Raffelhüschen

Bernd Raffelhüschen is a German economist and, since 1995, has been a Professor of Finance at the Albert Ludwigs University of Freiburg. His primary research focuses on the determinants of life satisfaction in the context of happiness research.

On November 21, 2022, Bernd Raffelhüschen spoke at the Museumsgesellschaft about Public debt, inflation, and low interest rates: an explosive charge for the economy and social affairs.

I only received the slides of his talk yesterday. Here are some of the most relevant figures Professor Raffelhüschen showed during his presentation.

Germany's national debt is 2.381 billion euros, compared with the United States' 30.569 billion US dollars. In Germany, the value corresponds to 72.5% of gross national product, whereas in the United States it is 122.1%. Subsequently, each German citizen carries a debt of 29.000 euros, whereas in the US the figure is approximately 90.400 USD per capita.

To limit expenditures and avoid excessive debt, governments implement measures. While the US has a debt ceiling*, Germany has a Schuldenbremse (debt brake), i.e., a balanced budget amendment.

*soon to be raised? 

The Schuldenbremse is a constitutional rule that prohibits the government from spending more than it receives in revenue. The Bundestag (parliament) voted to suspend the debt brake for two years to cope with the extra expenses during the Covid pandemic. 

Still, Germany seems better off in debt than the US, but looking at the demographic pyramid should give us Germans the creeps. Who will pay for the Gesetzliche Rente (statutory pension scheme) in the future?

Today, the contribution to the Altersrente (old age pension) is 9.3% of your income, to which your employer adds another 9.3%. In case of a fixed contribution plan, i.e., the 18.6% are kept, the present pension level of 48% of your last salary will drop to 36% for those retiring in 2070 (green curve, LHS).

If, on the other hand, the German government seeks to keep the overall pension level at 48%, the contribution to the pension fund must exceed 26% of income (blue curve, RHS).

Another way to finance the Rentenlücke (pension gap) is taxpayers' money. This is already done. In 2020, the federal subsidy to the pension fund already exceeded 100 billion euros annually, with the trend projected to continue.

Another future challenge will be the Gesetzliche Krankenversicherung (statutory health insurance), which covers 90% of the German population. Currently, the general contribution rate for statutory health insurance is 14.6% of your income. Half (7.3%) is contributed by the employee, and the other half by the employer.

In all countries, healthcare services are under cost pressure. Maintaining the status quo will increase the state health insurance contribution to 20% in 2060, whereas yielding to pressure will increase it to nearly 28%.

I doubt the American Social Security system and Obamacare will undergo such dramatic developments.

What is the best way to care for old age? Raffelhüschen's four recommendations are, "Don't put all your eggs in one basket!"

 

The best long-term investment is stocks, which return 5% after inflation. They remain the best choice relative to bonds or real estate.

Inflation developed strongly after years of zero interest rates and price stability in the eurozone.

Primarily due to energy costs, producer prices for commercial products rose by nearly 46% from January 2021 to September 2022, while consumer prices in the eurozone reached a record increase of 10%. Energy will remain expensive, so high inflation will persist in the coming months.

The reasons for the present situation - the coronavirus pandemic and the war in Ukraine - are apparent, but one factor usually needs to be included: the quantity of money in circulation.

Due to the coronavirus pandemic, the European Central Bank (ECB) has increased the money supply by a factor of two. 


Yesterday, a lady visited Red Baron to inquire about his happiness in life. This poll continued a series of interviews I undergo every second year. I assume the data are also used in Professor Raffelhüschen's study on the happiness of living in a particular region in Germany.

Using personal data collected across Germany, Raffelhüschen publishes a Glücksindex shown on the map above.

The state of Schleswig-Holstein has the happiest people, with a happiness index of 7.44, while the south of Baden, including Freiburg, falls within the middle range, with a Glücksindex of nearly 7.

May it remain so.

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