Monday, June 3, 2013

Retirement Reflections

Savers are foolish because interest rates are ridiculously low.  The bank pays .6% for a 1 year CD and will go all the way to 1.2% if I contract for 18months.  So my $100,000 CD returns $600 a year.  If I had a million dollars it would give me a retirement income of $6,000 a year.  Unless of course I trust some Wall St. shill who wants me to sign an 80 page small print "disclosure" to make me a better return.  They want to put me in SIVs of such sterling quality that I cannot help making the historically fabulous return of 8% or 14% or 21 % and certainly better than whatever industry benchmarks they can find.  I can't wait for the eventual explanation that I only lost x%, 2 or 3% better than industry averages. 

So why the big outcry that Americans are not "saving enough" for retirement?  You cannot simultaneously lament that people are not saving enough and then implement a policy of financial repression and monetary largess that savages the value of the saving.  Is this not obvious?  If the purpose is to encourage saving so that the government can borrow it and spend it, could we say that is a little disingenuous?  In the real world, saving is a good idea.  Everybody should save for a rainy day.  But I believe that the government has stated that they would like to target inflation at 2% which means, reduce the value of money saved by 2% every year.  To borrow money they would like interest rates to be something low, say, infinitesimal, like .1%.  They are currently creating $85 billion/month of new money that they hand out to purchase bonds so that the rate will stay that low.  This is convenient because "somebody" gets to use the new $85 billion for buying things.

 I did a quick calculation.  My neighborhood is a nice upscale Southern subdivision of about 1,000 homes. They have an average value of $400,000: a good number of rich doctors and their $1.2 million homes and some main street 3 BR 2 Bath older homes of $175,000.  Won't $400 million buy them all?  So every month enough new money is created to buy all the homes in MY neighborhood AND 200 other neighborhoods in similar cities. What is this money used for?  Banks sell iffy mortgage backed securities (MBS) to the Federal Reserve and get new cash improving their "bottom line".  The Fed gets lousy paper.  What does the Fed do with this "asset"?  Holds it until it becomes worth more. At some point the Fed may sell it.  What if it just forgave it?  Well the Fed would be "insolvent".  Can the Central Bank, source of an infinite fountain of liquidity, be bankrupt?  Now that The Fed is holding everybody's mortgage why not cancel them all?  Whoopee! Boom. Done.  Everybody's better off and who is complaining?  Perhaps the 22% of homeowners who have already paid off their mortgage and maybe the rest of America that realizes if they had gone impossibly deep into debt, they would now be living in a gift mansion instead of still renting from the same crummy landlord.

So we are currently playing in a rigged game.  Savers know this and that is why they are not saving.  The entire idea of money for retirement is an illusion, a fantasy.  The amount of money you have must be an order of magnitude higher than what is currently needed to cover unfortuitous re-evaluations of your assets. That may be why the super rich are hoovering up all the oxygen in the room.  And as for planning--what is the cost of a knee replacement and a Grand Circle tour of Spain in 15 years?  Who knows?  You might have enough money today but the future is dependent on what government decides to do about the value of your money--it has little to do with how much you decide to put aside.  If the probability of a black swan event: stock market crash or hyperinflation is figured at 5% (or statistically unlikely) there is NO protection for that eventuality.  Again, everyone with money is running a 5% chance that money will be worth much less.  Pick your own likelihood over the next 25 years.   People under 30 have to be laughing at these odds.  What are their chances of getting a nest egg to 65? They would be saving like crazy if they thought it was true that inflation will be "only" 2% for the next 25 years. And by the way how can they consume and save more with a low paying job?  The other strategy is to count on comprehensive deflation. What little money you end up with when everyone pays their debts will be worth MORE.  The likelihood that the government would allow this when they can simply print all the money that people need is vanishingly small.

 Retirement calculators cannot figure the most likely scenarios for the future. Given an unstable monetary system, the completely unimaginable is the future we are going to get.  The term collapse does not do it justice, something personal like screwed would be accurate.

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