Ritchie on pensions

Lordy, but the man does get his economics wrong.

OK, long post here about pensions. The greatest iniquity of which is that most money \”invested\” in the stock market doesn\’t in fact buy new shares, it buys \”second hand\” ones.

Which of course is terrible, just a casino for the spivs to take a rake off from.

He entirely misses the point that precisely because one can unload an investment, that is, precisely because there is indeed this secondary market, the premium paid for new investments is lower.You know, as the risk is lower because you can get out in a liquid market then the price demanded to compensate for risk is lower.

Think it through for a moment: If you\’re locked into an investment for 30 years, do you want a higher or lower return than if you\’ve got a 30 year investment that you can, if you should so wish, get out of today?

Is there anything which might be a guide to on this? How about bank accounts? You get pretty much nothing on a basic on demand account in interest, don\’t you. But if you\’re willing to lock it up for 12 months  in some form of deposit account you get higher interest, don\’t you?

See? Being able to leave an investment lowers the risk and thus the compensation demanded for taking such a risk.

Anyway, Ritchie has a great new idea: essentially, let\’s replace PFI with direct investment by people in similar infrastructure deals. Buy bonds in your local NHS hsopital. Leaving aside the merits or not of this idea one delightful little phrase:

….establishing the rules on how pensioners are paid by People’s Pension Funds, what happens if they want to transfer their funds or die before retirement

\”What happens if they want to transfer their funds\”. Which gives us that secondary market all over again and we\’re back pretty much where we started. We\’ve a primary market that leads to, in his terms \”real investment\” and a secondary one which is just a casino. But, and here\’s the point that he\’s admitted, that secondary market exists because the investors themselves want there to be a secondary market: otherwise, why would he propose that there should indeed be a secondary market in his new scheme?

Which makes all his complaints about the null value of the secondary market fail rather…..

8 thoughts on “Ritchie on pensions”

  1. He must somehow have missed the teenage years where all sorts of elementary questions occur to you which you get answered by asking your father or going off to the Public Library.

  2. Unbelievable; without a secondary market in things like used cars, furniture, etc, it is much harder to establish price discovery in things that are new. As Tim says, an investor is surely more likely to hold an investment that he or she can sell if they need to than one that they have to hold forever.

    The same goes for housing; does Richard Murphy think it is immoral that there is a market for houses?

    There surely must come a point when this man is put out to grass.

  3. The first joint-stock company, the Dutch East Indies company (VOC) had shares that were tradeable right from the start – in fact, the regular gathering in the street to trade them led to the creation of the first bourse.

    Maybe Ritchie is of such history-changing genius that he proposes overturning more than 300 years of financial experience. Or maybe he’s a WGCE.

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