Monday, June 14, 2010

Two's a crowd, if the government is one of them


Few Americans today expect that Social Security is going to carry them through retirement, but many still believe that retirement accounts like 401(k)s and 403(b)s, IRAs, plus taxable investments will provide financial security. Before the investment "lost decade" of the noughts and massive federal government economic intervention, that was a reasonable assumption.

Daniel R. Amerman, in an article published at the Financial Sense web site, makes a persuasive case that current ultra-Keynesian, quasi-Marxist government spendthrift policies will "crowd out" the private sector on which growth in retirement funds depends.

The problem isn’t that the US economy fell by $300 billion in real terms between 2007 and 2009. The more relevant issue for long-term investors is that the private economy fell by $1.3 trillion, even while total federal, state and local government spending rose by $1 trillion. “Crowding out” is an obscure term if you're not an economist – but this replacement of the private economy with government spending may end up being one of the largest determinants of your standard of living during retirement.

On the most fundamental of levels, stock market valuations and traditional long-term investing are based upon a growing economy. However, when government spending is surging at rates sufficiently far in excess of economic growth, this means that the private economy is necessarily shrinking. And because the investment models that drive conventional financial planning assume a rapidly growing private sector, this fundamental competition between the government and private investors for a limited pool of future real resources may lead to a collapse of stock market values and conventionally invested retirement portfolios.

Amerman says, in other words, that the government is competing with the private sector.


In that situation, the government "wins." A few large and well-connected corporations will thrive, but business as a whole can be crippled by whatever new taxes, regulations, and restrictions the government imposes, nor can it match the salaries and benefits a bloated and triumphant public sector is able to offer the ambitious.
… What the government is doing is grabbing a much greater share of an overall economy that is shrinking in real terms, as a result of the so-called Great Recession. The US economy was $14.52 trillion in 2007, and it was $14.25 trillion in 2009 in real dollar terms. Federal government spending rose by $700 billion, state and local government spending rose by $300 billion, and the private economy shrank by $1.3 trillion. (Inflation adjustments are based upon the official GDP deflator as of 7/1/07 and 7/1/09, which I and many others believe to understate inflation. With a higher and more realistic rate of inflation, the shrinkage in the real economy is significantly greater.)

Government spending as a share of the real economy rose from 35% to 43% in only two years, a dramatic increase of 22.1%.


In Keynesian theory, government spending can stimulate the private economy. That seems to be true — we've had gigantic government stimulus in the past two years, and at least the stock market has gotten a contact high from it, although not the poor sods trying to find jobs that aren't there. But even classical Keynesianism sees government intervention as temporary, taking up the slack until the normal economic cycle kicks in and the private sector starts


But that's the bit our current masters in Washington don't get, or don't want to think about. Never let a crisis go to waste, and all that. "Stimulating" the economy is a Trojan horse under this regime, a way to expand federal control over the economy … and in turn, over all of us who aren't independently wealthy.

Back to Amerman:
Not only retirement planning, but the very fundamentals of stock valuation are based on the exponential mathematics of endlessly compounding growth. While many people don’t realize it, from a financial mathematics perspective most of the value of the stock market is generally based not on today’s earnings, but expectations about increases in future earnings. With no growth or negative growth, it’s not just that future stock price increases don’t occur – but most of the value of the stock market today implodes. Taking everyone’s IRAs, Keoghs and pension plans with it.
Although he doesn't say so, I suspect that crashing retirement plans are not an unforeseen consequence of the Failed Messiah and His Army of Marching Marxists. They're part of the strategy.

Scupper the counted-on retirement funds of most people and you're well on the way to making those irritatingly independent middle-class folks into government dependents. If the Failed Messiah has his way, in a few years we will be reading breathless headlines and watching moving lips keening about Baby Boomers whose golden years have turned to lead. But wait! Your rich Uncle Sam is going to save you!


All you'll have to do is convert your IRAs, 401s and 403s, pensions, brokerage accounts, and of course any precious metals you might be holding, into U.S. Treasury debt instruments. Have to do; you'll get no choice. In turn you'll receive whatever in the way of an annuity the government believes you are entitled to.

If you don't like that scenario, it's past time to think about ways of heading it off. It won't be easy — 40 percent of the population now receives government benefits and pays no taxes. As in other Western countries, there is a huge welfare constituency that will dig its heels in against any reduction in government spending. Three people in Athens were killed in riots against proposed austerity measures. Don't imagine it can't happen here.

But we're Americans. A self-serving, bloated government — even "ours" — is vulnerable if enough of us make sure that it is.


June 15

I have just received a radio message via a tooth filling from the Army of Marching Marxists. The spoken words were a little hard to make out because of so many background voices muttering "TV speech" … "Bush's fault" … "BP at fault" … "their fault" … "watch the teleprompter" … "kick some ass" … and various obscenities from someone whose name seemed to be Rom E. Manual. However, I was able to discern this much:

"We won! We love the little people so much we going to make them littler! We won! You're a racistsexisthomophobicislamophobic unaccredited journalist. Your dog no riding in my taxi. What wrong with you? We won! We take retirement savings and redistribute so everybody wealthy! Your IRA help pay off national debt, we give you food coupons and doctor visit coupons! Everybody wins, you know what we're saying? We're Army of Marching Marxists, don't you forget! We dangerous for racistsexisthomophobicislamophobics, Constitution-quoting extremists, and farmyard animals! We won!"


Sheila said...

Now you've stepped in it - just wait for the multitude of whingy emails coming your way from all our sainted seniors, insisting that Social Security is not a ponzi scheme or entitlement program: "It's MY money, and they OWE me." Newsflash, folks, we've all been forced to pay, and many of us will never see a dime - while many of the golden oldies now making such a racket will receive far more than they ever paid in - interest included. I would happily relinquish all claim to any and all monies theoretically owed to me by Social Security if the damned pyramid were abolished forthwith. But then, what do I know? I'm part of that increasingly shrinking minority that pays taxes and doesn't depend on others for handouts. Oh, and spare me the "You'll be old some day too; have a little compassion." I'm already past fifty (does that count as old yet?) and I have plenty of compassion for those who deserve it.

Rick Darby said...

Now, now, Sheila! I'm one of your elders -- I won't see 60 again.

The coming wave of baby boomer retirees should, in fairness, receive Social Security payments according to the terms under which they paid in. For some people that represents a lot of money that they had to fork over to the government.

But I don't blame younger workers for being wound up about their SS payments, which they will probably never benefit from because of the massive debt load an irresponsible government has taken on. They should start a revolution. The young have the energy.