Economics and politics - comment and analysis
11. November 2022 I Heiner Flassbeck I Economic Policy, Economic Theory, Financial Markets, General Politics

Gambling for retirement

After the great financial crisis of 2008/2009, everyone was wiser for a moment. Gambling, as we knew after the bad experiences of that time, is dangerous in principle. It is particularly dangerous if you don’t even gamble with your own money, but go into debt to try your luck in the casinos of this world. So you take on debts for which you have to pay fixed interest, and hope to gamble so successfully with the sum then available that you can not only pay the interest, but also make a profit because the return achieved exceeds the interest. With this wonderful profit, so the hope, one can then enjoy one’s retirement in peace.

Can there be anything more absurd? No, not really, unless this action is not taken by simple-minded private individuals, but by the state. But that is exactly what the Federal Minister of Finance is planning. Because of demographic worries, he wants to create a pension invested in stocks whose capital will initially come from government debt. Later, citizens will certainly be made to pay into this fund in some way, so that the whole nation can gamble together a really stable and secure pension in the long term, regardless of demographics.

The model, one hears, is Norway, where the state has used oil revenues to fill a huge fund that is involved in pretty much every type of investment you can imagine on the world’s markets. There are similar funds in the Middle East as well. Whenever countries really don’t know how else to use the horrendous revenues from fossil fuel sales domestically, they try to find global investments for the excess revenues. At present, this is again particularly acute because the revenues of oil-producing countries are exploding in the face of extremely high crude oil and gas prices. Saudi oil multinational Aramco made more than $40 billion in profits in the third quarter of this year alone. What will Aramco’s already filthy rich owners do with that?

There is already too much saving

For the world, this kind of saving creates an enormous problem because, on the one hand, it reduces demand in countries that consume commodities, and on the other hand, it stimulates saving where there is already far too much saving. This has enormous and clearly negative effects worldwide on the investments that ultimately matter, namely investments in tangible assets. Since there is not enough investment in tangible assets, and thus tangible assets that really generate returns, namely those based on productivity increases, for all the savings in the world, interest rates have been close to zero or even below almost everywhere in the past decade. The high stock prices were to a considerable extent the result of a speculative bubble, because the masses of investment-seeking capital rushed into stocks, since bonds offered no or hardly any return.

The low interest rates were therefore, contrary to what libertarians assume, by no means due to the arbitrary decisions  of the world’s central banks. Rather, they were a sign of weak global demand, which in turn paralyzed investment in physical capital. Although companies were making decent profits across the board, they were not putting their money into expanding capacity; instead, they were themselves using the funds they generated to look for financial investments outside their own operations.

The fact that in almost all industrialized countries companies have shown surplus revenues over the past twenty years, i.e., have become net savers, should really make anyone thinking about creating new yield-seeking funds wonder. Where is the return to come from if real investment activity is further weakened by each new fund, by each additional saving in this world? But such considerations are alien to the German finance minister and his advisors. They certainly do not want to think and act in macroeconomic terms, not to mention take into account global considerations.

But I am, after all, incurring new debt to kick-start the fund, Christian Lindner might retort. That’s true. But unfortunately, incurring debt in order to make additional savings is macroeconomic nonsense. Even if the finance minister were to incur an additional ten billion euros in debt next year (compared to what?), it would only amount to taking ten billion from the capital market and giving it right back to the capital market. What’s the point of that? To believe that you can achieve a sustainable return via shares in this way is absurd.

But the German finance minister will probably not take on an additional ten billion in debt. He will indeed borrow the ten billion for the equity fund on the capital market, but at the same time, in order to comply with the debt brake, he will save the ten billion elsewhere. That is particularly absurd then. It means nothing other than that he will cut the demand for goods and services, which directly benefits companies, by ten billion in the hope that this will increase the returns of the companies of this world. After all, this is the only way to earn money on the stock market – without speculation. According to Adam Riese, however, you reduce the return on investment of companies if you reduce their demand, which is why this action is counterproductive from the outset. If citizens are also forced to save in order to pay into the equity fund, the result is just as absurd.

The next flop after Riester

Overall economic thinking is difficult. But someone who, for whatever reason, has become federal finance minister would have to try it at least once. He might come up with some simple conclusions. There is obviously no shortage of savings in this world, but an abundance. It is true that private households have always saved, but in the ideal world of “Ordnungspolitik” that Lindner likes to cite and that his closest advisor Lars Feld has internalized like a religion, entrepreneurs as debtors and real investors were the natural antithesis of savers. However, that no longer exists!

If even the companies save on balance, saving by the state or saving by private individuals stimulated by the state is simply harmful to investment activity and overall economic development. Consequently, any attempt to “capitalize” pensions is doomed to failure.

In the early 2000s, Germany installed a funded scheme in the form of the Riester pension, which was a complete failure. Despite high subsidies from the state, there is no question of this making pensions more secure. Apart from the German insurance companies, no one has benefited from it. Even then, any macroeconomic criticism of funded schemes was simply ignored from the outset. But instead of analyzing why this attempt failed so badly, they are now trying to ignite the next stage of capital coverage, this time with even more windy arguments.

Those who fear the aging of society must invest more in fixed investment so that our children, with higher productivity, can more easily bear the burdens of the future. Those who strive for capital coverage harm precisely this investing and thus directly complicate the task of our children. How uneducated in logic or cowardly must the bulk of economists in Germany be if, even on such a fundamental question, they are not even remotely capable of distinguishing between the milkmaid effects at the micro level and the really relevant effects at the macro level? How ignorant must a policy be that simply ignores a simple fact such as that of saving companies and pretends to the people that the market economy works today just as it did seventy years ago?

The article has been published today in German on Telepolis (