Is Contributing to a Retirement Account Worth It?

Adam Taggart
By Adam Taggart on Tue, May 7, 2013 - 12:42am

A growing number of voices are warning investors that continuing to fund your 401k, IRA or other "tax-advantaged" retirement account could be a bad idea.

The general thesis is that the government will find a way to dip into that savings, whether through more taxation or outright confiscation.

This concern falls under the "they'll just change the rules" prediction. Yes, these plans currently offer varying degrees of tax deferment. But what's to prevent the government from worsening or eliminating these benefits in the name of national interests if we get into another 2008 (or worse) type crisis? Or perhaps they'll do this obliquely, like summarily putting your money into special US Treasury bonds to "ensure" you get a guaranteed return (while spending your capital and delivering a real return much lower than its nominal value).

At a recent conference, Jim Rogers and Congressman Ron Paul had this to say:

Rogers: They will take our retirement accounts. They will take our 401k’s. They will say, ‘you’ve all been having such a hard time earning money in your 401k’s, so what we’re going to do is we’re going to save you.’

Paul: I don’t doubt it for a minute. They’ll do what they think is necessary. and they’ll use force, and they’ll use intimidation, and they’ll use guns. Because, you can’t challenge the state and you can’t challenge the State’s so-called right to control the money… I think that’s very possible at that time when things get a lot rockier than they are now.

Yes, this all sounds very extreme. But how much can/should we discount this potential?

Personally, I stopped contributing to these types of government-sanctioned accounts three years ago for these very reasons. Largely because I've heard other investment advisers whom I respect voice the same concerns (though sometimes only privately).

At this point, since there is a lot of anxiety but little visibility that such drastic steps could be taken, I don't actively advise people to stop contributing. But I do think that prudent investors should research the matter, calculate their own assessment of the probability, and invest accordingly.

So I ask those reading this: What's your assessment of the risks, and what steps (if any) are you taking?

Note: If you're reading this and are not yet a member of Peak Prosperity's Investment Group, please consider joining it now. It's where our active community of individual investors gathers to offer mutual support and helpful information to our members who are seeking to build financial wealth across the vast array of investment vehicles. Simply go here and click the "Join Today" button.

58 Comments

Hrunner's picture
Hrunner
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Joined: Dec 28 2010
Posts: 256
In a word- No.

Really, the logic is the same as for the stock market.

Both seem to me more like gambling than investing at present. 

Will the stock market correct this week or next? 

Will the government confiscate my retirement/ force me into T Bills this week or next?

It's like the War Games line, "the only way to win is not to play"

My only question is whether/ when to get out of IRA/ 401k completely, especially if you have more than one.

One of the main reasons I am a member here is to get an "early warning sign" that things are about to turn.  I assume, perhaps naively, that I can make a lot of adjustments rapidly, say in the 1-4 week time frame, which will allow some latitude to 'play the game' a bit longer.  However, I cannot argue strongly against the "Get out of Dodge Now" strategy.

I think the most difficult situation is matching funds.  If the company matches 50% to 100%, then you are still gambling, but the payoff is much higher.  I could see a strategy where you commit a small portion of salary, a portion that you are willing to lose all or 50% of, to a fund that matches (immediately, no strings attached).  And just gamble that things will not turn this year, or you will have enough lead time to adjust.  Then by monitoring PP et al. for warning signs, liquidate the fund with penalties when the time seems right.  Again, only if matching is at least 50%, better 100%.  Anything less than 50%, forget it.

If you are gambling this way, plan ahead.  Run a simulated liquidation.  Know what you have to do.  Even have the letters and paperwork drawn up.  Be ready to use FedEx overnight if time is close (your plan administrator is probably in Oklahoma or Bangladesh).

Some have proposed converting your IRA to self-directed i.e. 'checkbook' IRAs and buy physical gold with it, or invest in a startup business of someone you know trust.  Those ideas have attractive features.  However, the flip side is that I don't how to predict what the government will do with those accounts.  I assume they will ask that you liquidate your gold or shares or whatever and put into UST or pay a horrific penalty.  It doesn't seem nearly as clean and as simple as liquidating now and converting to physical PMs or shares.  They can't tax/ spend what you/ they don't have. 

It's all about risk tolerance, and right now I don't have much.  I'm willing to miss out on a possible additional year or more of bull run in the stock market for the security of doing the safe thing.  The world is simply too fragile and led by very poor quality people right now.

sand_puppy's picture
sand_puppy
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I'm out too

I started to feel that the risk is too high leaving money inside the financial system.  A couple of years ago I  cashed out of my 401k, paid outrageous taxes, and bought physical PMs.  

We set up a "monthly aquisition program" with a PM dealer in Tenn, Franklin Sanders (aka "the money changer") and purchase a small ammount of physical each month.  This is our current retirement plan.

For me, it is not just about risk, but about using my modest savings to move the world in a direction that in harmony with my values.  As Catherine Austin Fitts, Foster Gamble and Charles Hugh Smith all recommend, simple acts like moving one's money are political acts that influence the shape of things to come.

westcoastjan's picture
westcoastjan
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this is where it is really hard to be a contrarian

This article mirrors what my thinking has been for a while now. The risk factors are at an all time high, with new game/rule changes being announced on an as we go basis. But to stop contributing definitely goes against much that we have been brainwashed with for so long. Not that I care so much about what others think, but I am sure many would tell me I was truly off base with my thinking if I stopped contributing.

The big problem is identifying where else to park funds - not  so much with return on investment in mind, but more for guarantee of return of principal! For the small investor there are precious few places or things to invest in, once one has built up a foundation of PM. I don't want to put all my eggs in one basket, and therefore would not go "all in" on PM, which seems to be the only thing that we are able to (at this time) retain control over.

So on that basis I have begun to subscribe more to the philosophy of some PP members who advocate for investing strongly in one's personal resilience and self sufficiency first and foremost. As I go about my day to day life I am thinking more in terms of what can I do to enhance this lifestyle I have chosen, as well as to enhance my enjoyment of life itself? I think that part is extra important. We should not forget that we must try to enjoy each day to the fullest, given the uncertainty of the future.

There are always investments in fine art... For those who imbibe, start and build a great wine or spirits collection. Hard liquor does not spoil. In recent years the price and availability of Scotch has zoomed astronomically due to demand from the newly acquired tastes of the emerging middle class in the BRIC countries. Ditto for fine wine. This will continue, and at some point, with ridiculous transportation costs from fuel, many of these things will not be available to Joe Average. At the very least these will keep pace with inflation, plus they make great barter items! In addition, you get to enjoy them along the way. If it really hits the fan as some think it might, we might as well go out with a fine libation in hand, gazing upon our fine art, and toast the fact that at least the buggers did not steal this from us! wink

Jan

 

 

davefairtex's picture
davefairtex
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Posts: 5058
IRA/401k confiscation - but why?

We all very quickly move from the question "should I continue contributing" right to "will they confiscate it from us" by changing the rules in some way.  I guess that's just the sign of the times.

The last rumblings of this I heard was back post-crash - I think it was back in 2009 - when the Treasury posted a request for comments regarding conversion of retirement accounts into annuities.  I don't think any underlying situation has changed on this in that I don't see any decisions having been made.

That said - there are a number of nations in the eurozone that have seized pension funds and have put those pensions into sovereign bonds, on orders from Brussels/ECB/IMF.  Spain, Ireland, Portugal to name three I can think of.  The whole thing reminds me of that bank robber Willie Sutton who, when asked why he robs banks, responded - "because that's where the money is."  Compared to GLD, the amount of money in pension funds is really vast.  If you're going to confiscate something, might as well confiscate something big, right?

And since its all so very digital, it makes it quite simple.  To avoid major equity market dislocations, its possible that a simple rule change is all it takes.  "All new money must be invested in US treasury bonds."  Rule gets implemented by the brokerage firms.  And the early withdrawl penalty gets upped to 20%.  Or more.  So instead of seizure, its just coercion which ends up acting the same when viewed from the 30,000 foot level.

Am I continuing to contribute to my IRA?  No I am not.  Getting a distribution is easy, accomplished with ACH, takes 2 days, the money lands in my checking account at my favorite bank.  I've tested this, works great.

But let's go to the next level.  Why were those pension funds seized in the eurozone?

1) they had a sovereign debt crisis, and 2) they couldn't print.

So for a US seizure scenario to play out, most likely the Fed will have run into limitations on its ability to print, AND the US must have a sovereign debt crisis.  Otherwise there's no need to seize anything.  My opinion is, if it is your belief that the Fed has the unlimited ability to monetize, then do not worry about the seizure scenario.  Unlimited monetization ability means no sovereign debt crisis.  You get a currency crisis instead - there is no free lunch, alas.

Its my opinion that the 401k/IRA/Pension seizure activity belongs in the deflationary crash/sovereign debt default/limited money printing outcome postulated by Nicole Foss.   It happens to be unfolding right now in the eurozone periphery.

I think its a possible outcome here too - a high enough possibility that I want to watch events closely and take at least basic precautions against such an outcome.  And if the Nicole Foss scenario starts to take shape seriously in the US, that IRA of mine is the first thing I throw under the bus.

robie robinson's picture
robie robinson
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Posts: 1148
No, there

isn't sufficient need to contribute. I had, 6 or 7 yrs ago, a SEP. I thought about it too much. Closed it and withdrew the funds over 3yrs. Now I've nothing to worry about except crows,squash vine borers,colorado potato beetles, the list of agrivations is long but its different now. We are happier now.

sand_puppy's picture
sand_puppy
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Posts: 1754
Out of 401k and Fiat

Dave's and Jan's posts (and now robie's) reminded me that the moves we are describing out of retirment accounts are more than that.  They are "Out of the financial system AND out of fiat currency (as our storage vehicles) AND withdrawing support from CHS's neofudal system."

I appreciate CHS's explanation today on zerohedge of a mechanism by which wealth is transferred from the lower 95% to the upper 1% (the financier class).  Paraphrasing:

1.  The financier class offer's itself free money (zero interest rate loans = free money).

2.  The financier class purchases essential resources like rental housing, utility companies, privatized freeways, private hospitals, privatized parks, beaches and postal services.

3.  The working class then pays rent for the priveledge of living in houses, turning on lights, driving on roads, going to the doctor, mailing letters, hiking in the mountains and swimming at the beaches.

We are not supporting THAT, either.

 

 

robie robinson's picture
robie robinson
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Sand-Puppy?

thats what is meant by "going Galt" its a movement. we, my wife,kids,and I were some of the first to "go Galt". It is very freeing.

 

AustinHorn's picture
AustinHorn
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Posts: 18
Looking at this from a different point of view

I'm a CPA and now a CFP and financial advisor.  My training was under the back drop of "invest for the long-run", efficient markets, blue pill-type standardized financial education.  So this website, among others, has been highly enlightening.

Like Dave, I think that the confiscation issue is down the list in terms of concerns.  But I certainly think those are all very conceivable outcomes for a nation/world with an insolvent government and citizenry.  With that in mind, I look at contributing to 401k's, IRAs and other retirement plans from a different point of view.  I think it may make sense to reduce (or possibly eliminate in certain circumstances) those contributions for these more important reasons:

1.  Diversification (by account type) - I see alot of clients who push all of their savings dollars to tax-deferred retirement vehicles.  When they have a cash need that can't (or shouldn't) be met by their emergency fund, they either have to borrow from a 401k or take a distribution from a retirement account that will get taxed as ordinary income and possibly get hit with a 10% early withdrawal penalty.  I think everyone needs to have sufficient liquidity outside of their emergency fund in non-retirement vehicles.

2.  Diversification (by asset class) - In most employer-sponsored retirement plans, there are very limited investment options.  It is also very difficult to invest in PMs in individual retirement accounts.  It's very easy to buy these types of assets outside of these accounts, however.

3.  Distribution Planning (Tax diversification) - All distributions from traditional IRAs and 401k's are taxable at ordinary income tax rates, while distributions from nonqualified accounts/assets are not (income from these accounts, however, is taxable).  If you have a good mix of Qualified/IRA assets and nonqualified assets, you can easily manage your tax bracket down once you begin the distribution phase by selecting which type of asset you drawn down on.  Too often, I see clients that have only IRAs/401k assets to draw down on, which leaves no room for tax efficient distribution planning.

4.  Government Reporting - Only income and gains from nonqualified assets is reported to the IRS.  Retirement distributions AND their account values are reported to the IRS via forms 1099-R and 5498.  So they already have a mechanism in place to track how much you have in any particular retirement account.  No such mechanism (that we are aware of!) currently exists with nonqualified accounts/assets, at least not yet.  This point, while government related, doesn't really have to do with confiscation.  I just prefer the government to have less information about my assets than more.

While there is a (possibly valid) fear that there might be government confiscation at some future unknown date, all of the above items are more important reasons, IMHO, to make sure you don't ignore savings to nonqualified accounts/assets.  

My wife and I are both in our early 30's.  Until about 2 years ago, all non-emergency fund money was directed towards maxing out our 401k plans and our Roth IRAs.  Now, we contribute just a bit more than the maximum we need to get our company's matching contribution.  Everything else goes to a taxable brokerage account, monthly purchases of PMs, cash for a possible future purchase of land, and investments in our personal resiliency.  If we continue this plan, it will allow us to be prosperous no matter the outcome.

Wade

westcoastjan's picture
westcoastjan
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Posts: 561
correction to my first post

Re Scotch, I meant to say prices have been increasing with supply decreasing due to decreased demand from BRIC countries. Quality, high end singly malt Scotch could theoretically be a great investment as only so much is available in any given year. Having previously worked in a BC government liquor store, I can confirm there were times that we could not get our hands on some products as it had already been bought up by China and India. Food for thought...

Jan

Jim H's picture
Jim H
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Posts: 2379
WestcoastJan

I already have two bottles of Oban in my prep's.. may have to add more now   : )

Grover's picture
Grover
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Posts: 799
here's to the future

I woke up about a dozen years ago from my financial slumber. Being a slow accepter, I kept contributing the maximum amount to my 401(k) account. The first 5% had varying degrees of corporate matching. In 2004, I quit contributing completely. I wanted to withdraw my funds, pay the penalty and taxes, and then use the funds outside of the system. Corporate policy prevented me from doing that while I was still employed.

My situation has changed recently and I'll be able to withdraw my funds this year. I ran a TurboTax scenario to see what it would cost (using last year's tax rules) to take it all out this year. Additional taxes would be slightly more than 30% of the account balance. Taking the amount in 3 equal lumps reduces the increased tax to just under 27%, but leaves me exposed to rule changes.

It all boils down to comfort about expectations. Too many promises were made over the years. They can't all be kept. Social Security is a prime example. Social Security is nothing but a Ponzi scheme. Nonetheless, those of us who have "contributed" all our adult lives should have a reasonable expectation of receiving benefits. Eventually, it will blow up just as all Ponzi schemes do.  I suspect that Social Security will eventually be a form of welfare. It already is moving in that direction. My neighbor told me that 85% of his benefit is taxed. It wasn't always like that. The question is, how will the erosion continue, not will it continue?

Changes have to be worthwhile and justifiable (at least on the surface.) I suspect they will attack financial assets first - 401(k) and IRAs contain a significant balance of funds and it will be easy to paint those with funds as somewhat cheating the system (you did get a tax benefit, right?) Primary housing will probably be exempt for quite a while. <Speculation warning> If you have any recognizable assets, those will have to be used before receiving funds from the Social Security Administration - SSA (note: Literally, this is ASS backwards.) Punish those who have saved. That little change would reduce the expenditures in the near term. This "can" could be kicked a bit longer down the road. Isn't that congress' ultimate goal?

I'm leaning toward withdrawing my entire balance this year, paying the increased taxes, and then losing all of it to gambling debts. ;-) That way, there wouldn't be a trail to assets that can be used against me.

I'd sure like to hear where I'm off my rocker. This is a big step to take. Thanks,

Grover

grandefille's picture
grandefille
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Posts: 35
Carrots are better than sticks

I listen to The Survival Podcast, and agree with the host's position on retirement accounts.  Namely, that outright confiscation of such accounts would prompt a strong, negative response from middle class owners of those accounts.  It's much less risky for TPTB to offer a "great deal" which accomplishes their goals and doesn't create citizen outrage.  For example, if treasury rates are starting to rise, or TPTB believe that is a credible risk, they could offer to convert 401(k) funds to a treasury obligation "guaranteed" to pay slightly more than current interest rates at the time of offer.  Sheeple would be happy to have the higher, "safe" income.  If interest rates skyrocket after such a conversion, people would be unhappy, but believe that they made a free choice.  The government would have a low long-term cost of borrowing, and be somewhat insulated from rising interest rates.

As for me, since 2011 I'm contributing only to get the 50% match, and no more.  I also save 3 times that amount outside of tax-deferred accounts.  My total savings are divided equally between tax-deferred and regular accounts.  If I were to see something like the above scenario receive serious discussion in Congress, that's a sign to withdraw my 401(k) funds and pay the penalties.  I'm not withdrawing not because I have a fairly high income.  My tax rate will go down substantially in a couple of years when I leave full-time employment.

Julie

westcoastjan's picture
westcoastjan
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Posts: 561
another correction!

I meant to say prices have been increasing with supply decreasing due to decreased increased demand from BRIC countries.

The way I am typing today you would think I was into the Scotch... LOL!

 

RoseHip's picture
RoseHip
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Posts: 147
What kind of World

Are people saving 401k/IRA plans to retire or live in? Is today's version of retirement really going to be an option on the table for people not currently in their 40's or 50's?

Rose

Time2help's picture
Time2help
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Posts: 2765
I'm out

Been out for a while.  Why support the system?

GiraffeOK's picture
GiraffeOK
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Posts: 36
Cash out and buy rental property?

Would it be a good idea to cash out the 401K/IRA to invest in a modest rent house? If the wealthy are buying rental housing, isn’t it a good idea for me as well? I know some of the drawbacks – possible housing crash, difficulty finding good tenants with the ability to pay, illiquidity, depreciation, taxes, – but at least a house is a physical asset capable of providing an income. Thoughts, anyone?

thc0655's picture
thc0655
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Posts: 1512
We're out

In 2010 we converted our 401-k's (neither of us had ANY matching) to self-directed IRA's (one gold eagles and the other silver eagles, stored outside of "the system" a 45 minute drive from home).  We haven't contributed to either since then, but are currently saving/investing for retirement outside of "the system" in tangible wealth.  In 2 years we'll start withdrawing IRA eagles at as fast a pace as practical considering the tax code at the time (of course we'll be hoping for a huge drop in the spot prices to limit our taxes :)).

Confiscation or forced conversion to govt bonds seems like an unlikely, but very high impact, scenario.  Since the govt can't convert our eagles electronically to govt bonds, my assumptions are that we'd be near the end of the line nationwide for confiscation and that the process would be obvious and slow.  My plan is to stay plugged in here and elsewhere and when I see the handwriting on the wall to physically get to the vault before they do, physically withdraw, and deal with the aftermath later.  That seems like a dire and chaotic scenario where many small fish might slip through holes in the nets.

thebrewer's picture
thebrewer
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Posts: 110
We're half out

We stopped contributing to my SEP 4 years ago and to my wife's 401k three years ago. We did the 401k a bit longer because of the matching funds from her company. Had not to take free money but two years ago as her company started cutting back, the first thing to go was the 401k match. At this point we stopped contributing.

I took my SEP, paid the penelty and put it into physical PM's. As far as the 401k went, we have moved half the money into a cash account to hedge our bets a bit. I wish we could get it out but that is not an option unless she leave's her job. That tells you a little something right there about government control of YOUR money.

BSV's picture
BSV
Status: Silver Member (Online)
Joined: Jan 26 2009
Posts: 170
Out

I'm a retired small business owner. My wife and I had a defined benefit plan, which I terminated a decade ago and transferred the funds into IRA accounts for the two of us. Last fall I finally had enough of the uncertainty, so we terminated the IRAs and paid the tax. We immediately felt poorer, but that was an illusion.

For those with IRAs and other tax-deferred accounts and who are considering whether to terminate them, it helps to remember that the federal government has a claim against your account. So let's suppose that your account is a nice round number -- think of a number that relates to your own situation. Actually, the net value of your account is 35% or so less than that, depending on your tax bracket. Once you accept that, the decision to terminate and pay Uncle Sam his due becomes easier.

The decision becomes a lot easier if you think that taxes are only going up in future. The federal government is currently borrowing -- what is it? -- 40 cents of every dollar spent? This is insane.

Lnorris's picture
Lnorris
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Posts: 105
We're half out too

We're half out too.  We have both stopped configuring as of 2011 to 401k's.  I took the penalty and pulled all of my retirement out and converted to PM's. Due to empoyment the other half remains locked away in the other 401k acct.

We refinanced our mortgage this year and are living on one salary. The other salary is going to pay down the mortgage and regular purchase of PM's and improving our resiliency.

I'm more concerned with another MF Global disaster or the government converting retirement accts to treasury bonds.

My father in law was a Sr. VP at a large bank for many years. I recall him saying a couple of years ago that the one thing he hadn't counted on in retirement was inflation.  I found it amazing that he actually said this given the line of work he was in.

Wendy S. Delmater's picture
Wendy S. Delmater
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Posts: 1982
limited options

I toolk all of my money out of my IRA, paid the taxes and took the penalty hit. It all went into tangible things related to resillience: garden, well, woodstove, insulation, solar hot water, mold prevention (changing out building materials) and such. I could only do so much. Mine was the much smaller half.

My husband still has part of his retirement money in a pension . He's one of the few in the company that has an actual pension, but he transferred in from a division that had them 30 years ago. The rest is in a 401K and they no longer let people borrow from it - company policy. He's putting in funds to get the matching amoutn for now. We can convert part of it to a Roth IRA and are considering doing that via the HAA. But if TPTB want his retirement monies, we are up the creek except for what I've done, at least until he reaches full retirement age. He pays alimony and aftet that's paid we'd have $200 a month to live on if he took early retirement. Full retirement is soon, so we have our fingers crossed and a little bit of PMs which we are adding to.

And we started a small business in the home. It's something.

Gratidude's picture
Gratidude
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@GiraffeOK

No need to cash out. Search online for "Checkbook IRA" or "Real Estate IRA". I moved one of my IRAs to IRAServices.com and so far they've been great. Financially I think the smartest thing is to rent your primary residence and then own as much cash-flow positive (or neutral in the near-term) income property as you can find. The income keeps up with inflation, it requires very little effort after the purchase, and it is a significant barrier to any govm't confiscation efforts. The trick is to buy smart. 

Most people seem concerned about tenants. I've got many employees and many rental units. Trust me, tenants are a far less hassle than employees. If you've raised a well behaved teenager you can easily deal with tenants. 

Oliveoilguy's picture
Oliveoilguy
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Posts: 578
Checkbook IRA
Gratidude wrote:

No need to cash out. Search online for "Checkbook IRA" or "Real Estate IRA". I moved one of my IRAs to IRAServices.com and so far they've been great. Financially I think the smartest thing is to rent your primary residence and then own as much cash-flow positive (or neutral in the near-term) income property as you can find. The income keeps up with inflation, it requires very little effort after the purchase, and it is a significant barrier to any govm't confiscation efforts. The trick is to buy smart. 

Most people seem concerned about tenants. I've got many employees and many rental units. Trust me, tenants are a far less hassle than employees. If you've raised a well behaved teenager you can easily deal with tenants. 

Worth a look.

GiraffeOK's picture
GiraffeOK
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Posts: 36
Real Estate IRA

I was aware of Real Estate IRA’s but thought they were too much hassle and too restrictive. But postponing the tax hit would give me about 30% more working capital to invest in a house. Thanks for the suggestion, Gratidude. I’ll check into it.

Hrunner's picture
Hrunner
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Posts: 256
Thanks Jan for the Reminder in Alternatives

I like your line of thinking.  Tools and personal resilience, because it will benefit you directly, without a middle-man, and libation because of appreciation.  "Libation without devaluation!"  I like the sound of that motto.

One thing that is sad, but also illustrative of the current distortionary environment, investing in one's self and and one's local 'stuff' only is kind of against the idea of capitalism.  The whole idea of capitalism is that I could be profitable, and take my profits and support other worthy ventures, thus making everyone wealthy- capital provider, capital recipient, community.  This is appropriately 'spreading the wealth', not the other manner like our marxist friends believe is the way forward.

H

Hrunner's picture
Hrunner
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Posts: 256
Dave, soon they can't print

Hi Dave,

Good reminders and analysis as usual.  I would simply add that the utility of QE is already rapidly running out, as evidenced by the poor GDP and dismal jobs numbers.  Stock market is up because Wall St has low operating costs (few employees and not expanding new physical plant), low borrowing costs, and is buying back its own shares with low cost debt instruments and profits that they do not want to invest in growth i.e. new employees, aquisitions and new physical plants.  Anyone will a modicum of sense knows this works for a little while, but in an exponential debt system, true (actual) growth must happen, or die.  I.e., you can mothball your R&D for a year to save money, but what happens in year 2?

The future is becoming more clear to me.  There is fake wealth, money printing by the Fed, and real wealth, the holdings of citizens.  Soon enough, QE will come to an end.  Repudiation of the USD, a credit system that is fully constipated and dead, an alarmingly uptick in inflation, all or some of the above will stop it.  What then?  Two choices, hyperinflation and currency devaluation or confiscation of citizens wealth to pay the bills.

Contemplate these two simple diagrams from Credit Suisse via zerohedge:

let's see, I can go after the 32 + 8 trillion of the millions of less that $100,000 USD (billions actually) of voters, who coincidentally have weapons and the ability to form giant riots, or I can go after the 85 +69 trillion from a 350 million total crowd who have the ability to withdraw financial support to my campaign.  Not a great choice (would Chris say a 'predicament' or a 'dilemma'?), but if scenario playing, I would choose door number two.  The "wealthy paying their fair share" starting to sound familiar?

Harvey Dent and others believe that deflation is inevitable due to demographics.  I think it's a thoughtful argument.  However, I'm not convinced.  It's looking more and more like a confiscation scenario.  Graphs and data like above speak loudly I'm also quite sure there will be dozens if not hundreds of unintended consequences along the way (even rich people will do irrational things when backed into a corner), which is what we need to be resilient for.

 

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jmcsd
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Quote: "No such mechanism

Quote: "No such mechanism (that we are aware of!) currently exists with nonqualified accounts/assets, at least not yet.  This point, while government related, doesn't really have to do with confiscation.  I just prefer the government to have less information about my assets than more."

Unless you're holding PM or other reasonably untraceable assets, the USG knows everything you have.  The extent of this knowledge was revealed to my wife and I when applying for my mother-in-law's MediCal long term care.  At the SSA interview, they knew where every nickel was that she had in both qualified and unqualified plans, real estate and values, mortgages, and registered automobiles, bank accounts, etc. SSA demanded an accounting of how unqualified money was spent, when, and by whom for accounts dating back seven years.

Do not live with the idea that "No such mechanism...currently exists with nonqualified accounts/assets..."  They know everything including how you spend it and where.

JMCSD

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tbh524
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Posts: 10
Pulling out of a 403b plan

Maybe this isn't the best forum for this but the subject fits with what I've been thinking about this account for some time.

I have a special retirement account called a 403b which is like a 401k except for educational institutions.

I stopped putting $$ in long ago but it has a fair amount in it that I would prefer be used elsewhere.

Problem is, I was told I cannot pull my own money until I reach a certain age(many years away) or I quit the job at the institution where I made the contributions. Does anyone have any expertise on these types of plans? I'm willing to pay the taxes and penalties but I can't quit my job!

Thanks!

 

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davefairtex
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Posts: 5058
IRA confiscation, deflation, and/or printing

Hrunner -

The confiscation scenario and deflation do actually work together.  Capital runs and hides when the government starts swiping it and taxing everything in sight.  Look at France for an example of this.  Anyone rich enough to be a target flees the country to - Belgium, for instance.  Property values in Belgium are doing quite well thank you.  My hypothesis: its rich people running from France.  Same thing happening in London.  Rich Greeks and Spaniards are fleeing, and buying property in London.  The harder they chase it, the more it will run and hide.

Likewise, small business owners won't be encouraged to expand business or buy new machinery if their retirement money is put in jeopardy.  The more uncertainty there is, the slower the economy will go.  Risk taking will drop across the board.

I don't think the US will directly steal pension money via some sort of "wealth tax" they way they do in France.  Possible certainly, but I'm more worried about them seizing my actual cash and replacing it with an account filled with "special" treasury bills that can only be sold when I retire, and then, sold only at a certain rate - Social Security writ small, as it were.

But this sort of thing will likely only occur if there is a sovereign debt crisis here in the US.  And likely, that only happens after Europe and Japan have their respective denouements.

So I think we have some time.  That assumes there's no Black Banking Swan that hits in the meantime.

However, I have a real question if the US could ever suffer a sovereign debt crisis if the Fed really stands ready to be the buyer of last resort for US Treasury bonds.  And yet, that's a policy choice.  I'm not sure what choice they'd make - repurpose pension money, or monetize.  Perhaps the answer is some of both, to avoid a currency crash.

In this US sovereign debt crisis scenario, monetization is much less about stimulating the economy, and much more about making sure all that US Treasury debt (both new, and the stuff that needs rolling over - the average duration is something like 5 years) gets bought by someone.

 

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westcoastjan
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I am with you on that

Hi Hrunner,

Thanks for the reply post. I think I will print off a little banner "Libation without devaluation" and paste it somewhere important (in my banking file?!?) to remind me that there ARE some things we can still control! (Mind you the buggers could very well do the prohibition thing again, but I think if anything were to stir up violence in the masses, banning booze would be it! cheeky)

I agree with what you said re the capitatlist perspective. I come from a family of entrepreneurs. From where I sit, my father and my siblings, and what they accomplished in building their respective small businesses, is the epitome of the capitalist model. All are (were) good employers, acted with integrity, treated people well, hired disadvantaged people, and did well by their families, friends and communities. This is capitalism at its best, with the reciprocal benefits trickling down into the places where they lived.

What we are seeing now is waaaay beyond a gross distortion of what capitalism was meant to be. It has morphed into nothing but a greed fest, and it makes me absolutely sick to see the havoc they are wreaking on the very people like my family members, amongst all the other middle class folks who worked so very hard for what they have. That can really make the blood boil!

But don't give up hope on the good type of capitalism just yet. I see all kinds of opportunities for little business ventures just from the many things that are talked about on this site. For example, start a business helping apartment dwellers do balcony gardening or balcony solar power. There are all kinds of possibilities for those who are "go-getters".

I have been thinking a lot about this retirement account thing since this article was posted. Reading the comments, what I see is an almost across the board loss of confidence. If there is any one thing that will be the death knell of the financial world, it will be loss of confidence. I know that we "Martensonians" (gotta love that word!) are but a spit in the bucket when it comes to awareness. However, I detect a subtle shift out there, with more people starting to at least pay attention. As many have said here, a lot of people seem to have an inkling that something is not right... were our loss of confidence to infect those around us, who in turn infect those around them, we will quickly move from the slow burn to the raging fire, of that I have no doubt.

I am sad for all the people who have children and grandchildren, and how they must be really confounded about what to do about this current situation. It seems the noose is tightening with regard to how a person can save to take care of their families futures. I do not envy you with the choices you will have to make. For those who do not have land or a homestead, it is going to be tough I think. I am by myself, making it that much easier to make decisions on the fly. I have made "flexibility" in my financial affairs and as well as physical and financial mobility my number one strategy. I can't control what TPTB do, but I sure as heck can and will do things to keep myself one step ahead of them. This site has been instrumental in shaping that outlook, and the preparations I learned here have given me confidence to make the right decisions at the right time. On the bright side of things, at least I live in place where I can do that...

At the end of the day, I think investments in myself, my well being, and my enjoyment of my life are far more important than a few bucks in the bank - which given our current situation, I now have to worry about whether or not they'll be there tomorrow or the day after.... what a way to live. Gee, it's enough to drive a girl to drink Scotch! wink

Jan

 

Hrunner's picture
Hrunner
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Posts: 256
Dave, US is already in a sovereign debt crisis

Davefairtex,

I agree with your idea of capital flight, however please consider these two counter-arguments:

1)  For the first time in history, the strong majority of the globe is following the same monetary template, and, worse, the leading central bankers meet with each other, and I believe co-ordinate at some level.  Result- there will be no place for money to run to and hide.  Especially considering the scale of tens of trillions of dollars (please see above pyramid diagram).  So the "run and hide" strategy works for a handful of people, on a much smaller scale.  You need to remember that the biggest part of capital, retirements and pensions, public funds, is sitting in institutions that will never offshore to St. Barts or similar.

2)  I think it is likely capital controls will happen very quickly, with little warning, perhaps over the weekend.  Money will not have time to move, even if it could (see #1).  Please see Cyprus.  Again, while a small number of people and dollars can move, again the vast majority will be trapped.  It is an open question whether the transition will occur 'in series'  i.e. Japan then EU then USA, or in parallel.  Series means more disruption likely, spread out over many months to years.

Japan, like the US, is already insolvent.

Please listen to the podcast by Christine Hughes at Otterwood Capital Management, posted at tfmetalsreport.com

http://www.tfmetalsreport.com/blog/4700/todays-assignment

Keep reminding yourself that half the USA has less than $50,000, most much less.  The 47% has their stake in their social security and medicare future, not in private accounts.   What do they care if money is confiscated from "the rich" and converted to T Bills?  It was ill-gotten anyway, right?

 In other countries, the imbalance is much greater.  Government "leaders", who have a personal vested interested in staying in power and control, and feathering their own retirement and futures, will throw the 53% overboard, however immoral or stupid that plan is. 

The USA I believe is already mathematically insolvent by the technical definition that we have made monetary promises (debts) we cannot keep (someone once corrected me that an entity that can print money can't be bankrupt since it can always print its way out of debts).  So please consider changing your language from "if" the US has a sovereign debt crisis to "when" and "how" the US deals with its sovereign debt crisis.  If nothing changes (nuclear fusion, 100 billion barrels of oil discovered), sovereign debt crises will manifest really in only one of two ways-  bond yields will rise to crushing levels (see Greece), and in Japan, this rise does not need to be very large at all to swamp all tax revenues (again, see Christine, and Kyle Bass).  And then once a country's interest on debt exceeds tax receipts, what do you do?  Actually, I believe it will happen much sooner than that as bond holders will demand ever higher yields when interest is only 50% of tax revenues, e.g.  Then finally you tell your debtors to go pound sand, and declare an official default a la Argentina in the 1990's.  Then everyone gets a new monetary standard (sounds simple, no?).   Or, as you correctly point out, central banks buy all the debt.  This is not benign but highly inflationary and simply pre-currency collapse manuevers.  These are just two responses to the same sovereign debt crisis with equally bad results.

Japan is insolvent (see Christine Hughes explains well). EU is insolvent. The US is insolvent.  They have encumbered debts that cannot be paid. There are two paths forward, two variations on a theme- default by repudiating debt, which aligns more with the deflationary scheme, which means essentially tell creditors, and US retirees expecting large pensions and benefits, that you ain't gonna pay, you are going to get less.  Inflate, which means "I will print like crazy to pay you back, however, your dollars will be worth half as much as you were expecting", which is to anyone with half a brain, the same result as repudiation.

Inflation is more mysterious to the 'low information voter' and easier to stomach politically, so I've been of the view that this is the path that will be chosen. I personally believe that repudiation and belt-tightening (austerity if you will, despite the protestations of our liberal friends) is more moral, more controllable, and gives you more choices about the future. I think inflation, just like in Weimar Germany, will have some very unpredictable and very unwelcome outcomes.

 

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Sirocco
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Depends on individual circumstances and risk assessment

To the question of whether people should continue contributing to their retirement accounts or not...

Excellent question! I've been contemplating this very topic quite a bit lately, so I've really enjoyed everyone's ideas on this. My view is that each person has a unique set of circumstances, assessment of and tolerance for risk, and need for "wealth" and security after ending paid work - that will determine how they prepare for "retirement". There is no "one size fits all" answer, but there area number of factors to consider, including age of the individual, perceived required standard of living for the individual, risks specific to the individual's circumstances, etc.

My current opinion on the world situation is that there are a host of enormous risks out there (the usual 3 Es, plus terrorism, pandemics, and all the rest), and one day one or more of these risks will hit us, probably in a big way. However, I think that, absent a black swan event, TPTB will keep juggling the balls for some time yet. How long? I wish I could say, but my guess is years, maybe even 10 - 20 more years. And I think the "economic collapse" is likely to be more of a slow descent down a ladder of "more of the same" (ie every day most of us get poorer, the super rich get richer, and the earth gets more razed ) than a sudden BAM! now the world is completely different. 

So, I've done, and continue to do, my risk assessment; and I've identified 2 categories of risk with what I figure to be a high probability - 1) black swan events (which by definition are upredictable) and 2) slow grinding "global progress" into a poorer and poorer standard of living for nearly everyone and everything. Once an individual has assessed their risk, then they can decide how to manage those risks. My personal approach to risk managment is to diversify; to try to cover as many bases as is practical. The basic needs for survival (food, water, shelter) are required no matter what the situation is, so in my opinion they come first. Additionally, I think that "owning" the means to produce those items is the only way to guarantee that you will actually have them - so some years ago my family purchased 60 acres of forest land (which essentially gives us unlimited firewood to stay warm, and plenty of room for growing food) which we continue to improve and develop. Our property gives us the means to fulfill our basic survival needs.

Once a person has covered their basic survival needs, then they need to consider how they will procure those items (goods and services) that they can't produce themselves. This is where "money" comes in. Everyone is going to need "wealth" above and beyond their basic survival needs - how much wealth is unique to each individual. Given that I am approaching age 60 and I believe the current economic paradigm is going to continue for some time (years), my partner and I continue contribute to our traditional retirement accounts. Since we will begin drawing on those accounts within a few years, I think that there is a good probability that the funds will still be there to draw upon. If I was younger, say with 15 or more years to go before being able to draw on the accounts, I might opt for a different course of action. With diversity in mind, we also have a small amount of PMs in our possession; but we also have been collecting tools and skills for a low-energy future. We are working on being able to produce some trade items directly from our land (timber and lumber, but also fruit, beer and maybe hard spirits).

Where "wealth" (however you want to measure or define it) is concerned there are absolutely no guarantees. Every action (including inaction) is a gamble. Consider that even economic collapse is not guaranteed, so contributing to traditional retirement accounts might make sense for some people. Boils down to each person's circumstances and risk managment strategy...

Poet's picture
Poet
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Posts: 1891
Diversification - Including Retirement Accounts - May Be The Key

In your frenzy to divest yourselves and pay the taxes and penalties (and possible state taxes and state penalties on top of the Federal taxes and penalties), don't forget a few, often-forgotten advantages of retirement accounts".

Considering filing bankruptcy - especially due to medical bills?

"In 2005, Public Law 109-8 [2] amended the Bankruptcy Code, by exempting most organized retirement plans, even those not subject to ERISA, and accorded them protected status, claimable as exempt property by a debtor declaring bankruptcy under the U.S. Bankruptcy Code.

"Now, most pension plans have the same protection as an ERISA anti-alienation clause giving these pensions the same protection as a spendthrift trust. The only remaining unprotected areas are the SIMPLE IRA and the SEP IRA." (Source.)

How about if you lose your job and want to apply for food stamps?
There is a $2,000 household countable resource test (such as money in a bank account). But thank to changes in the law in 2008, that test currently excludes most retirement accounts like 401(k), 403(b), traditional and Roth IRAs, etc. (Source.)

Either of the above scenarios may be more likely for millions of Americans than an eventual out-right confiscation.

Poet

davefairtex's picture
davefairtex
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Joined: Sep 3 2008
Posts: 5058
insolvency, sovereign debt crisis

Hrunner -

I don't think I can respond to everything you said - I'll just take the easy bits.  :-)

First, sovereign debt crises.  The US isn't in one, at least not by my definintion.  In my world, a sovereign debt crisis occurs when the interest rates on a given sovereign debt in the free market jumps dramatically, making the interest payments impossible to service over the long haul.  By that (rather rough) definition, Greece had one, so did Spain, and Portugal, and Ireland.  But neither the US, nor Japan have had rates jump just yet, so a result, both nations still have room to maneuver.

By my definition, the crisis is only realized when confidence in the debt of that nation snaps.  Its the old thing about snowflakes and avalanches.  The potential might be large for an avalanche, but the actual crisis only occurs once the right snowflake touches off the avalanche.

I don't think the US (from a sovereign debt standpoint) is past the point of no return just yet.  I believe Japan is.  Neither nation is in actual crisis.  If they were, rates would be substantially higher than they are today.  If the US doesn't alter our track we'll get there soon enough, but I don't think we're there yet.  Kyle Bass is talking his book; he believes in the trade or he wouldn't have done it, but in some sense, he's trying to transform a potential avalanche into a real one.  In many ways its like the goldbugs who are trying to talk the world into engineering a COMEX default.

As regards insolvency - I don't believe the US is insolvent due to currently funded social programs.  A treasury bond, and a social program funded by an Act of Congress are not the same thing.  It's not the same level of "promise".  Recipients that don't get what they are getting today have no standing to sue the government for non-payment.  "Last month you gave me an EBT card, and this month you stopped!  I'm gonna sue!"  Good luck with that.  Congress waves that magic legislative wand, and poof!  No more "insolvency."  Social security is a social program with enough window dressing to make it feel like a pension plan.  (I can just see the responses I'll get from that one)

Capital Flight.  Until some worldwide capital control regime is put in place, capital flight will continue to happen.  Its happening now.  Certainly the weekend strike is the normal way these things go, but unless we have a black swan (EMP attack, solar flare, etc) we should be able to see it coming a ways out.  Take Slovenia.  Do you have bank deposits there?  I'd get them out today.  I give it a month or two before Draghi cuts them off, but it could be sooner.  As for the more sweeping controls, I'm going by the following - "The first rule of politics: never believe anything until it has been officially denied."  So far - no official denial, so I'm not going to worry about it just yet.  But it really won't be a bolt from the blue.  It never is.  How else can the well-connected have enough time to escape in advance?

Big money has already been moving to the US for a while.  If you look at a chart of US bank deposits, after the euro debt crisis started to hit in 2010, demand deposits went from about 450 billion to 900 billion over two years.  And  savings went from perhaps 5 trillion to 7 trillion.  Remember reading stories about how banks were saying they might just start charging fees for excessive deposits?  Just imagine what would happen if 2.5 trillion were to try and move into the gold market.

http://research.stlouisfed.org/fred2/series/DEMDEPNS

http://research.stlouisfed.org/fred2/series/SAVINGS

I'm sure a chunk of it also ends up in treasurys, but I don't have the charts to show that.

Its certainly not in the interests of the US to stop money fleeing here.  How else could we fund our deficits so cheaply?  Staves off that sovereign debt crisis for a while, and floats our equity market, making us all feel good.  Of course too much of a good thing and the USD gets too strong, but so far that hasn't happened so far.

Armstrong suggests that's one of the steps along the way - failure of Europe and Japan will cause money to flee here in truly massive quantities, causing both EUR and JPY to plummet, and the buck to rise possibly quite dramatically.  We're the only place in the world with a deep enough market to absorb all that money coming in.  That's why the core fails last.

Here's an article where he talks about this dynamic, and why it doesn't matter if nations decide to denominate bilateral trade in their own currencies.

http://armstrongeconomics.com/2013/05/08/dollar-trade-reserves/

I don't think the biggest problem the US faces is sovereign debt.  I think it's total debt.  The overall debt bubble hasn't popped yet; certainly the Fed could buy it all up, but the interest burden would still remain.  Japan has taken 20 years to pay down its debt from its bubble, and that was in a time of generally increasing energy production.  I don't think the same outcome will occur today if that same strategy is used.

Here's a statement which might be fun to talk about:

When the Fed buys up existing debt, it isn't inflationary.  No new money is actually put in circulation, as long as "face value" is paid for the debt bought.  (That becomes less true as the Fed starts paying over par).  In our credit money system, money is only created by a willing borrower taking out a loan.  In some sense, the inflation we currently have (such as it is) isn't being caused by the Fed, its being caused by the Treasury's deficit spending.  Treasury is that willing borrower.  Certainly the Fed is enabling the process, but without the Treasury excessive borrowing, there would be no inflation.

So - thought experiment.  If the Fed were to end up owning all the debt and somehow were able to avoid paying more than par, rates would certainly go to zero across the board since all that money would be looking for a home, but there would be no increase in the credit money floating around the real world, therefore, no inflation.  This makes sense only if you believe money = cash + total credit.

The key to this is that the Fed is simply swapping one form of money for another - swapping Fed Bank Credit in exchange for a debt instrument, which are equivalent forms of "money" in my worldview.  From the viewpoint of the real economy, there is a conservation of value at that moment in time.  A treasury bond worth $1M has been swapped for Fed Credit worth exactly the same amount, and its the money floating around the real economy that determines inflation.  Fed Bank Credit was added to the system, but at the same time, that debt instrument was removed thus keeping things neutral from the standpoint of money + credit in circulation.

Of course in the real world, the Fed buying all this debt does raise the price of debt and so on the margins the Fed does end up printing money - and taking on default risk too.  But in terms of understanding what causes inflation in our monetary system, what they are doing at least theoretically, isn't inflationary, since (credit) money is only created when a willing borrower takes on new debt.

 

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Lnorris
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Joined: Mar 28 2011
Posts: 105
Article from Financial Sense on Retirement accounts

 

 

Maybe All Your Retirement Accounts Belong to Us

 

One of the Federal watchdog agencies established by 2010’s Dodd-Frank financial legislation is mulling expanding its scope to cover not just credit products, but also retirement savingsplans, according to Bloomberg.

The internal deliberations at the Consumer Financial Protection Bureau (CFPB) have not been made public. Director Richard Cordray, whose January 2012 appointment during a congressional recess generated controversy for President Obama, said in an interview that the agency was “exploring… what authority [it has]” in retirement savings products such as 401(k) and IRA accounts. Americans’ retirement assets total some $19.4 trillion.

On the face of it, Dodd-Frank does not explicitly give the CFPB regulatory jurisdiction over retirement savings plans. Until now, that job has fallen predominantly to the Securities and Exchange Commission (SEC). However, Dodd-Frank has helped created a maze of agencies and agency relationships that’s far from clear.

Is the U.S. government looking for revenue in the tangled mess of retirement asset regulations?

caught in the web
Source: The Economist

Cato Institute scholar Mark Calabria observed in an interview: “I could imagine the CFPB growing into a role on investment savings if it seems like the SEC is asleep at the wheel.” The concept of a regulatory agency “growing into a role” rather than being assigned a role in a clearly delineated regulatory structure is alarming to some, and the CFPB has recently received critical scrutiny for its foray into large-scale data mining of consumers’ banking, saving, and spending habits.

Long-Term Questions and Problems

Long-term, we see several problems confronting U.S. fiscal policy that give us pause when we think of Federal jurisdiction over retirement assets.

One is the question of an eventual exit strategy of the Federal Reserve’s QE program. Another is the possibility of the eventual growth of the Treasury’s borrowing costs due to increasing skepticism about the “full faith and credit” of a Federal government that can’t get its fiscal house in order.

Either of these could create a situation in which lower demand for Federal debt would trigger higher borrowing costs, with all the attendant problems that would involve. Higher interest rates have historically often been the pin that pricked asset bubbles.

Retirement Savings—the Argentine Solution

One possible tool for increasing the “demand” for U.S. debt could simply be a mandate that Americans’ retirement accounts be comprised of a certain proportion of government debt. This would not be unprecedented; Argentina resorted to such a policy in 2008 to control borrowing costs after its devaluation of the peso. Since the value of the bonds that retirees were forced to hold immediately plunged, it amounted to a de facto partial confiscation of savers’ assets.

The present attention of the CFPB to retirement accounts is the most recent indicator that we should not consider such tactics to be unthinkable in the United States. For example, in 2010, Senators John Kerry and Jeff Bingaman proposed an “Automatic IRA” program that would have required employers to contribute an amount equal to 3 percent of an employee’s wages into a government-mandated IRA. Unfortunately, as well-intentioned as such a program sounds, it could easily become a tool for ensuring a flow of funds into debt that the U.S. Treasury needs to sell to pay its growing bills.

Byzantine legislation and regulatory agencies with unclear mandates always lead us to ask uncomfortable questions about the future.

 

 

 

Hrunner's picture
Hrunner
Status: Gold Member (Offline)
Joined: Dec 28 2010
Posts: 256
My Definition of Insolvent

Dave,

Good exchange of ideas, and agree with some of your thoughts, but some facts are not correct.

Agree with your definition of sovereign debt crisis and that Japan and U.S. are not in one (yet).

Consider the possibility that Kyle Bass could be 'talking his book' and be correct at the same time.

Most goldbugs I know want futures markets simply to operate fairly and transparently.  The current Comex is corrupt, non-transparent and has clear evidence of malfeasance.  For myself, I want a market that clears gold and silver at a market price, and be allowed to freely compete with other currencies and commodities.  Reform not destruction.

Insolvency

Most reasonable accountings of US debt obligations place total US debt + obligations at $211 trillion.

Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt

http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html

Given a US population of 317 million, that is $650,00 per every man, woman and child.

That is my definition of insolvent.

Bloomberg reported that the US 2012 increase in debt obligations was $11 trillion.  That is $34,700 per every man, woman and child, per year.  Average US household (2.6 people per household) earnings of $50,000 (and going down in real terms) means each US household would need to pay $90,220 each year to tread water, much less to deleverage.

That is my definition of insolvent.

Your thoughts about UST and social obligations are distinctions without a difference.  They are both monetary promises made by the US government that people are expecting to be paid.  Legal framework differences aside.

Surely you understand that congressional (and parlimentary) wands can be waived at any time to "amend" promises made (see Argentina c. 1990 and the $128 billion of debt owed to US that vanished with a wand wave, and the recent restructuring of Greek sovereign debt.).  The same is true for social programs.  Or they can let the Fed do their dirty work by inflating the obligation away, but I think the world is wising up fast to that magic trick.

Capital flight of a few smart and fast entities may move as you are talking about.  You are talking about the margins of a few trillion.  I am talking about the meat of the pie.  Of tens of trillions.

Your Japan-EU collapse scenario seems to set up an ultra strong USD, ultra week euro and yen scenario.  That would make US exports ultra expensive.  I don't think the Fed or the government will let that go on very long.  Currency wars and such.  Response would be as always USD money printing counter measures.

I think you misunderstand money creation.  Yes the commercial banking system creates money by the fractional reserve system.  But the Fed itself says that it (the Fed) also creates money:

"Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank. The actual process of money creation takes place primarily in banks."

Modern Money Mechanics, page 3.  http://www.rayservers.com/images/ModernMoneyMechanics.pdf

All of the QEinfinity $85 billion per month is new money, created by the Fed, out of thin air.  It is paid to commercial banks for MBS and UST, at dubious (highly inflated) values for both.  Velocity is very low and decreasing as Main Street and consumer is not interested in borrowing and growing.  So hot money goes into asset bubles of stocks, sovereign bonds, mainly, and some (a lot actually) gets parked at the Fed (as excess reserves) for the time being.  The owners of those assets, mostly the 1%, now have more nominal wealth on paper than they did yesterday.  However, nominal wealth can be cashed out and that cash can buy real wealth such as real estate, gold, motorcars, fine art.  The poor suckers whose wealth is in cash, or future obligations of social security and medicare are losing wealth.  This I believe is the wealth transfer that Chris Martenson has been referring to.  Honestly, it took me a while to grasp it.  Chris, if you're reading, you may want to explain this more simply and with examples as it's kind of an elusive idea.

The swaps you are referring to is basically what Operation Twist was.   Agree that is balance sheet neutral.  However, that is not what the Fed is doing now.

I confess inflation and deflation are hard concepts for me to understand.  The simple definitions (inflation= excess money chasing limited goods and services) do not really do the market pricing system justice, IMHO.  I have come to appreciate that you can have both inflation and deflation at the same time (biflation), depending on perceptions of what is valuable at the moment, and what future expectations are (gold could inflate but at the same time housing prices could deflate, if there was fear of mass job losses and mortgage defaults).  I am beginning to come around to the idea of forgetting the concepts altogether and simply talk about the prices and price changes for a given market, at a given time.  Energy costs go up, cost per gigabyte of storage go down, at the same time.

 

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How to define insolvency

Thanks Hrunner... you have really been energized with your posting lately and I for one enjoy them very much.  

One definition of unfixable, inevitable insolvency that makes sense to me is this;  the point in time where a long term blended rate (10 year as surrogate) mean reversion would cause all taxes to be consumed by debt service. Christine Hughes touches on this in the case of Japan in this much referenced video;

If you look at the long term Japan 10 year history (below), my eyeball tells me that 2.8% is just about the long term mean, so her discussion of this as being the point (in interest rate space) at which all tax revenues are consumed by interest expense (18.03 - 20:45 in the video) tells me that Japan is insolvent with no means of righting the ship.  As Christine says (and Kyle Bass said before her) Japan is toast.   

http://www.advisorperspectives.com/dshort/charts/markets/international/N225-charts.html?Japan-10-year-bond.gif   

Davefairtex put this comment out for discussion...  it's not clear to me whether he believes this, or if this idea comes from someone else and Dave is asking for feedback;

  When the Fed buys up existing debt, it isn't inflationary.  No new money is actually put in circulation, as long as "face value" is paid for the debt bought.  (That becomes less true as the Fed starts paying over par).  In our credit money system, money is only created by a willing borrower taking out a loan.  In some sense, the inflation we currently have (such as it is) isn't being caused by the Fed, its being caused by the Treasury's deficit spending.  Treasury is that willing borrower.  Certainly the Fed is enabling the process, but without the Treasury excessive borrowing, there would be no inflation.

I agree with HRunner..  this is absurd.  The lie is the sentence I highlighted above.  ALL of the money that is borrowed as treasury debt certainly does go into circulation.. paying all sorts of Gov't bills...this is not even a debatable point.  The Gov't has become the buyer, and borrower, of last resort in order to keep our total debt increasing.  Yes, the FED enables... and our Gov't could not borrow so much, at such low interest, were it not for them, but that does not change the net result, which is new money.  This idea of the FED buying at par vs. over par is silly and meaningless - though you can bet the primary dealers get their Vig for doing their part in kiting the bonds for the FED to buy (since it would be illegal for the FED to buy directly from the Treasury).  Twist is not money "creationary".. all other QE is.              

 

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westcoastjan
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another reason to reiterate enjoying life now

I just got the word that two acquaintances, both in their mid 50's died this week. One from a heart attack the other from a hiking incident in which he died before help was able to reach him. He had just retired about 2-3 years ago after working for 35 years in the same place, accruing a very generous employer sponsored pension plan. He was financially set for a great retirement. How sad.

I guess I am just reiterating the point that we not lose sight of how important it is to enjoy life in the here and now, and not place too much emphasis on saving for later. We never know if we are going to even make it to "later".

Jan

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definitions again

Hrunner -

I think we're getting closer.

There are two things: debt obligations (which are bonds, that have coupons, and come due at a defined time) and unfunded liabilities.

A debt obligation is typically an instrument - with a coupon, a par value, and an expiration date when the balance is due.  Some real person or entity forked over cold, hard cash and gave it to you.  And this instrument is your promise to repay them.

An unfunded liability of the sort we are talking about - Medicare, Medicaid, Social Security - are simply budget projections forward of expected spending required to meet the conditions of the current laws in force.  Alter the conditions of the programs, and the projections change.  These projections are in no way a legal obligation of the government.  The government can change any of these programs, at will, with no ill effect to its credit rating, and nobody can sue it for this action.  That's not the case with a bond.  Ask Argentina - they're still in court over their default back in 2000.

The US government changed Social Security back in 1986.  No default occurred.  It could change it again, and no default would occur.  Our credit rating might actually improve.

Last point.  Bonds can be traded.  They have real value.  You can buy and sell them.  That is because they are a serious and very difficult to repudiate obligation of the government.  Your medicare payments 20 years from now, on the other hand, are not tradable.  Neither is your social security.  They are not financial instruments.  In fact, everyone knows they are subject to change at the whim of the Congress so why on earth try to treat them as the same thing?

I don't mean to diminsh the importance of trying to plan for the future, and "unfunded liabilities" is a fine way to present our likely future costs assuming nothing changes, but sovereign debt is absolutely not the same thing as an unfunded liability - at least as regards Social Security, Medicare, and Medicaid.

If it doesn't walk or quack like a duck - it's not a duck!

 

Now then, about my inflation bit and money creation misunderstanding.  Let's not address my main point just yet - which is perhaps "out there" for mainstream thought.  Let's see if we can agree on the basic stuff first.

First of all, your quote from the Fed Booklet was exactly one sentence too short.  The full quote was:

"Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank. The actual process of money creation takes place primarily in banks"

First let's examine what the Fed's "major control" really is according to the booklet.

Reserves: We can see that at least recently, this hasn't worked so well.  There are 1.5 trillion of additional reserves, but no new lending has emerged.  Additionally, Steve Keen has pointed out that the whole "reserve theory of central banking" doesn't actually work the way they think it does, because banks first make loans, and then find the reserves later to cover the loans.  I can provide you a link if you're interested.  Its kind of a major hole he found - what the theories said, vs how things work in real life.

Rates: In the old days (i.e. pre 2009), the Fed could use rates quite effectively to control money growth.  Raise rates = fewer loans.  Fewer loans = deflation.  Lower rates = more loans = higher inflation.  Its a pretty simple equation.  That's because banks create inflation when they lend, and deflation happens when loans get paid back, or loans are defaulted upon.  Currently, the Fed would dearly love for banks to make more loans, but that's just not happening, even with rates at 0%.

So lets stop there.  I'd like us to agree on two things.

1) Regular banks create inflation via the loans they make.  An increase in total loans outstanding causes an increase in inflation, all other things being equal.  And a decrease in total loans outstanding causes deflation, all other things being equal.

2) During normal times the Fed controls money creation (loans at the regular banks) by changing interest rates, but during situations like these today, neither rates nor reserves appear to be useful in "controlling the money supply."  If banks don't lend - and/or borrowers don't borrow, the Fed ends up with zero ability to control the creation of money via its normal channels - the regular banks and their lending.

I'm leaving aside for the moment any talk of Fed Money Printing.  We'll get to that in a moment, after we can agree on the basics.

 

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inevitable insolvency

Jim - 

I like the attempt to define it.  I'm not sure I'd use the 10 year mean, since its pretty clear that were Japan not in a 20 year deflationary bust, their 10 year rate would be substantially north of 2.8%.  I'd use something less conservative - perhaps the blended average of nations of similar size during "normal times" (whatever that is) which is probably more like 6-7%.  By that metric, Japan's goose is even more clearly cooked.  The fly in search of a windshield, etc.

However once we all agree on that, the discussion then moves to how long "inevitable" takes.  The sun will cool and the earth will die, that's inevitable.  But its quite a ways out in the future.  Exploring what the triggering events are - that's the interesting question to me.  Is Kyle Bass a triggering event himself?  It seems like he's trying to run around dropping snowflakes on an avalanche-sensitive mountain!  I believe his case, but I'm just as clear that he's motivated to trigger the very situation he is betting on to come about in the near term, because keeping those bets on costs money, and the sooner it happens, the better for him.

Japan has likely been inevitably insolvent for a while now.  Perhaps Abenomics will cause the final denouement.

Bottom line though, I like the rough definition; debt at average 5-10 year rates (call it 6%) divided by tax revenues = no room to maneuver once you hit 100%.  And that's really just the upper limit.  A debt crisis may well occur prior to this point in peripheral economies, or conditions where rates are north of the average.

Just for amusement, I constructed the associated chart for the US: total public debt x historical 6% rate / government receipts.  36%, the highest its ever been.  Series are available from FRED if you care.  Looks pretty dreadful to me.

 

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davefairtex
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i was wrong about japan

Turns out Japan's situation isn't quite as dreadful as I had assumed.  One important difference is the government revenues denominator - their taxes are higher than the US.

[Back of the envelope calculations to check accuracy: 240% debt/GDP, 31.5% gross govt revs/GDP.  240 x 0.06 / 31.5 = 45.7% today - and by EOY 2013, possibly 250 x 0.06 / 31.5 = 47.6%.]

They're still badly off but they haven't hit that 100% number, and they're actually pretty far away from it.

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Jim, Disentangle Money Creation and Inflation

Jim,

Thanks for your note and your compliment.   As I very much value the PP community and Chris and Adam, I try to post in between hectic times (I'm sure we are all in the same boat in that regard).

This is a very complex topic and make no claims to fully understand.  But when faced with complexity, I find it's best to lay down some markers first, and clearly state assumptions.  Then one can move to opinion and guesses about what is likely in the future.

Davefairtex is of course right that commercial banks create money through the fractional reserve system.  This is new money, backed by a future promise to pay off a loan made by the bank.

The Fed also creates money through Quantitative Easing.  Make no mistake, this is new money, created by thin air printing.  It is backed by .... well, the full faith and credit of the United States, however one wants to quatify that. 

Deficit spending, contrary to the statement above, does not automatically have to add to the money supply.   In a hard money system, with a finite amount of money, the government still has the ability to deficit spend.  But to pay off the deficit, it must gather additional money from the "country", primarily by taxing citizens an (additional) amount, over and above the current operating budget with its balancing tax revenues.  The government could also raise tariffs on imports (trade and price implications), tax corporations more (still taxing citizens but indirectly and hurting domestic industry), come up with a creative VAT or sales tax, but it would still need to confiscate money some how, some way from a zero sum game. 

Our current fiat monetary system and Federal Reserve allows for an expansion of the money supply not based on expansion of actual real wealth, but, I guess, based on future promises to expand real wealth.  This is a "trust me" system for the holders of USD/ US treasuries. 

The hard money system requires tough choices, but forces a constant balance to the system.  Growth is slower but always in balance.  As you can probably guess, the fiat system supports irresponsible spending in the "now", pushing hard choices and tough living onto future generations, also hoping and praying that your economy will expand and be productive enough to keep up with the deficit spending.  This is a founding principle of Keynesians.  To be fair, true Keynesians believe the deficits should be paid back, but in the distant future, with an energized and revitalized economy. 

We seem to not have the adults in government that have ever been able to do the "payback" thing.  My life experience tells me that irresponsibility usually outstrips real increases in productivity.  The only thing that puts a stop to this loop is high/hyperinflation, economic recession/ depression due to debt and bond market revolt, eventually currency collapse.  We are seeing some of those things, soon to see more of those.

As I said in an earlier post, inflation is a hard thing to get your arms around.  In my experience, just looking at the classic definition of increased money supply in a fixed world of goods and service does not capture the real world.  Consider that a counterfitter could print millions of 100 dollar bills in his basement to the tune of 10 billion USD, take it to the bank and deposit it.  That would increase the money supply without increasing the supply of goods and services, but if he just went on about his life and never touched it, to spend on property, stocks, motorcars, movie tickets, tax advice, then all that new money would have no effect on prices.  That is similar to our current situation.  

The Fed is printing vast amounts of new money, but much of it ends up in bank accounts in commercial banks, just sitting there in "excess reserves".  However, some new money is finding its way, via the commercial banks, into real estate (hedge fund investing mainly I believe), stock prices, and a little bit of it in wage increases.  I think that is accounting for the modest inflation we have now. 

If the worm turns, and hiring really picks up for some reason (I don't know what triggers that at this point in time but I assume anything is possible), then we will get roaring inflation, because all that cold money sitting in reserves (trillions) will get whooshed out into the system via loans and amplified via fractional reserve system.  Which the Fed believes it can control by raising interest rates, but primarily (hypothetically) by selling UST and pulling money out of the system. 

The small problem with that plan is that the scheme of selling UST into the open market will put upward pressure on yields, which will severely increase the US government borrowing costs (new UST and rolling over UST) to the point where it consumes half to all of the tax revenues, making the US an even more risky investment, making USTs yields rise, which is the definition of a feedback loop.  Chris has talked about this in his how does QE end blog post, which has excellent graphics explaining this.

If you are interested, I follow the MZM money supply, the "Total Credit Market Debt Owed" and the velocity of money.  Look at the two money and credit graphs below from the Fed and tell if we have a net zero or net increasing money supply.  However the most striking graph is showing that the velocity of money right now is amazingly low.  My best guess is that velocity will be one of the first indicators to turn, prior to inflation, and that will be signal to activate inflation mitigation strategies.  Such as getting out of an IRA and investing more into precious metals.  I'm really interested to hear any other members thoughts on this strategy, especially on watching velocity as a very leading indicator.

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davefairtex
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next step: excess reserves

Hrunner -

Ok, now we agree, money is created by banks.  Now onto the next step: Excess Reserves.

I assert that the excess reserves sitting at the Fed don't represent some 1.8 trillion dollar monetary Sword of Damocles that will go whooshing out into the marketplace causing 18 trillion (10x its weight) in inflation once the time is ripe.  That's Old Thinking - based on the debunked Reserve Theory of Central Banking.  In the real world, if banks have a customer for a loan, they lend that customer money.  If there's no customer, no loan is made.  Reserves don't matter.  If the banks have a customer, money gets created, and the reserves get found later.  As a result, there is no 18 trillion dollar danger from those Excess Reserves.  We can all breathe easier.  Future inflation will happen - or not - completely independent of Excess Reserves.

I recommend you read the details here:

http://www.businessspectator.com.au/article/2012/10/22/commodities/myth-money-multiplier

Here is a related chart.  This is Fed Treasury & MBS holdings less Excess Reserves.  Notice what is happening.  Basically, the entire contents of new Fed Treasury & MBS buying is going straight into Excess Reserves.  Is this inflationary?  Similar to your counterfeiter example, if the guy prints 10 billion in notes, but stores them in the basement and doesn't spend them, its not inflationary.  And unlike our counterfeiter, Excess Reserves aren't required for inflation to strike.  Banks are counterfeiters that don't need money in the basement to cause inflation.  They just do it automatically whenever they find a customer.  The only thing that stops bank counterfeiting is higher rates dissuading customers from taking out loans.

There might be a modest uptick there off the trendline clearly visible in 2003-2008 - perhaps an "extra" 200 billion or so - but it doesn't seem very dramatic.  Certainly not when you consider TCMDO of 56 trillion dollars, 200 billion is a rounding error.  Even if you just look at MZM, 200 billion is just 2%.  And over 5 years?  A rounding error.

Perhaps this is why your MZM has tanked.  Excess Reserves have zero velocity.  They're counterfeited money sitting in the basement.

So...thought experiment.  If the Fed bought another 10 trillion in MBS & treasury notes combined, and it all went to Excess Reserves, would it be inflationary?  This is a different question than the one I asked before - but I think its a close cousin.  I claim no.  Largely - not inflationary.

That's not to say it has no effect.  This all has a dramatic effect on rates.  And that distorts all sorts of things.  But it doesn't drive general monetary inflation - only willing borrowers do that.

If the Fed went out there and bought real stuff from real people who then turned around and spent that money, that would be a different story.  Whatever the Fed buys, causes inflation in that area.  The Fed buys bonds.  So in the current case, bonds are artificially pumped up - dropping rates.  But without other willing borrowers, those low rates doesn't turn into general monetary inflation.  Only bondholders see this effect.  There is likely some leakage into the real economy from the profit the bondholders get from their assets being artificially inflated - that's what I was referring to when I talked about "par value" - but I don't think its that dramatic.  Perhaps another 300 billion or so.  And all the related asset inflation from people desperately chasing yield - significant for those asset classes, but not likely to affect food or oil.  Top 1% benefits, most of the rest of us get to watch, except the savers who actively get harmed.

Now that we know Excess Reserves don't pose any monetary inflation danger in and of themselves, and we know that the vast bulk of Fed buying more or less goes straight to Excess Reserves - I think the answer is, the Fed really doesn't have the control it pretends to have over the money supply after a massive debt bubble pop.  The free market is more powerful.  No borrowers = no general monetary inflation, regardless of rates, reserves, etc.

Of course there is an inflation risk - if the free market borrowers suddenly decide that 0% rates look awfully good, they'll rush out and borrow.  And then the Fed faces that dilemma you pointed out: raise rates to control borrowing, selling bond holdings to implement this, taking losses on its portfolio, and then of course the Treasury's deficit starts to rise, the housing market tanks, stock market tanks, economy slows down, etc.

Last point.  I'm not saying Fed buying is good, something that should be continued, something desirable.  But I think its general monetary inflation effects are overstated.  Rates distorted - you bet.  Bond bubble pumped even higher, without question.  Yield chasing too.  Perhaps this is the blow-off top of our 30 year bond bull market - the Fed's Last Bubble.

But general monetary inflation awaits willing borrowers, which haven't yet appeared.  Me, I'm watching the TCMDO components.  Business is borrowing now but so far, consumers are largely asleep.  If/when they wake up and start borrowing, that will be the time general monetary inflation will start to get out of hand.

Or - the government could simply raise its deficit spending - monetized by the Fed.  That too causes general monetary inflation, and much higher localized inflation in the areas where the government spends its money (health care, education, defense).  But that trend is going the other way, believe it or not.  The deficit is contracting.

But inflation is all about willing borrowers, and not about the Fed - because Fed printing goes largely into Excess Reserves.

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WH
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What is a retirement account?

My fiance and I contribute to our 401k only as much as the law forces us to. We are not counting on that money AT ALL. However, we have found another option for retirement: Indexed Universal Life insurance. It's the only cash investment/retirement vehicle we are willing to put our energy into. If we don't see dramatic inflation in the future, then this vehicle will work wonders. The principle never goes down. So you can't lose money (except through inflation). In fact, our policy pays a guaranteed return of 2 percent. The ceiling is 12 percent. It won't pay more than 12 percent. So the account isn't subject to the volitility of the indexes (this is SP 500). The best part is, you can take out a loan against the principle (not a withdraw) and it's not taxible. One thousand dollars per month for 30 years or so, at an average compounding yield of 6 percent will give you about 100k in yearly tax-free retirement income for the life of the account. When you kick the bucket, the life insurance part of it kicks in. This is the best retirement plan we have found. It's defintely not a traditional retirement plan, but it certainly worth exploring for that purpose.

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Hrunner
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Dave, Good Inflation Discussion- But a caution

Dave,

Good points overall and I don't think I've posted anything (at least intentionally) that disagrees with your thorough analysis.   We agree- new money created (counterfitted),  by both Fed and Fractional Reserves, but sitting dormant in accounts does not create inflation. 

By the way, this discussion has raised a semantics question in my mind- what is the distinction between "inflation" and "asset bubble"?

Some points re what is going on now in the stock market:

- Corporations are operating with lower costs (due to layoffs and physical plant closures, and delayed capital spend), and relatively similar revenues YOY, which increases the bottomline and makes them look healthier than they really are.

- Corporations are taking a sizeable portion of those new found profits and buying back their own shares.  This is not just guessing, I have looked at several household name corps and quarterly transcripts, and they are spending about half of profits on share buybacks, AKA float shrink (see TrimTabs and Biderman who is all over this).   Fewer shares, same amount of liquidity = higher stock price.

-  Commercial banks and momentum chasers in Hedge Funds are buying stocks because the Fed, with hot money infusions, ZIRP and bond market distortions, has forced them into risk-on in a search for profits.  This is not an accident by the Fed but a stated goal i.e. "wealth effect" statement.  One small problem- many retail investors and average Americans are out of the stock market, so no "wealth effect" is distributed to them. 

- (Oh yes, Number Four- fewer IPOs and more mergers, decreasing the total size of the equity market)

So why can't we just call this 'stock market inflation'?  More money chasing after fixed quantity of stocks (actually shrinking quantity of stocks).  Is the term 'bull market' sexier?  A rose by any other name.... Stock market is up 43% Y/Y, is this a great bull run, or hyperinflation?  As mention, I really struggle with the concepts of inflation and deflation.  It almost seems reasonable to discard those terms and simplify by talking about the price of X, and making a case whether X is over-priced or under-priced.

One force that bears mentioning, that explains a lot of the 'why' of your lack of inflation discussion is demographics.  This is Harvey Dent's main focus, but in sum, he says the West is aging (not really controversial) and older people spend less pound for pound compared with younger people.  Olders are more careful with expenses in general for obvious reasons- they have fixed income as far as they can see, whereas youngers have 'their whole life ahead of them'.  Plus Olders don't need as much, are downsizing their house, downsizing their family, as opposed to their counterparts having new babies and taking on all that new purchasing.  Harvey's contention is that in order to avoid deflation, central banks will have to print tens of trillions of dollars simply to make up for demographic dropoff in spending.  So we seem to have a Battle Royale set up by demographics and natural, appropriate public and private deleveraging in Corner 1 and money-printing and fractional reserve lending in Corner 2, both trying to set the price of stuff.  Don't know about you, but I prefer nature to take its course versus some artificial forcing function by a few "smartest people on the planet".

 

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davefairtex
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complete agreement

Hrunner -

I think we're in complete agreement.  From my analysis, the asset bubble in housing was exactly that - driven by a 6.2 trillion dollar increase (4.5 trillion to 10.7 trillion) of home mortgage loan money 2000-2008.  If you track the increase in mortgage loan money, it tracks home prices reasonably closely.  More loan money chasing (more or less) the same number of houses = home price inflation.

Likewise, the Fed buying all these bonds today injects money into the bond marketplace (perhaps 2.5 trillion), in just the same way as borrowers (subprime, and the rest) did for housing.  So now we have "bond market inflation" (a bond asset-price bubble) which shows up as lower rates.  And some of that money leaks over into stocks, junk bonds, and even rental homes as people hunt desperately for yield.  But rather than going to the real economy, much of the bond money is sitting in Excess Reserves, so it doesn't cause "general inflation."

Homebuyers alone printed 6.2 trillion during the housing bubble.  The Fed during its 5 years of printing has only done 2.5 trillion.  Just to give you a sense of magnitudes here.

I'd only differentiate between an "asset bubble" and a more general economy-wide inflation if all the prices more or less moved in tandem.  I.e. oil, food, clothing, wages, housing, rents - all of it moved up at more or less the same rate.  Right now commodity prices overall have declined (18%) since 2011, which says to me we don't have general inflation.  Over that time, 20 year bonds have gone from 4.4% down to 2.7% - definitely "bond inflation".  And SPX has gone from 1300 to 1600 - stock inflation!  Housing - more or less flat.  Conclusion: selected asset inflation, but that's it.

As for what causes stock market move - I'd add to what you said - company earnings also benefit from refinancing debt at historically low rates, and also because the underemployed workforce has no wage pricing power.  Wages remain stagnant, interest costs drop, and consumption is supported by government deficit spending.  A happy picture for corporate profits - as long as it lasts, of course.

Hyperinflation, to my mind, requires a loss of confidence in the currency.  That's not what I'm seeing.  We're just seeing selected bubble blowing by a "rifle-shot" money injection.   The buck rising right now doesn't say hyperinflation, it says international money fleeing from elsewhere into the reserve currency, which should help blow equity & bond market bubbles too.  I know this because the USD is up modestly since 2011.  If Europe starts having its bond market problems again, the USD should move higher especially with the Yen already on life support (down 20%).

I also agree about the longer term deflationary impulse from demographics, and from the debt bubble pop.  A one-two punch.  Or - perhaps - rising demographics drove the debt bubble.  Now that's an interesting thought.

Sigh.  The current situation is just silly.  Who prints money anyway?  We want to emulate Zimbabwe?

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Jim H
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I guess I disagree with both of you then....

Davefairtex said,

Likewise, the Fed buying all these bonds today injects money into the bond marketplace (perhaps 2.5 trillion), in just the same way as borrowers (subprime, and the rest) did for housing.  So now we have "bond market inflation" (a bond asset-price bubble) which shows up as lower rates.  And some of that money leaks over into stocks, junk bonds, and even rental homes as people hunt desperately for yield.  But rather than going to the real economy, much of the bond money is sitting in Excess Reserves, so it doesn't cause "general inflation."

This statement is untrue.  The printed money is going directly to support the deficit spending.  The government spends money all over the real economy.  The deficit spending is something like 40 cents on every dollar the government spends.  If free markets were allowed to work, then borrowing rates would be higher and the government would be forced by the cost of money to borrow less, and spend less

I really don't understand why you keep trying to make this point over and over again Dave?  Why do you say that the money that is being printed is ending up in excess reserves?  The money that is being printed to buy mortgage backed securities off the banks balance sheets may be.. true (at least to the extent that these are old mortgages vs new ones).. but not the money being printed to buy Treasury debt.  That money goes to fund the Government's deficit spending, plain and simple.  That money goes out into the economy, to pay for 40% of all manner of Government programs and spending.  Again, that money may not be inflationary, but it is creating a massive distortion of the true, underlying contractionary reality.  In doing so, it invites disaster... just because you don't have feeling in your arm does not mean that a cut and subsequent infection won't kill you... you will just get much less warning before you die.               

Now, this does not mean that the printed money is immediately inflationary, and I don't disagree with the conclusion that we are not now seeing any signs of hyperinflation, or even bad inflation.  That is yet to come.  My point is that this printed money represents a massive distortion of our system, of a type that has not been played with before.  You (Dave, and maybe HRunner if he really agrees with the highlighted sentence above) make it seem all so mundane and safe.  It is not... It is not because the thing you don't talk about is the debt, which is always growing.  When Japan blows, it is going to take down all fiat currencies with it.  Do you really think that Japan can have a currency crisis on their own without anyone else noticing that all Western nations are on the same path?    

Travlin's picture
Travlin
Status: Diamond Member (Offline)
Joined: Apr 15 2010
Posts: 1322
Try this Jim

Jim

Let me see if I can clarify with this graph.  The blue line is base money and the red line is the excess reserves of commercial banks.

As you know, base money is created out of thin air by the Federal Reserve and increases money in circulation.  This winds up at banks and they make fractional reserve loans which further increases the money supply by a much bigger factor.  All banks are required by law to keep a certain amount of money on deposit with the Fed as a statutory reserve.  Any amount above this is an “excess reserve” and historically paid no interest.

You can see in the graph that the Fed has created a little over $2 trillion in new base money since the crash.  The commercial banks’ excess reserves grew from virtually nothing to about $1.8 trillion dollars in the same period.  That money is on deposit at the Fed, not circulating and funding loans.  Since 2008 banks haven’t been lending.  That’s partly because of lower demand and credit worthiness, and largely because the big banks were insolvent.  The Fed even started paying interest on these excess reserves to help bail out the broken banks, so they earn money with no risk while they slowly repair their balance sheets.

The Fed’s increased base money is preventing deflation that would be caused by bad debts and the shrinking of the real economy.  Think of it as an IV for a bleeding patient.  In theory inflation can be contained as long as the excess reserves are at the Fed and not funding loans.  The Fed claims they can unwind these reserves in a controlled manner, but skeptics abound.

Does that help?

Travlin

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5058
agreement with Jim too

What a day.

"that money may not be inflationary, but it is creating a massive distortion of the true, underlying contractionary reality."

Agreed!  I said the same thing when I said that government deficit spending was supporting consumption, and thus corporate profits.  And I've said something similar elsewhere - without deficit spending, we'd be enduring the impact of our bubble pop and we'd be in deflation.  And that the deficit spending isn't sustainable.  Agreement again!

"I don't disagree with the conclusion that we are not now seeing any signs of hyperinflation, or even bad inflation."

Not disagreeing is...agreement!  We aren't seeing any signs of overall inflation.  Specific inflation in individual sectors, you betcha.  Education, medicine, bonds, and stocks - government spending-related sectors, rifle-shot "money printing" bond inflation, and "people hunting for yield" inflation.

In some sense, I think the "bond inflation" we're seeing from Fed printing, much of it is only "going around once."  That is, printing does its work to inflate bond prices, but then gets parked as Excess Reserves.  If it didn't just stop there, but entered the general economy instead, it would inflate other areas too, not just bond prices.

That's why HRunner's M2V is tanking.  Excess reserves have no velocity.  It inflates once and then stops.

We also agree that its a distortion of reality, and thats a dangerous thing.  Bubbles end badly.  We also agree that debt accumulation is dangerous and unsustainable longer term.  If/when rates return to their norms, 32% of our tax revenues will go to interest payments.  That certainly seems bad.

So much agreement today, I can hardly contain myself!

We do have a solitary point of disagreement though.

I don't agree that Japan will take down "all fiat currencies."  When Japan blows, money will flood into the US, masking our problems for a while longer.  US bonds will go higher, the buck will rise - I'm not sure about the equity market, it could go either way.  Commodities probably drop because Japan effectively goes off-line.  It will depend on the form things take.  Gold in USD might do well, or it might not.  Certainly gold in JPY will likely continue to do well.  Its up 30% since 2011, and hit an all-time high 2 weeks ago.

The response to all that money coming in from Japan will be interesting - and likely revealing of just how impotent the Fed is to control the money supply with its current toolset.  Honestly all it can do is cause "bond inflation" (i.e. a bond market bubble) and its already done that.  For a encore - do we imagine the Fed will take ownership of the entire US Treasury debt when all that money is pouring into the US from Japan?  Excess Reserves at 10 trillion?  30 year rates at 2%?

 

darbikrash's picture
darbikrash
Status: Platinum Member (Offline)
Joined: Aug 25 2009
Posts: 573
All your cash belong to us

 

 

So Japan is going broke? Insolvent? Well there are some that don’t think so.

 

Reading for all the world like a deranged epilogue to Naomi Klein’s “Shock Doctrine” we have an installment from US hedge fund manager Daniel Loeb as principal shareholder in Sony Corp.

 

His angle is the breakup of Sony, of course to benefit his 6.5% stake in the firm. Taking a page from the classical disaster capitalism playbook, his action plan is instructive to illustrate who is really insolvent and who is not, and how to position oneself to profit from the real game, not the Austrian simulacrum of what the game should be. As reported in today’s NY Times, here is his play summarized:

 

The campaign is a bet that Japan will prove the next gold mine for global investors. Long hobbled by a so-called lost decade of little economic growth, the country has come to life in recent months under the stewardship of Shinzo Abe, who as prime minister has promoted policies meant to attract private investment. Mr. Loeb is betting that Mr. Abe will expand deregulation.

 

……

 

Mr. Loeb has recently expressed his interest in Japan. Referring to the changes by the Abe government, he called it “a huge game change” at an industry conference last week. “And there’s a lot more room to go,” he added.

Mr. Abe has called his revival effort a plan of “three arrows,” including aggressive monetary easing by the Bank of Japan and enormous stimulus spending by the government.

…..

But it is the third arrow that has Mr. Loeb’s attention. The Abe government hopes to shed Japan’s reputation as a land of strict hierarchy and bureaucracy. Business mistakes were often seen as shameful, and outright confrontation largely disdained.

 

Wait for it…..and here it is from the Sony chairman:

 

“Japan is a harmonious society which cherishes its social values, including full employment,” he said in a speech last year. “That leads to conflicts in a world where shareholder value calls for ever greater efficiency.”

 

Ok, so we now we get the full program. Strike 1.) Aggressive monetary easing, Strike 2.) Enormous stimulus spending, and Strike 3.) a concession that shareholder values, not social values are the top priority.

The neoliberal trifecta- virtually guaranteed to spur corporate profits to new highs- at the expense of everything else.

But note that this message is not being delivered by the government of Japan, it is being delivered to the government of Japan.

 

Anyone want to guess that this is a far cry from insolvency for Japan? It would seem that Mr. Loeb can read a balance sheet…and unlike the pundits is looking right at the asset column…….

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