Regulators’ views of capital market efficiency are framed on the past, a past where high costs and crude suitability standards did not ostensibly materially impact saving’s ability to fund both consumption and capital investment dynamics. To make the transition we need lower transaction and structural costs and more sophisticated processes. This is a dynamic which will make an impact on savings, asset prices and returns, and possible fundamentally impact consumer confidence.
Statement – In an aging population with high unemployment, high levels of debt and a disparity between income and wealth, saving assumes an even more important place in supporting the status quo.
Regulatory context – Regulators need to protect investors and promote efficient capital markets in order to promote investor confidence. But, many regulators have got this message back to front, believing that confidence is about attitude and to a certain extent, education, and try to engineer investor confidence in the interests of capital markets – I am not joking. They think confidence is a matter of perception, when it is a matter of fact, structure and outcome. And not many Canadian regulators get it.
The issue is this: how do you promote investor confidence and saving when many of the factors that underpin confidence and saving are either missing or impaired? Do you ignore the issues and spin confidence, or do you acknowledge reality, manage expectations and thenceforth set the foundation upon which investors can build assets and confidence?
The dynamics – In an aging population more and more individuals rely on their assets to fund their consumption and must sell these assets to another buyer/saver.
Without saving to supply the demand for asset sales, asset prices will fall, and as asset prices fall so will consumption expenditure, and by virtue of that the return on assets – this will lead to further falls in asset prices.
In truth, where a population is aging, young savers will need to save more and spend less as the older generation consumes more en masse. But, as the population declines, the capital need to support production declines, resulting in a fall in the value of capital. In order to balance the transfer between current and future production and current and future saving, asset prices need to adjust.
But, with poor asset returns since the end of the 1990s, large pension fund deficits and weak funding positions of governments, with respect to their own pension commitments, there is considerable uncertainty over the amount of expenditure aging generations can provide.
The fly in the ointment – But, we have experienced rising participation rates among older workers and falling participation rates amongst younger workers, lower wage increases and increasing levels of student debt. The younger generation, as a whole, may not be able to finance the necessary transition.
The conflict – We need saving to stabilise asset prices and to fund growth of capital if economies are to accommodate their large debt burdens. We need a stable adjustment process.
The dilemma – There is a risk that today’s savings will achieve a transfer of assets that may no longer be able to deliver the returns needed to finance the younger generation’s retirement.
One solution and investor confidence – regulators views of capital market efficiency are framed on the past, a past where high costs and crude suitability standards did not materially impact saving’s ability to fund both consumption and investment dynamics. To make the transition we need lower transaction and structural costs and more sophisticated processes. This is a dynamic which will make an impact and possible fundamentally impact consumer confidence.
The loser – will be the financial services industry!