Don't Count on Savings

The failing of the economy to allow for savings sufficient for taking care of oneself in later years is not clear to most people, including many economists. It is not clear to many financial advisors. That is because saving and investment is rarely set up with goals and definitions: Specifically what do I want the money to do? What period of time? What level of spending? What degree of loss of purchasing power to plan for? How will the asset be invested during the period it is used?

Instead people save what they feel they can and try to put it where they hope they can get the best return. Few study sufficiently for the task. Few use professionals properly. Few actually like doing the work investing and follow the news. This last is an important point. For example, as a financial advisor for twenty years, I realized that I was not a stock picker. I wasn’t interested. It was not an area that I wanted to spend my time. I found professionals who did find it interesting and were successful. I used the division of labor for my and my clients’ benefit. The whole “do it yourself” approach is wrong headed. Professionals often use the amateur investor as a counter-trend indicator: when the small investor begins buying it is time to sell.

What you can see in just the equity market is that since the end of the tech boom in something like 2002 the stock market has not kept pace with the loss of purchasing power. It is not that it has just not had good returns. What returns it has had in relation to what a dollar can buy, the equity market in the U.S. has lost value.

The market that has actually risen, is the bloated Federal bond market. Guess what happens when the Fed stops buying and attempts to get rid of some of its astonishing horde of bonds. It won’t be pretty. The stock market will tend to dive as well.

So those people who are suggesting that people aren’t being personally responsible and saving enough and that is why we can’t get rid of Social Security are not paying attention. Government actions are destroying assets and our ability to save. That is the box we are in.

But it does take a long-term view to realize the size of the box and that it is getting smaller. Current politicians can’t see it because of their self-imposed philosophic blinders. Banking, financial, and business leaders by and large aren’t looking either. We can’t get even a modest public comment about our future and the entitlement programs out of any of them.

We are heading for this blind. Surprise!

Inflation Update: First Quarter, 2012

I have been writing this since the turn of the year. It has been subdivided already several times. A couple parts have appeared as other posts and several pages are just sitting around in this file, orphaned! I have again divided it so that I can get something out and the length will not evoke cursing. This section is my inflation update. Maybe some of the rest will appear in the future.

I realized recently that my most “favorite” group that constantly announced the coming of hyperinflation has only made one such announcement in the last several months, and that one was somewhat less frantic than normal. (Recently, they have been touting stocks.) In their last prophascy of doom, they did touch on issues that are important, but since they have only one economic note, hyperinflation, they don’t consider other, equally nasty, potentials, of which there are several. But apparently, hyperinflation is not the immediate threat they have often claimed. They haven’t said why they have changed their tune.

Yet, there is plenty of good reasons to be concerned about inflation in the next few years. For the fun of it, let’s divide up the issue into two separate (but certainly related) questions:

If by inflation you are asking about the money supply and its impact on asset prices and the economy: just look at the stock market! There is plenty of made up money sitting around that comes out and bids up assets when given even a glimmer of hope. True, company profits are healthy. My question is about the source of those profits. Is it just savings from leaner operations, or is it return on growing business. I fear that it is the former, which means little for future economic improvement. What reasons do we have to suggest that businesses are investing in the anticipation of growth?

There is new, made-up money floating around, for example, our balance of payments for last year was again a large deficit, perhaps smaller that in 2007, but still large. That means that a lot of electronic dollars left the country, billions of them ($110B in the third quarter, 2011; $124.7B in the second quarter, 2011), and didn’t return, won’t return (for those dollars to come back other currencies would have to be better than the dollar, and that isn’t happening). At the same time, notice that our money supply did not shrink by hundreds of billions. Think about this. We sent over $400B dollars out of the country last year, and didn’t notice it. Where did it come from? (Hint: International trade is done entirely on credit!)

The money supply within the country, in the broad measure that I use, MZM, shows the resumption in the upward trend continuing. The graph available, and widely used, is hard to read and the current trend is still only a few of months old. So what it means is unclear. What appears to be the situation at this point is that the increase is on the same growth line as before the meltdown. But since the base is larger, the growth will have less impact. Think of the difference it means to you to have a $10,000 raise when your income was $30,000 vs. $200,000. So, an additional $100B means more when the money supply was $1T in the 80s vs. today’s nearly $11T. The rate of growth in the money supply would need to be a lot steeper to be really important. The growth we see isn’t good, mind you, just not frightening.

Another important measure of the money supply is new loans made by banks. This is the method by which the Fed puts money into the economy. The Fed has been trying to push new made-up money into the economy since 2007 with little success. Recently, however, loans are beginning to increase again. Just new loans would not be an issue. After all, business needs credit, and amount would fluctuate over time. Further, with the deep recession, the amount of loans would have declined. A healthy economy would need credit to grow. If that new credit reflected new savings we would be seeing real growth soon. Of course, it doesn’t. Savings is being sucked into the Federal deficit. So, the growth of bank loans tends to indicate new made-up money being pumped into the economy, which could lead to another round of asset price inflation. The recent upward trend of new bank loans is worrisome, and needs to be watched. Again, the graph is too small to give good detail, but the slant of the upward movement isn’t too steep.

We are still sitting on a time bomb. If you look at the reserves (deposits) of banks who are members of the Federal Reserve (nearly all banks), you see that the amount of reserves they have is amazingly high. This is the Bernanke plan. Notice the last big jump to about $1.8T. That was QE2. That is to say that much of the massive amounts of money that Bernanke and his gang pushed into the economy is actually just still sitting at the Fed. It really didn’t do much except keep interest rates at stupidly low levels. It did help push commodity prices up, which is another type of asset boom. Does anyone believe that the interest rates actually reflect any element of the real economy? Low interest rates have not sparked new investment. They have merely given an unearned bonus to holders of federal debt and kept BO thinking that his deficits don’t really cost anything.

The time bomb will be the consequence when banks begin to think that they should move those reserves to their banks and expand their loan portfolios. Then we have a real inflation as the money supply explodes (once put into the economy, under current rules, each dollar moved from the reserve could become ten, or the $1.8T of excess reserves could become an additional $18T (our current money supply using MZM is almost $11T). The Fed actually knows that is a bad thing. When they first expanded the reserves with QE1 in 2008, there was a lot of talk about what they would do to sop up the excess reserves, which were then about $1T. That talk has completely disappeared as the economy failed to improve. But the problem remains and has gotten bigger. If the economy begins to grow the Fed will have to do something. Any action the Fed takes to sop up that money will raise interest rates, perhaps dramatically, and that would put a lid on the economy. That would also send interest rates up around the world and make things in Europe much worse. So ignored everywhere right now is this time bomb that will go off if the economy does begin to grow.

If you are thinking of prices as an indication of your cost of living (quality of products is often forgotten), the news is mixed. For example, the costs of health care and health care insurance is going to continue to skyrocket, especially if the quality of care is considered. (This increase in cost is only partly due to ObamaCare. Wait until that really begins to kick in!) Government interference in healthcare has never lowered cost or improved care. It has only made people feel like they were getting something for nothing.

Gas prices have risen, and will remain at higher levels until various international issues have been resolved. The last few years the pressure on prices has been due to new demand from countries that actually were developing. The current problem is due to the threatened supply because of Iran’s level of irrationality, Iran being a major oil producer. Again, the West’s willingness to allow its technology and industriousness to be hijacked by local warlords and savages becomes the source of economic shocks.

(The problems with higher food commodity prices that we had a while ago have abated, mostly due to higher crop results, e.g., the end of the draught in Russia. There are countries that are still seeing lower supply and thus more expensive food supplies. Most of these countries have governments who are controlling the markets. I can’t help but wonder if their problems are due to their governments inability to continue to subsidize food distribution.)

Reports from some U.S. food processors report that they have had to raise their prices from between 5% and 7% in the last year. No doubt we will see some upward movement in prices and no upward movement is good. Even price inflation rates of 2% are damaging. But there is no indication on the horizon that we are moving toward hyperinflation.

I just read another of Peter Schiff’s monologues. Among other things, he claims that price inflation is running at 10% (He just said inflation, but I assume he meant prices, in his writing he often switches back and forth.). He and others have constantly asserted that the CPI has been politically corrupted and that actual prices increases have run much higher. I do think that the CPI has been manipulated in many ways, and a lot of it was politically motivated, at least implicitly. But I have a problem with rates of price increases much higher than a few percent. Why? Let’s say that prices were going up at the rate of 7% a year, which is in the ballpark of many such claims. That would mean that prices today would be double what they were ten years ago (rule of 72, see below). Is that your experience? It isn’t mine. Some have argued with some justification that the quality level in many products has improved at the same or nearly the same price and that lots of technology prices have dropped. As I suggest in my review and comments of his books, I think Schiff often shoots from the hip, which I don’t find admirable. He has been right on some important things, but I’m not sure that it was because of good insight or just accident.

I did say that the situation is mixed, didn’t I. What I meant is that the news is that mixed in with the reports that prices are generally drifting upward are some reports of some really bad spots. In December, I would have said that foodstuff commodities prices had dropped, but the thinking that loosening of credit in China and Europe was going to stimulate demand has run them back up a little.

As I see it, the problem that could most affect us immediately is a financial crisis brought about by the European governments. The finance ministers in Europe are saying that they aren’t sure that this bailout will succeed. The Greeks have shown that they fail to live up to their promises, and curse others when that is pointed out. The other tottering European economies are very dependent upon low interest rates and the availability of massive amounts of made-up money. Remember, the euro zone’s long-term plan is a “fire wall” of several hundred billion euros. Where is that money going to come from?

So, my expectations for the next year or so is that our economy will continue to totter along. If unemployment moves up, or people become to understand the figures that are before them, we could see a big pull back in equities and consumption slow. That would lead to QE3 and more of a mess.

Prices will continue to inch up. Commodities will continue to have upward pressure. Basically, we will have more of the same.

There are two other considerations to watch for: The implimentation of the new rules for banks and derivatives and the actions that BO might take in anticipation of the election latter this year. Neither of these will be good for us and will be inflationary.

Having said that I should also say how reliable I regard my expectations. (Do you notice that nearly all of today’s prognosticators never look at how they did in the past?) Reliability of economic predictions is dependent upon two separate issues: One – how reality oriented is the analysis; Two – lack of omniscience. There is also one other point to keep in mind, good economic events require rationality, at least to some extent, and productivity. As good economic events are in short supply, for obvious reasons, the question is then how far off on the down side are my comments. I noted the areas that I thought that we could have major problems. There could be problems coming that I, or anyone, has not noticed. The most recent example, aside from people missing what is under their noses (the residential real mortgage meltdown), is 9/11. Another major terrorist strike could upset everything, and we would have a hard time recovering, too. So, I have tried to cover the economic bases that I can spot. But there could be others. Just keep on your toes.



P.S. I just read an article about investments in Turkish companies by venture capitalists, Now I don’t know how true the article was, although it did make Turkey sound like a much better place than I would have imagined. What I thought was so amazing about the article was that it didn’t mention the Turkish government or nationalized companies once! (Except to imply that the government wasn’t an issue!)

The Financial Realities of Individual Retirement

I am writing this for several reasons but one important one is to further establish the importance of paying attention to the real world when attempting to make policy recommendations like some recent suggestions as to how to deal with the entitlement mess.

To begin, let’s review the current situation:

1. The current ideal is to retire at age 65 and live in blissful non-productivity for 20 to 30 years.

2. Up until the 90s, it was expected that a worker would accumulate pensions from his employers over the years and when he retired he would receive a fixed income to support him. These pensions have been disappearing steadily for decades and there only a few left for new hires. The health of company savings to support existing pensions is in question. There is a federal agency that would supposedly put funds into a failing pension fund, but it is underfunded itself and could not rescue an economy wide problem (such an agency shouldn’t exist, either). (For example, see)

3. Self-funded retirement plans, such as the 401(k), have been shown by repeated surveys to be insufficiently funded by employees to provide for their retirement. The gap is very large. Employees also have the tendency to remove the funds from retirement accounts at various times for various reasons.

4. Survey after survey has documented that Americans have a very poor grasp of how to manage their savings and investment, including retirement accounts. The primary element driving most decisions is fear of loss. The sources of their fear are stories about the Great Depression, reading newspaper headlines, incomprehensible discussions of investment options, stories of thief and greed, and the economic chaos around them.

5. Retirees are becoming increasingly dependent upon Social Security and Medicare after retirement (see below).

6. The government dominated economy has resulted in two major recessions in the last ten years resulting in the current period that is described by the government and press as a recovery but feels very much like a bad, senseless downward spiral.

Consider the situation of a reasonable, hardworking, educated baby-boomer who has been successful from the standpoint of the quality of jobs and his level of income. Let’s call him Max. Max is 62 and all his life he has accepted the idea that age 65 he will retire. As a responsible person, he has saved and tried to make sound investments his entire life. He has not hired professional help other than talking to various stockbrokers. He began working as adult in 1972 but didn’t begin paying attention to the issue of savings for several years. His initial experience in the 70s was with high inflation and then the recession that ended in 1982.

But Max has now entered what will surely be remembered as the golden years of investing for the baby-boomers. From 1982 until December 1999, the market rose nearly continuously (for example, 1987, which is remembered as the year of a crash, was actually up slightly for the calendar year.) The later 90s were somewhat skewed by the inflation fueled tech boom, but overall, the period was the best of the Twentieth Century.

Since 1999, the investment markets have flattened or worse. Consider that the inflated high of the Dow Jones Industrial Average of December 1999 was 11497. As I write the Dow is 11471 (and in my opinion, it is over priced). After nearly twelve years, the Dow sits at the same place, nominally. I say nominally because the dollar today is not the dollar of 1999. If we accept the government Consumer Price Index as a real measure of consumer prices over time (I am not advocating using the CPI, but I don’t know of a good alternative.), since 1999 the dollar has fallen over two percent a year. According to the Department of Labor’s online inflation calculator, it takes $1.36 today to buy the same stuff as one dollar in 1999, or today’s dollar is worth $0.73. (The same calculator gives the today’s figure of $234.76 in relation to 1982.) That means that if you correct for inflation today’s Dow is 73% of what it was, or 8434, not 11471. Even if you add in dividends and subtract taxes (capital gains taxes as well), you have a result that a general investment in American productive assets for the last twelve years has been a very large loss. Max has suffered a major blow to the prospect of a comfortable retirement. Maybe Max may not be able to retire at all, even with Social Security, although I am not sure that there would a job for Max when he needs it.

How could Americans prepare for retirement in such an economy?

Most prescriptions offered for investing for retirement assume an economy that is growing. Those recommendations didn’t work in the decade ending in 1982 and they aren’t working now. There are recommendations for periods of crashes and depressions. If these ideas work at all, they generally don’t work for prolonged periods of time. There are other approaches that do work to a certain extent and are good. However, they tend to be complex and assume knowledge that few have. They also wouldn’t work if widely practiced (which is to say that I am here concerned with the general situation and not how an individual could protect himself). For the vast majority of people, there is no good investment option today that will help them through to their last years.

Another little known fact is that those people who have saved some assets for retirement have often not actually planned. Their accumulation was based on what they could save and invested in what made sense at the time. Many, when they retired, accepted the conventional wisdom that retirement income needed to be “income without undue risk” and placed significant amounts in bonds. These people will tend to run out of money even faster during retirement. They don’t have enough to support their rate of spending for very long. Nor do they or their advisors have the tools to recognize the threat and make changes early enough to make a difference. They have not made provision for consumer price inflation or the rapidly rising cost of medical care. They aren’t prepared for 20 years or more of idleness. They just don’t know how to plan financially and don’t know they should.

For the many people who keep whatever they have managed to save in “safety of principle” accounts (fixed annuities, savings accounts and CDs) or fixed income accounts (bonds and pensions), they have seen their assets and income slowly decline as the Fed has kept interest rates low, inflation continues, and the what small income they receive is taxed. People with bonds have seen their principle increase as interest rates and their income have declined. But, if they are paying attention, they know that the future probably holds higher interest rates (see Greece, Spain, and Italy today), and their principle will drop like a rock if they still hold those bonds.

Beyond that it should not be surprising that very few people have any idea of how to invest. They do not know how the economy works. Where would they get that knowledge? It isn’t taught in schools at any level nor do the academics actually know anything about the real economy. They don’t know how retail businesses work. They don’t know how manufacturing works. They don’t know how businesses make profits. They don’t know how international commodity or currency markets work. They really don’t know why stocks have the prices they have or why they change, short term or long term. The ignorance about economics or our economy is more than widespread. It is terminal. Who suggests that it is important to know? People learn about their own professions, but often not much beyond that. Business schools are not good sources, either. Most businesses have to retrain business school grads, even MBAs. It is no wonder that few people are able to save and invest in a manner that will successfully support them into their 90s, especially if they retire later than normal. The number of people who do adequately save and invest has to be less than five percent.

A realistic look at today’s economy would suggest that the foreseeable future does not hold the promise of better results. There is no indication that anyone in authority has a clue as to what makes an economy grow and contract. They do not even understand that only productive, profitable jobs are worth creating. Government debt will continue to pile up. The Fed will continue to add stimulus, achieving nothing but a huge financial overhang that may fall and crush us. Don’t forget that the regulations required by all of the reform bills after the Meltdown in 2007-8 have yet to be released and implemented.

It seems to me that any criticism of people for not being prepared for retirement is not based upon a recognition of the facts of the real economy. Only a very few are going to have found a method to invest their savings in such a way to be able to support themselves if they retire.

To sum up, it is very difficult for salaried or wage paid individuals to save and invest successfully for their retirement, standard pension plans have suffered significantly due to the economic conditions, and from other sources we know that Social Security and Medicare can not continue for very long. So, what can we conclude? My conclusion is that the mixed economy, the welfare state in the United States, cannot support the coming old age of the baby boomers, with or without Social Security.

These problems that people have with their savings and investment, the nature of our economic situation, and the poor future prospects are not the fault or the responsibility of individuals. The responsibility lies with the people who control the dominate actor in our economy, the Federal government in its many aspects: the President, the Congress, the Fed (and the intellectual leaders who guided them).

What else did you expect from 100 years of constant legislative attacks on capitalism and the businesses in the United States. That the problem has not been big until now is a testament to American perseverance. It couldn’t last forever.

For the future to achieve the promise of a happy old age, not to mention prosperity for everyone, in the US, a couple things have to happen:

1. The economy has to be freed up to become productive and prosperous. In other words, our country needs to become a capitalist nation. The process of transforming ourselves from a welfare state to a nation that recognizes right must do so in a manner that does not further victimize the present day population, as I discuss elsewhere.

2. People need to revise their thinking about retirement and work. Work is not the onerous thing most people make of it. Retirement for 20 or 30 years, after working for 40, is not generally feasible in good situations, let alone the one we are in today.


This Post is one of three that deal with the issues connected with the entitlement mess and how to resolve it. All three should be read in order to fully understand the issues. The other two Posts are:

A Flight of Fancy (Not Fantasy)

The Right Way to Solve the Entitlement Problem


Thank you.

C.W.