Is Superannuation Doomed to Failure?
The bubble began in 1711 when the Lord Treasurer, Robert Harley, created the South Sea Company. Its primary activity was the funding of government debt incurred during the war of Spanish succession. The company convinced holders of short-term government debt to exchange it for stock in South Sea.
The stock was supposedly a perpetual annuity. In 1719, the company again sold shares of government debt, gaining a 5% dividend. By the end of that year, the South Sea Company held over 20% of converted British national debt.
In 1720, the share price rose from 128 pounds in January to over 1,000 pounds by the end of the year.
Suddenly (and abruptly) in August of the following year, the party came to an end. Investors realized the company had no real revenues and was essentially a Ponzi scheme.
The bubble collapsed.
Why you may ask am I bringing up something that happened in 1720? I am bringing up South Sea because it defines the four cornerstones of a bubble AND the one critical piece for disaster, government "theory":
In the case of the South Sea Bubble, everyone who was involved, the government, the directors, and the investors believed that the initial investment was "just a recapitalization of debt." Investors believed that the South Sea Company was behaving like a bank. They had invested in securitized debt, and that security would pay a nominal rate of interest for many years.
Customers who purchased shares in the South Sea Company ignored the fact that there was really no company producing revenue.
This exacerbates the problem. With the creation of the South Sea Company's equity, the Government had successfully offloaded 1/5 of its debt. One of its largest gambles, the cost of the Spanish war, had been paid for. No one in the government wanted to question the efficacy of the South Sea solution.
Executives come to believe that there are certain "rules of the game" that will protect them. In 1720, the New World seemed to be a font of all riches and had created a new security for all investors.
In view of the above, I submit that the superannuation guarantee scheme might not be all it's cracked up to be. Superannuation schemes are complex financial instruments whose money flow has a big impact on the overall direction of the economy.
There are some underlying consequences of superannuation investment. In fact I believe the global flow of cash has already given us a taste of what further enlargement of the super guarantee will not be a victim of but cause.
We as a global economy are experiencing one of the most deep and severe recessions since the great depression. This has been caused by over investment, and the creation of bubble markets, so far we have seen bubbles of shares, property, sub-prime debt and, in the case of Greece and Ireland, sovereign debt.
Markets which are set up to bubble and burst are always very risky; they almost always cause a bigger fall than rise. The wealth generated from a bubble market is false; it is built on unsustainable growth fuelled only by one factor.
Quite often the growth comes from unsustainable levels of demand in a market. People enter the market because of fast "guaranteed growth", however sooner or later the market will burst. The demand entering will eventually not fuel the false growth, and the bubble bursts.
"In the case of superannuation we are seeing markets force fed cash like French Goose, swelling the liver fatally."
Superannuation policies actually contribute to bubble markets themselves. The money gathered from superannuation payments is actually invested in the stock market to generate interest. This is because the bank's base interest rate is not enough to cover inflation and provide a reasonable return, so a more aggressive strategy needs to be implemented. This usually involves the money gathered from superannuation payments going into investment funds which essentially all have to go to the stock or bond market in one form or another.
So to regress I will take you through the four cornerstones of a bubble, in light of the South Sea Bubble and superannuation and see how you feel at the end of it;
In the case of superannuation, all the decision makers believe it is the "Holy Grail". Simply getting people to save more can't be a bad thing. Can it? After all it's just like money in the bank we get paid interest pretty much no matter what, and the passage of time guarantees we retire to live like kings. This fallacy has developed because the government can't afford to pay pensions.
Consumers who invest in superannuation are forced to; the decision making is taken away from them and given to employers, unions or financial planners. This is the blindest of blind spots because the consumer isn't even looking the first time.
The government has used the ruse of super guarantee to reduce its future debts for the aged pension and public service superannuation e.g. increase the Super levy and we can increase the pension age.
I am not making a judgment about whether or not the government has a responsibility. I am pointing out that it benefits in an inordinate way from continuing the fallacy. This in turn makes the effects worse.
The financial planning industry insists on quoting returns over the long haul, in thirty years you‘ll average "x" return. They want to show you that superannuation performs like a Government Bond, with a higher yield, when we know it does not.
Ask any fund manager, financial planner or government official and you will be told superannuation is the best thing since sliced bread! In fact merely questioning the assumption will yield a torrent of outrage, shock and abuse worse than if you were kicking a puppy.
Look at the kicking and screaming over financial planners being forced to be paid as professional i.e. fee for service.
Cases of bubble market crashes from the past can be seen throughout time. More recently you can see examples of boom/ bust markets with the dot com bubble in the early 2000s, or the housing market bust from 2007-2009.
The dot com bubble was an era of over investment in an under-profitable market. Huge sums of money were being poured into unprofitable companies, simply because there were so many buyers that the market was continually growing. When mismanaged and unprofitable companies started going bust demand declined, this lead to a steep bursting of the dot com bubble.
Perhaps the upcoming disaster of superannuation will be the first one caused by money being forced into a market as opposed to be being tricked into it.
The stock was supposedly a perpetual annuity. In 1719, the company again sold shares of government debt, gaining a 5% dividend. By the end of that year, the South Sea Company held over 20% of converted British national debt.
In 1720, the share price rose from 128 pounds in January to over 1,000 pounds by the end of the year.
Suddenly (and abruptly) in August of the following year, the party came to an end. Investors realized the company had no real revenues and was essentially a Ponzi scheme.
The bubble collapsed.
Why you may ask am I bringing up something that happened in 1720? I am bringing up South Sea because it defines the four cornerstones of a bubble AND the one critical piece for disaster, government "theory":
- The necessary fallacy.
In the case of the South Sea Bubble, everyone who was involved, the government, the directors, and the investors believed that the initial investment was "just a recapitalization of debt." Investors believed that the South Sea Company was behaving like a bank. They had invested in securitized debt, and that security would pay a nominal rate of interest for many years.
- The consumer blind spot.
Customers who purchased shares in the South Sea Company ignored the fact that there was really no company producing revenue.
- Government complicity
This exacerbates the problem. With the creation of the South Sea Company's equity, the Government had successfully offloaded 1/5 of its debt. One of its largest gambles, the cost of the Spanish war, had been paid for. No one in the government wanted to question the efficacy of the South Sea solution.
- Finally the industry in which the bubble occurs develops a security rationalization.
Executives come to believe that there are certain "rules of the game" that will protect them. In 1720, the New World seemed to be a font of all riches and had created a new security for all investors.
In view of the above, I submit that the superannuation guarantee scheme might not be all it's cracked up to be. Superannuation schemes are complex financial instruments whose money flow has a big impact on the overall direction of the economy.
There are some underlying consequences of superannuation investment. In fact I believe the global flow of cash has already given us a taste of what further enlargement of the super guarantee will not be a victim of but cause.
We as a global economy are experiencing one of the most deep and severe recessions since the great depression. This has been caused by over investment, and the creation of bubble markets, so far we have seen bubbles of shares, property, sub-prime debt and, in the case of Greece and Ireland, sovereign debt.
Markets which are set up to bubble and burst are always very risky; they almost always cause a bigger fall than rise. The wealth generated from a bubble market is false; it is built on unsustainable growth fuelled only by one factor.
Quite often the growth comes from unsustainable levels of demand in a market. People enter the market because of fast "guaranteed growth", however sooner or later the market will burst. The demand entering will eventually not fuel the false growth, and the bubble bursts.
"In the case of superannuation we are seeing markets force fed cash like French Goose, swelling the liver fatally."
Superannuation policies actually contribute to bubble markets themselves. The money gathered from superannuation payments is actually invested in the stock market to generate interest. This is because the bank's base interest rate is not enough to cover inflation and provide a reasonable return, so a more aggressive strategy needs to be implemented. This usually involves the money gathered from superannuation payments going into investment funds which essentially all have to go to the stock or bond market in one form or another.
So to regress I will take you through the four cornerstones of a bubble, in light of the South Sea Bubble and superannuation and see how you feel at the end of it;
- The necessary fallacy
In the case of superannuation, all the decision makers believe it is the "Holy Grail". Simply getting people to save more can't be a bad thing. Can it? After all it's just like money in the bank we get paid interest pretty much no matter what, and the passage of time guarantees we retire to live like kings. This fallacy has developed because the government can't afford to pay pensions.
- The Consumer Blind Spot
Consumers who invest in superannuation are forced to; the decision making is taken away from them and given to employers, unions or financial planners. This is the blindest of blind spots because the consumer isn't even looking the first time.
- Government Complicity
The government has used the ruse of super guarantee to reduce its future debts for the aged pension and public service superannuation e.g. increase the Super levy and we can increase the pension age.
I am not making a judgment about whether or not the government has a responsibility. I am pointing out that it benefits in an inordinate way from continuing the fallacy. This in turn makes the effects worse.
- Finally the industry has a security rationalization
The financial planning industry insists on quoting returns over the long haul, in thirty years you‘ll average "x" return. They want to show you that superannuation performs like a Government Bond, with a higher yield, when we know it does not.
Ask any fund manager, financial planner or government official and you will be told superannuation is the best thing since sliced bread! In fact merely questioning the assumption will yield a torrent of outrage, shock and abuse worse than if you were kicking a puppy.
Look at the kicking and screaming over financial planners being forced to be paid as professional i.e. fee for service.
Cases of bubble market crashes from the past can be seen throughout time. More recently you can see examples of boom/ bust markets with the dot com bubble in the early 2000s, or the housing market bust from 2007-2009.
The dot com bubble was an era of over investment in an under-profitable market. Huge sums of money were being poured into unprofitable companies, simply because there were so many buyers that the market was continually growing. When mismanaged and unprofitable companies started going bust demand declined, this lead to a steep bursting of the dot com bubble.
Perhaps the upcoming disaster of superannuation will be the first one caused by money being forced into a market as opposed to be being tricked into it.
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