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.

Saturday, June 1, 2013

Monetary Mahem

The more I think about the strange conditions of our current monetary arrangements, the more puzzled and then angry I become. Many people worry about the debt we are leaving our children and I confess it is a staggering sum BUT no one is really expecting to pay it back. We each owe some $70,000. The government is in an enviable position;  it can borrow more money to retire old debt or  it COULD forgive as much debt as it likes. Consider, the Treasury “produces” (sells) a bond, the Federal Reserve creates the money to buy the bond and puts it on its balance sheet.  Since 2008 the Fed balance sheet has gone from $800 million to $4.5 T. It could go higher—there’s no ‘debt ceiling’ vote for the Federal Reserve balance sheet.  Why can’t it be $10 T? Is it possible to create "off balance sheet" obligations, a kind of special folder that's not part of the general balance sheet?  And if the balance sheet became $10 T, why couldn’t the Federal Reserve forgive $5 T?  Who would mind having their debt cancelled? Of course the Central Bank would be “insolvent” but let’s just not tell anyone and keep handing out money. Doesn't the Central Bank determine who is and is not "solvent"?  Is there a Trust issue here?
     So the Federal Reserve CAN forgive any amount of any balance sheet debt.  It has paid for it—it can tear up the note. We owe copious amounts of money to China, other countries, and pension plans and they want their money back.    Whoever sold the bond—Treasury, JP Morgan, has the cash and the Fed has the promissory note and the revenue stream from the bond.  But they don’t need any money, they can get more.   So they forgive it.  They "buy" Mortgage backed securities (MBS) at par value($1) when they are worth 60 cents on the dollar.  They turn around and sell them for 40 cents on the dollar and allow the banks to go to work collecting the 20 cents.  The Fed can buy anything because it creates money and it can sell it (which reduces the money supply since somebody has to give them money for it) or it can write it off, like I have to do when I "loan" my children money and they “promise” to pay it back.  
    Now I ask, Isn’t this a deranged, immoral system? Here is the Federal Reserve, a fountain of liquidity, spewing dollar bills into the economy at whatever rate seems necessary. Many of us work to acquire our dollar bills and here is an organization that can just “counterfeit” whatever it needs.  It doesn’t call it cheating to create money, it calls it ‘managing’ the money supply. When the money supply goes down, fewer will have any money to buy my dental services.  So the plan is to give money, lots of it, to favored recipients so it can trickle down to the rest of us who need to find some way to labor for it. So who cares what Congress decides about its budget? The budget is a theoretical construct, a sort of internal “I should lose weight” irresolution that is not matched by eating fewer calories.  Produce the money for whatever you want to do and never worry about paying it back.  The only worry is that the dollar is "not accepted" for payment. When a sufficient number of actors--countries, trading partners, banks, people consider not accepting dollars for payment, the jig is up.  I will admit this is unlikely.  Infuriating but true.
       So another question is, whose debt gets bought and for how much?  I have some bad debts I would like to sell but I don’t think the Federal Reserve is interested in my failed loans.  When they buy $40 Billion MBS a month they are controlling the market and gradually re-floating the biggest TBTF banks. So you see my problem—Unelected Federal Reserve Governors give money to whoever they think needs it to keep the system afloat:  the Treasury, Morgan Stanley, Deutsche Bank, whoever.  If the system doesn’t get new fresh cash, it sinks (or deflates) and “assets” like bank accounts are in danger of disappearing.     It is ALL funny money. But if you have enough of it you can buy real things.  I quickly calculated that in my neighborhood of approximately 2 square miles, there are 1,000 homes with an average value of $400,000.  Obviously $400 Million in cash could buy them all.  So the Federal Reserve in one month is able to ‘buy’ 100 neighborhoods like mine.   If they bought all our mortgages and tore them up, we’d all be a lot richer.  Could that be what they are doing for the banks?  They replace non-performing lousy bonds with cash and still allow the servicers to continue collecting from the retail debtor. 
     There is no reason to ‘worry’ about the debt. The government should obviously do the right thing and balance its books but it can’t and it is not going to.  It is going to be inflated away, defaulted  on or “forgiven”. There IS a reason to reflect on the justice of the arrangement that allows the unelected to cut themselves checks and forgive selective debts. A good and responsible steward could make this system work and I thought this was what we had.  I thought we had prudent men with vision and a heart for justice working with the best and brightest economists.  But no, we have government policy apologists who want the government to do everything it finds useful and “necessary”.  They do not consider the moral hazard of controlling the value of money.  They should have begun tightening a long time ago to prevent the derivative fraud and bond fraud that is now consuming us.  I knew this in 1995 by shorting the over-valued S&P, was proven right in the LTCM collapse but lost money anyway when the system was “saved” from disaster by central bank intervention. This System is so fundamentally unjust and corrupt that it requires a re-configuration. The elites of government and business are in partnership to maintain their privilege.  They do not have a plan that includes the vast middle class and poor.  The elite are circling the wagons as more and more drop out of the favored class and they are instituting a system where greater and greater benefits flow to a smaller and smaller group.
     Let me re-iterate, the debt cannot be paid in present value money.  Inflation or default:  our two choices.

The above screed is my own rant at a problem well known to the thoughtful.  Money is political.  It is used for political ends to maintain control and order.  So who has political power?  Do “The People” have any say in this game? There is supposed to be a quid pro quo or a responsibility on the part of the government to maintain the value of the money we use.  Proper stewardship we would say.  The monetary authorities were not supposed to fundamentally intervene AT ALL in the system. They are arbiters not actors.  They are not supposed to support a plunge protection team, they are not supposed to bail out anybody LTCM, NASDAQ, TBTF banks, or the Treasury  by increasing liquidity. So now all who have worked hard for the last 15-35 years are about to be savaged by the requirements of the moment that the elites in business and government have KNOWINGLY allowed for the last 15 years.   Congress! What a bunch of paid shills.  It should have been inconvenient to have Congresssmen scrutinizing the Fed Reserve balance sheet. Instead we get off balance sheet obligations that we (the taxpayers) still owe. We get TARP-an unbelievable hoax of a policy that wound up supporting the miscreants who created the problem.  It didn’t solve a problem, it enabled the greedy to keep what they had and keep playing! 
    If we wanted money to support individual freedom we would need a free market system of money.  Free market money does expose us to private greed and malfeasance while public money exposes us to government graft and corruption. (What we are currently experiencing)  Banks that issued private notes and went bust were a fixture of 19th century America and caveat emptor was the rule of the day.  Having a gold system did not mean everyone kept their promises.  If you trusted the convenience of the private market then periodically events would leave you swindled. The private money system had its failures.  It may be however that our public money system is merely leading to a bigger failure.  That in essence is the core of the free market criticism.  The abuses necessary to maintain the system are distorting economic decision making.  Besides the frequent abuses of private money there is the larger problem from the government perspective of the tax consequences.  Private money is ‘outside’ the taxing authority.  It could be said to be part of the shadow economy.  It is not denominated in “legal tender” or tax consequence money.  It is like barter—I cut your grass and you babysit my children.  No tax event.  The government would like ALL economic activity to have tax consequences.  Their pound of flesh so to speak.  Private money facilitates economic transactions without tax consequences.  The government considers that illegal.  Thus if we instituted a free market system of gold, silver, bitcoin, or alternative currencies that were exchangeable into a legal tender system then numerous transactions would happen “off the record” so to speak and taxes would be dodged. Can’t have that.
   So the government has a one true value money system called the legal tender dollar system and all transactions MUST be denominated in this currency.  The government controls the currency but it has reneged on its responsibility to manage it fairly.  It has instituted a policy of financial repression that is designed to save the profligate at the expense of the prudent.  It is an intentional effort to set conditions of the monetary regime that the prudent cannot win.  Let me count the ways:  1) The government has decided that 2-3% inflation is OK AND they define how the 2-3% is calculated.   Calculated  inflation of 2-3%  may actually be closer to 9-10%.  Manipulating inflation statistics holds down mandated payments (federal pensions, SS, etc) and captures additional tax revenue by calling nominal increases that have less purchasing power, gains subject to taxation.  2) the 0% interest policy– shafts savers.  In this universe—any money saved is merely reduced by inflation with no return.  The implication:  Buy something.  Anything.  Or not.  Watch the future consume past earnings like a snake eating its own tail.  3) Investment or capital formation is muddled for all but the savviest thinkers or players.  Perhaps only the connected can ascertain what will survive (Citi) and what will fail (Lehman).  If you are out of the loop, just go shoot yourself and quit complaining.  It works for them.   Politically what can we do? 


First, Know the Game. It is your responsibility to change it if it is rigged. Voting for candidates may not be the best strategy.  Removing your "money" from the system may be a more potent vote. What if you opt out?  Take your money and go home.  Operate under the table.  Set up your own monetary arrangements with friends, link it to the system but keep score in an alternative currency and the currency of human feeling that really matter; love, trust, and affection.