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Blurred vision in a topsy turvy world

Posted by: katalysis

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In a recent speech MPC member Andy Haldane extolled the virtue of patience as being a key requirement of financial stability. For too long we have been impatient and looked to the short term. This myopia was a key driver for the credit bubble and subsequent crash in asset values. He illustrates the problem thus:-

“Ask your friends how they would feel if the price of their favourite luxury good were to rise by 10%. Then ask them how they would feel if the price of their house were to rise by 10%. The first is likely to be met with a frown, the second a smile. In general, people dislike goods price inflation, but like asset price inflation.

This feels rational right? Wrong. These perceptions suggest a sub-conscious myopia. Higher goods prices cut today’s disposable income. Higher asset prices cut tomorrow’s disposable income. So disliking goods price inflation and liking asset price inflation suggests a potential time-inconsistency in preferences. It is leaving as a bequest for your children the mortgage but not the house.”

According to a recent survey by AVIVA a surprising proportion of the over 50’s are seriously in debt, have little by way of savings and still owe substantial amounts on their mortgages. On top of this an increasing number are looking to equity release to try to bolster their living standards in retirement. Maybe the next generation will have no option but to take the long view.
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