by Michael Myers on December 6, 2009
Daniel Amerman describes the how deflation and inflation combine to reduce the purchasing power of the dollar. Devaluing the dollar bails out governments and companies who have underfunded pension plans. Unfortunately, it transfers money from savers to debtors in the process. Excerpts below.
Link: “Surviving The Cure For Asset Deflation” by Daniel R. Amerman, FSU Editorial 12/03/2009
Many people would say that the true lesson of the early 2000s in the United States is the demonstration what an extraordinarily loose credit policy can do in terms of asset prices. Low cost and easily obtainable mortgages led to a real estate bubble, even as easy and loose corporate bond markets led to a booming private equity market, with leveraged buyouts being an important factor in maintaining an overvalued stock market.
The problem is that Wall Street, the government, and much of America has effectively bet everything they have on these asset bubbles not only staying inflated, but continuing to expand. Pensions long ago became “the tail that wags the dog”, for state governments, local governments and most major corporations. Almost every state and local government in the US that has full time employees has entered into promises for future benefits, which it anticipates being unable to cover from ongoing tax revenues. Some of these promises are unfunded, others are fully “funded” (meaning they have adequate current portfolios given the investment return assumptions), but the mechanism all comes down to the same thing. Via the mechanism of the markets, vast sums of money and resources will flow from the outside economy into the local economies for all the states and cities, and will pay for the legally binding promises that would otherwise be unaffordable from current revenues. In other words – the asset bubbles have to not only be maintained, but must continue to inflate, or else the pension obligations bankrupt every level of state and local government.
Governments aren’t the only ones relying on asset bubbles, so are most of the major corporations. Oh, the defined benefit plans are disappearing fast in terms of the ability of workers today to participate, but there are still tens of millions of workers covered, and many trillions of dollars of pension and health care benefits that will have to be paid. Future benefits that would destroy corporate profitability, and drive many corporations into bankruptcy. [click to continue…]
by Michael Myers on December 6, 2009
Governments and non-governmental organizations around the world apparently have promised more than they can deliver to the citizens and voters.
For the United States, John Mauldin says that we must open the borders to allow more people to immigrate. Unfortunately, the policy conflict between opening the borders and maintaining a war against terrorism is glaringly obvious.
More immigration can create more revenue for Social Security and Medicare. Obviously, the U.S. Government is allowing immigrants to enter the U.S. However, it seems a deceptive way to make amends for the unsustainable promises made by our leaders.
Link: A Conversation with John – Thoughts from the Frontline Weekly Newsletter – John Mauldin
Demographic changes are predictable: we know how many people are going to be here in forty years because they’re already born. We know how many forty-year-olds we’ll have in forty years because they’re already born. So, we can see these changes coming at us.
If you’re Japan, you’re walking into a demographic nightmare. Russia is a demographic train wreck. And it’s not going to be but a few decades, in the grand scheme of things, until Iran will have more people than Russia. That’s got to be fit into your equations. You’ve got to look at these large, broad changes that are happening.
In the US, we’re going to be running into the freight train of Medicare and Social Security. There’s just not any way to get around it. We’re going to have to make tough generational decisions about how to handle that. And how we handle it is going to have enormous implications for our economy. If we handle it the way it’s likely to be handled – which is by raising taxes – then we have said we’re making a decision, conscious or not, that we’re going to become Europe. That means high residual unemployment and difficult, slower growth of individual opportunities.
There are other large changes when you talk about the demographic issues. Europe would have to take massive numbers of immigrants in order to support their system. They’re just not prepared for that. Neither is Japan. The US is blessed with a world population that wants to come here and are not very culturally different from us – especially the Hispanic populations. We’re going to need those immigrants. I think that one of the most economically suicidal things we’re doing today is trying to figure out how to close the borders. We need to be doing the opposite. We need to figure out how to open the borders. It needs to be a more rational policy than we have now. Again, you have to put those things into the financial equations.
by Michael Myers on December 3, 2009
Humberto Cruz at Boston.com reports that 51 percent of US households are now considered at risk of not having enough money to sustain their standard of living in retirement.
Link: Half of Americans at risk for not having enough in retirement, survey says – Boston.com
That’s the case even if they work until 65 – two years beyond the current average retirement age – and take a reverse mortgage on their home and use all their assets, including the mortgage proceeds, to buy an inflation-adjusted lifetime annuity to maximize their income.
In 2004, about 43 percent of households were considered at risk, based on the center’s analysis of a triennial Federal Reserve survey of consumer finances. In 2007, the number rose to 44 percent, the center now estimates, based on that year’s Fed survey. Without waiting for 2010 survey, the center’s researchers decided to update the index in response to the recent recession and economic crisis.
The index needed updating because the 2007 survey “reflects a world that no longer exists,’’ the center’s report says, with the Dow Jones Industrial Average near 14,000 and housing prices only slightly off their peak. [click to continue…]