed, the stockmarket’s decline this year has been so steep that it has erased all the gains made in the rally from 2003 to 2007. In late November, the S&P 500 index dipped to its lowest level in 11 years. The extravagant claims made for equities in the late 1990s, when there was talk of the Dow Jones Industrial Average hitting 36,000 (or even 100,000) have proven to be hollow. Lately the Dow, which was at about 13,000 at the end of last year, has been trading between 8,000 and 9,000.

A good deal of these losses will have fallen on the very wealthy, who can cope. Many others, though, are not so well placed. And one class of investor will be especially badly hit: workers in defined-contribution, or money-purchase, pension schemes. These people’s retirement income depends solely on the return generated by their pension funds; their employers are not liable to top up their pots if things go wrong. And the CBO reckons that defined-contribution plans are more exposed to equities than final-salary plans, in which the employer bears the risk.

A possible consequence of this is that workers will feel frustrated or let down, and thus be discouraged from saving for their old age—or at least from buying shares for the purpose. They were told that saving would pay in the long run. But those who have been methodically putting money into pension plans (often known in America as 401(k) schemes) must be wondering why they bothered.

Figures from Morningstar, an investment-research firm, show that an American who put $100 a month for the past ten years into the average equity fund would have accumulated just $10,932—$1,068 less than he invested. Even a balanced fund (one that mixes government bonds and equities) would have lost money. A European who invested a flat amount every month for the past decade would have lost almost 25% of his money, according to Lipper, another research firm.

It is hard to get individuals to defer gratification: retirement seems a long way off for someone in their 20s or 30s. So, faced with the returns from past thrift, the temptation for many will be to opt out of the system altogether. Already, the American Association of Retired People estimates that 37% of workers lack a pension plan.

Spend, spend, spend

For a decade or more, American households in particular have seen little need to save out of income at all. The household savings ratio (the proportion of disposable income that is not spent) has been below 2.5% since 1999. Asset markets—first for shares, then for housing—were doing households’ saving for them.

Calculating the savings ratio is an inexact business, because it is the residual between measures of income and consumption and so tends to be revised a good deal. It also excludes capital gains on existing investments, although the taxes on those gains are deducted from the income measure. You might imagine that a low ratio was nothing to worry about: add in capital gains—the savings a rising asset market bestows—and the ratio looks healthier.


Some economists accepted this argument. A paper from the American government’s Bureau of Economic Analysis in 2002 argued that capital gains “can be as important as personal saving in determining the future consumption possibilities of households” and pointed out that the ratio of household wealth to income had rocketed in the late 1990s.

But should this really have been reassuring? Financial assets are simply a claim on goods and services. If their value rises a lot faster than GDP, that either suggests investors expect the GDP growth rate to rise substantially (unlikely in a mature economy), or that the assets are overvalued.

Similarly, if people borrow to buy houses, the immediate effect will be to push prices up higher and make personal balance-sheets look healthy. But as the past couple of years have demonstrated, that can push prices too far, prompting consumers to overextend themselves. As the economy deleverages—ie, borrowers are obliged to repay debt—balance-sheets then deteriorate sharply.

All this looks particularly pertinent today. Americans and Britons may have been living in a fool’s paradise for a decade, saving less than they should because they thought share and house prices would stay high for ever. Now they have learnt the awful truth, they may decide to save a lot more, making the recession even worse than expected. Economists at Lombard Street Research estimate that the American savings ratio, which turned negative in one quarter of 2005 (ie, consumers spent more than their incomes), may rise to 10% over the next year and a half.

Changes in the savings ratio are driven as much by borrowing as by saving habits. The ratio is a net figure. Many consumers spend more than they earn, borrowing or dipping into savings to make up the difference. Indeed, David Owen, an economist at Dresdner Kleinwort, an investment bank, points out that during this decade British households have generally saved more of their income than German households have. But they have borrowed more too: so much more that their savings ratio is much lower than the Germans’.

If the savings ratio is going to jump, it is most likely to be driven by the reluctance or inability of consumers to borrow. That was what happened in Britain in the recession of the early 1990s. According to Capital Economics, a research firm, borrowing (including mortgage equity withdrawal) fell by nearly £22 billion ($38 billion) between 1988 and 1992; conventional saving rose by just £14 billion in the same period.

Many economists might regard a marked increase in saving as a bad thing just now. With rich economies all around the world in recession, governments would rather people spent, not saved. That will not happen without a push—when workers are worried about the outlook for their jobs, they usually save more if they can. The same tends to be true when their existing wealth, including their houses, falls in value. So governments are loosening fiscal policies to try and maintain spending power.

Recklessly conservative

That said, saving could be good news for companies. In the long term, saving gives companies the funds to invest in new equipment and in research and development. In the short term, companies would be grateful for any equity capital they could raise from retail investors, so they could bolster their balance-sheets.

Alas, that looks unlikely. The problem is that investors do not regard financial assets as they do other goods; lower prices do not encourage them to buy more, but simply reduce their confidence. Past returns are the main determinant of flows into the stockmarket; investors buy when prices have gone up, not down.

Net retail sales of British mutual funds were £14.1 billion in 1999 and £17.7 billion in 2000, the two years at the peak of the dotcom bubble. Investors were happy to pay price-earnings ratios of 20 or 30 for the market, and more than 100 for some technology stocks. By 2003, the FTSE 100 index had fallen by more than half; net retail sales of mutual funds were only £8.1 billion. In the first ten months of this year, which have seen price-earnings ratios fall into single digits, net sales have slumped to just £1.3 billion.

British investors have been relatively stoic. In America, equity mutual funds saw net outflows of $195 billion in the first ten months of the year. In some European countries, the picture is a lot worse. According to Huw Van Steenis, an analyst at Morgan Stanley, the annualised pace of mutual fund outflows in Italy and Spain this year has been 24% and 26% respectively. Across Europe as a whole, about $200 billion has been withdrawn from mutual funds in the past 12 months.

Indeed, continental European savers’ appetite for equities never recovered from the bursting of the dotcom bubble. A shareholder culture was being created in the late 1990s, thanks to privatisations and the creation of the German rival to the NASDAQ, the Neuer Markt, which collapsed spectacularly after the dotcom bust. But now investors want only the safest kind of mutual fund. European money-market funds received €95 billion ($120 billion) of inflows in the first nine months of the year, according to Morgan Stanley.

A focus on cash has its advantages. In the short term, the banks themselves will be very glad of a flood of retail deposits: that will leave them less dependent on jittery wholesale markets. And politicians will also be happy if cautious investors are willing buyers of government debt; many countries are moving into heavy deficit in the face of the recession.

But it does not look helpful to companies. If they want to raise equity, who will buy it? Not the big corporate pension funds, which have been moving into bonds and alternative assets (like property) in recent years. And not the hedge funds, which are being forced to sell assets to return money to clients.

Nor is it good, in the long run, for savers. Cash generates very low long-term real returns, of around 1% a year. Roger Urwin of Watson Wyatt, a firm of consultants, describes an overconcentration on cash as “reckless conservatism”.

Even low interest rates may not put them off. Having become used to (nominal) rates of 4-6% in recent years, savers may initially suffer from “sticker shock” if rates fall to 1% or so, as they already have in America and may well do in Europe. But the example of Japan suggests that nervous savers may be happy to receive nothing at all from their accounts if they think that is the only safe option: the return of capital becomes more important than the return on it.

What investors may be missing to their cost is that financial markets tend to revert to the mean. On the one hand, high past returns are an indicator of low future returns: that has certainly proved true for those who bought equity mutual funds at the turn of the decade. On the other hand, the converse is also true: low past returns (and low valuations) create an opportunity for the stout-hearted investor.

James Montier, a strategist at Société Générale, a French bank, has calculated that when American shares have traded on a low cyclically adjusted price-earnings ratio (a measure that smooths profits over the previous ten years), returns over the next decade have averaged 8% a year in real terms. When the initial valuation was high, the subsequent average was just 3%.

Risky assets look more attractive now than they have in ages. Corporate-bond spreads are sufficient to compensate for the kind of default levels seen in the Depression. Stockmarkets in America and Europe now offer a dividend yield that is higher than the yield on government bonds, something that has happened only rarely in the past 50years.

Unfortunately, savers do not seem to take account of these long-term factors. When the stockmarket is falling, they tend to view the idea of investing more money into equities as sending good money after bad. And the average diversified American equity fund is down 41% for the year, according to Lipper.

Falling stockmarkets mean that, without doing much, a lot of savers are less exposed to equities. A recent survey by Hewitt Associates, a consulting firm, found that the proportion of 401(k) plans invested in equities was at an all-time low of 53.8%, compared with 74.2% in 2000. Arguably, workers were overexposed to shares at the turn of the decade. But they may be underexposed now.

Whatever their asset allocation, savers ought to be putting more money into their pensions, given their nest-eggs have taken such a beating. But there is little sign of that; employees subscribed just 7.8% of their salaries to 401(k) plans this year, according to Hewitt. Even if you add in the average employer’s contribution of 4.4%, the amount is nowhere near sufficient to match the 20% of pay needed to fund the equivalent of a final salary pension.

Indeed, it was the realisation of how expensive that promise had become that led to many employers abandoning final-salary pension schemes in recent years, thereby passing the risk on to workers.

The generational challenge

Many people—especially the baby-boomers born between 1946 and 1964, who will be retiring over the next 20 years or so—will be asking themselves whether they will have enough to keep them comfortable in their old age, even if they save a lot. After all, it is generally accepted that they cannot rely on the state. The burden on the taxpayer would be too great.

But, as already noted, financial wealth is just a claim on the assets produced by the economy. Making pensions a claim on the private sector rather than the public purse does not change the problem. Will businesses in 20 years’ time be producing enough income to pay the dividends and bond interest to pay baby-boomers their private-sector pensions? And what will happen to asset prices if the boomers try to cash in their portfolios?

In demographic terms, asset markets could be seen as a pyramid scheme, in which each generation aims to sell its accumulated savings to the next. Provided the next generation is larger than the one that preceded it, the savers can sell their assets at higher prices. That was the case for much of the 20th century.

The baby-boomers will upset the pattern. If they retire at 65, they will start offloading their assets in 2011. And even in America, which has fewer demographic problems than Japan, there are not enough new savers coming along to replace them. Some hope that emerging markets will solve the problem, by acting as buyers of developed market assets and a source of higher returns for investors in rich countries, but the theory is unproven.

In a 136-page report, “The Business of Ageing”, John Llewellyn and Camille Chaix-Viros of Nomura, a Japanese bank, examine the potential effect on financial markets of ageing Western populations. As the baby-boomers run down their savings to fund their retirement, you would expect, other things being equal, real interest rates to rise (because the supply of savings will fall, relative to demand). As a consequence of this, the valuation of assets such as bonds and equities should come under pressure.

Evidence partly backs up this theory. For example, economists can plot a relationship between the proportion of the population aged between 35 and 59 (when people save most) and the level of real interest rates. The relationship has been negative, as theory would predict, since the 1980s (lots of savings kept interest rates low). The strong Western stockmarkets of the 1990s coincided with the boomers’ peak savings years. In Japan, the population aged sooner; some commentators have blamed this for the poor performance of the country’s equity market since the end of the 1980s.

Indeed, although the Japanese have a reputation of being a nation of savers, this has long since ceased to be true. Although the corporate sector has a surplus, the household savings ratio plunged from 11.3% in 1998 to 3% last year. One of the main reasons seems to be that the ageing population is running down its investments. For Japanese equity investors, it has not just been a lost decade, it has been a lost quarter-century; the Nikkei 225 average recently touched a 26-year low.

The worry is that the baby-boomers in Europe and America may be about to repeat the Japanese experience. They will react to the recession by saving more and thereby make the recession worse.

Nor will their savings earn a decent return if they invest the money in the wrong place. Keep the money in the bank and the returns could be paltry and the capital eroded by inflation. Put the money in equities and the risk is that developed stockmarkets suffer the same long slow, grinding bear run as Japan.

Dangerous as it might be, the second of these options looks the better. The time for investors to take financial risks is when risky assets offer a sizeable long-term return, not when risk premiums are low. Savers need to save themselves.