Wednesday, July 01, 2015

The Coming Era of Pension Poverty

Assuming "growth" will fund all promised pensions and entitlements is magical thinking.
The core problem with pension plans is that the promises were issued without regard for the revenues needed to pay the promises. Lulled by 60 years of global growth since 1945, those in charge of entitlements and publicly funded pensions assumed that "growth"--of GDP, tax revenues, employment and everything else--would always rise faster than the costs of the promised pensions and entitlements.
But due to demographics and a structurally stagnant economy, entitlements and pension costs are rising at a much faster rate than the revenues needed to pay the promised benefits. Two charts (courtesy of Market Daily Briefing) tell the demographic story:
As the 60+ million baby Boom began qualifying for Social Security and Medicare entitlements, the percentage of beneficiaries rose quickly from a decades-long level of about 16% of the total population to 18.5%. This might seem like much, but what's troubling is the steep rise in the number of beneficiaries while the number of full-time workers who pay the vast majority of the income taxes has remained stagnant:
Federal social spending (entitlements) has almost tripled from 5% of GDP to 14% while federal tax revenues/spending have remained range-bound as a percentage of GDP. In other words, social spending is soaring as a percentage of the economy (GDP) while revenues to support that spending are limited by the slow-growing economy and the correlation between high tax rates and recessions.
The other structural headwind is low investment returns in a zero-interest rate global economy. The only way to increase yields is to take on more risk, a strategy that has potentially catastrophic consequences: Pension Funds Are "Compromising Their Solvency" OECD Warns.
Any criticism of rapidly rising public pension costs quickly draws accusations ofunion-bashing, a favored propaganda technique to divert investigation of blatant abuse of the system. Since I have cousins who have retired from California police and firefighter jobs, I know all the insider games and tricks that many public employees can use to boost their pensions and benefits.
The issue isn't unions, it's the systemic abuse of public trust and public funds.
Buying political influence with campaign contributions doesn't mean promised public-employee pensions and benefits will align with tax revenues and yields on pension funds. The global economy is due for a recession and an extended period of slow growth/stagnation as the Great Deleveraging of credit/asset bubbles strips away phantom collateral and pops all the bubbles. This global deleveraging will occur whether we like it or not, and refusing to consider massive losses in pension-fund owned assets and declining tax revenues will only lead to greater fiscal imbalances/crises down the road.
The usual excuse for insider abuse is "everybody does it." What this means is "everybody on the public payroll who can get away with it does it." The private sector doesn't offer tricks like doubling your overtime in your last year of service to plump up your pension, or getting cashed out of your sick leave and unused vacation time to the tune of hundreds of thousands of dollars:
In the real world, these benefits vanish if you don't use them within the allotted time.
Promises made in flush times cannot be kept in lean times. Common sense suggests that public employee pension benefits should be tied to the revenues required to pay them and the rate of low-risk returns on pension funds. If common-sense is "union bashing," then we not only have a pension-funding problem, we have a propaganda problem.
Regardless of what was promised, what can't be paid won't be paid. The federal government can print money, but state and local governments cannot print money to pay soaring pension and healthcare costs. Push taxes and junk fees up enough and you will spark a taxpayer rebellion. If you doubt this, check out the origins of Prop 13 limits on property taxes in California.
I have suggested that the federal government eliminate the Social Security payroll tax and just print the money for Social Security pensions: How About Ending Social Security and Paying Retirees with Cash? (November 15, 2013)
The reason why this is practical is the Social Security system is not open-ended like Medicare; costs can be fairly accurately predicted, and SSA pensions are limited. In a deflationary $17 trillion economy, printing $1 trillion and distributing it to tens of millions of beneficiaries, most of whom paid SSA payroll taxes for decades, would not be enough to spark systemic inflation. (The Federal Reserve, so desperate to generate inflation, should jump on the prospect of goosing some mild inflation via broad-based spending by tens of millions of households.)
Assuming "growth" will fund all promised pensions and entitlements is magical thinking. We're going to have to do better than indulge our Spoiled Brat Economy mindset because "we wuz promised." What we were promised based on faulty assumptions, faulty projections and wishful thinking no longer matters.
Gordon T. Long and I discuss these systemic issues in a video program:

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Tuesday, June 30, 2015

Our Spoiled-Brat Economy

By insuring spoiled brats/vested interests never face the consequences of their actions and choices, we guarantee failure of the entire system.
Spoiled brats do not take kindly to being called out as spoiled brats. Since economies are aggregates of individuals, we can anticipate howls of outraged denial at our economy being identified as spoiled rotten.
The two essential characteristics of spoiled brats are 1) a complete disregard for the burdens of those paying the bills and 2) a childishly self-absorbed sense of overweening entitlement. Spoiled brats have no sense of fiscal discipline. Indeed, it is their defining characteristic. They want what they want, and they want it now, regardless of the cost to others or the system as a whole.
In America's Spoiled Brat Economy, no vested interest is ever allowed to fail. Lost billions gambling with borrowed money? Just throw a K Street temper tantrum and threaten to close all the ATMs when you go broke, and voila, Mommy and Daddy (the federal government and Federal Reserve) come rushing with trillions of dollars to make all the bad things like well-deserved bankruptcy go away.
That tens of millions of savers must be robbed of hundreds of billions of dollars in lost interest to rebuild your banks' profits and balance sheets--the sacrifices of others are of no concern to spoiled brats.
What does not allowed to fail bring to mind? How about coddled children who are crippled by helicopter parents who do their homework for them and schools that give everybody passing grades and gold stars?
A system that doesn't allow individuals and enterprises to fail is a system that is simply taking another path to failure. Students who are given gold stars and 9th place ribbons (Meet the Fockers) cannot possibly establish a real sense of accomplishment or learn how to make a realistic assessment of their deficiencies or strengths. They are crippled by all the "help" enablers press on them.
The same is true of spoiled-brat economies. Enterprises that are never allowed to fail (for example, too big to fail banks, bankrupt cities, counties and states, defense contractors who produce failed weapons systems, healthcare organizations that cheat the government and patients, etc. etc. etc.) become deadwood that saps the vitality of the economy, dragging down the few productive sectors.
The "help" lavished on vested interests include sweetheart contracts, direct subsidies, tax credits, lines of credit, zero interest rates and a vast range of other subsidies. The entire point of the vast lobbying machine that funnels federal and Federal Reserve largesse to vested interests is about staving off the very failure that keeps economies from imploding (creative destruction).
By insuring spoiled brats/vested interests never face the consequences of their actions, choices and self-absorbed greed, we guarantee failure of the entire system. So by all means, keep passing out subsidies to too big to fail banks and 9th-place ribbons, and give the brats whatever they want as soon as they start wailing, regardless of the cost to the system itself.

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Monday, June 29, 2015

The Global Template for Collapse: The Enchanting Charms of Cheap, Easy Credit

Cheap, easy credit has created moral hazard and nurtured magical thinking throughout the global economy.
According to polls, the majority of Greek citizens want the benefits of membership in the euro/EU and the end of EU-imposed austerity. The idea that these are mutually exclusive doesn't seem to register.
This is the discreet charm of magical thinking: it promises an escape from the difficulties of hard choices, tough trade-offs, the disruption of vested interests and most painfully, the breakdown of the debt machine that has enabled the distribution of swag to virtually everyone in the system (a torrent to those at the top, a trickle to the majority at the bottom, but swag nonetheless).
If we had to summarize the insidious charm of magical thinking, we might start with the overpowering appeal of using credit to ease all difficulties.
Need money to fund various healthcare/national defense rackets? Borrow the money. Need to keep people employed building ghost cities in the middle of nowhere? Borrow the money. Need to keep buying shares of the company's stock to push the value of each share ever higher? Borrow the money.
The problem with cheap, easy credit is Cheap, easy credit destroys discipline. Thelifetime costs of debt taken on to fund bridges to nowhere, healthcare/national defense rackets, ghost cities, stock buybacks, etc. are never calculated. Theopportunity costs are also never calculated.
When credit is costly and hard to get, marginal borrowers can't get loans and nobody dares borrow at high rates of interest for low-yield, high-risk schemes.When credit is costly and hard to get, what doesn't pencil out doesn't get funded.
When credit is cheap and easy to get, every scheme and racket gets funding because hey, why not? The cost is low (at the moment) and the gain might be fantastic. But even if the gain is unknown, the kickback/campaign contributions make it worthwhile even if the scheme fails.
Professional economists are duty-bound to claim national economies are not merely extensions of households. But this is just another falsity passed off assophisticated truth by a profession that is being discredited by the reality of its failed policies, failed theories and failed predictions.
Since human psychology remains the dominant force in all economics, the household and national economies can only differ in scale.
In the 1970s, credit was scarce and hard to get. Young workers qualified for a $300 limit credit card, and it took careful management of that responsibility (always paying on time, etc.) to get a meager increase to $500. Mortgage rates were high (10%+) and your income and household balance sheet were scrutinized before any lender took a chance on lending you tens of thousands of dollars to buy a house. After all, the bank would be stuck with the losses if you defaulted.
Then came financialization. Banks could skim the profits from originating loans and offload the risk of default onto towns in Norway, credulous pension funds and other greater fools.
And if a default threatened the bank--for example, Greece in 2011--the bank simply bought political power and shifted the debt onto taxpayers. "The ATMs will stop working," the bankers threatened their political flunkies in Congress in 2008, and the bought-and-paid-for toadies in Congress and the Federal Reserve obediently shifted trillions of dollars in private liabilities and sketchy debt-based "assets" such as mortgages onto the taxpayers and the Fed balance sheet.
The same transfer of risk and losses occurred in Europe, as these charts demonstrate: (Source: If Greece Defaults, Europe's Taxpayers Lose)
Here is the debt in 2009--mostly owed to private banks and bondholders:
Here is the debt in 2015--almost all was shifted onto the backs of taxpayers:
Ask yourself this: if you could shift risk and losses to the taxpayers, how would that affect your investing/gambling? Wouldn't you take much higher risks, knowing that losses would not fall to you but to abstract taxpayers? Of course you would, and this is the essence of moral hazard--the disconnect of risk and consequence.
Cheap, easy credit has created moral hazard and nurtured magical thinking throughout the global economy. The heart of magical thinking is that consequences have been disappeared or shifted onto others by financial enchantment.
The interest on the debt will be paid by growth.
We will make so much money on this investment/gamble, paying off the debt will be easy.
This bet can't lose because the Fed/People's Bank of China/ECB/Bank of Japan etc. will never let the market decline.
When I write about the Martian Central Bank issuing quatloos to save Earth's bankrupt financial system, we know it's a joke: the Martian Central Bank and the quatloo do not exist.
But there is no difference between believing in cheap, easy credit as the solution to all problems and believing that the Martian Central Bank will save us from the consequences of cheap, easy credit and the destruction of fiscal discipline.

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Get a Job, Build a Real Career and Defy a Bewildering Economy (Kindle, $9.95)(print, $20)

go to Kindle edition
Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.


And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.

You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.

So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.

It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20

"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.


Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube)
The Old Models of Work Are Broken

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Sunday, June 28, 2015

Greece, Democracy and Magical Thinking

Regardless of what the Greek people choose, at least the choice will be theirs, along with the consequences.
What is representative democracy but organized bribery on a mass scale?Politicians seeking control of the spigots of state wealth and power promise endless swag to voters. Those who promise the most swag and do so with the most inspirational Soaring Rhetoric (tm) win elections and gain control of the spigots of state wealth and power.
What are promises of endless swag but lies cloaked in magical thinking? The magical thinking has many manifestations: the aptly named Laffer Curve, used to justify cutting taxes to the already-wealthy; entry into the Eurozone, a magical land of unicorns and endless prosperity, based not on hard work and the creation of value, but on membership alone; the blowing of serial asset bubbles in real estate and stocks (works equally well in Asia and the West), and various iterations of Manifest Destiny: it's our right to grow rich, preferably on the labor and resources of others.
Representative democracy offers choices with no consequences: no matter which politico and party is elected, the promises of endless swag remain unchanged.
In contrast, direct democracy offers choices with consequences: voters make a choice of policies that, whether intended or not, have consequences.
This forces voters to actually ponder consequences rather than indulge politico promises of endless swag in return for supporting a corrupt, predatory, parasitic status quo that benefits the few at the expense of the many.
Even direct democracy is easily corrupted by magical thinking. The actual consequences may be ignored in favor of magical-thinking dreams of only good consequences and no trade-offs or sacrifices, all powered by the magic of debt.
Debt is the ultimate political aphrodisiac, for it enables an orgy of consumption and a bacchanalia of spending on the backs of children and the yet unborn who don't vote.
The most potent of all political fantasies is that growth will solve every problem, i.e. we can grow our way out of corruption, artifice, lies, kleptocracy and most importantly, out of debt.
And so now, at long last, the Greek people have a direct say on whether they prefer magical thinking (i.e. that a debt-based, Elite-ruled kleptocracy can produce endless swag for all as long as the kleptocracy is within the European Union) or the real world of trade-offs, opportunity costs, sacrifices and broad-based growth that must be earned by producing more than is spent and investing the surplus in productive assets rather than being squandered on interest payments for past consumption.
Direct democracy is anathema to politicos, Elites, state bureaucracies, vested interests and kleptocracies, because the people might refuse to be bribed by magical thinking promises.
Elected representatives and the public can both be bribed or threatened into compliance, but when the promises of endless debt-based swag for all fade, it's the people who bear the consequences, not the politicos.
There are no guarantees that the people will choose more wisely than their representatives. The masses can choose magical thinking over reality, too. But with direct democracy, at least the people have an opportunity to choose wisely.
Regardless of what the Greek people choose, at least the choice will be theirs, along with the consequences.

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Saturday, June 27, 2015

The Chinese Stock Bubble Bursts: Any Questions?

June 26, 2015

When financial authorities are in full-blown panic, they cut rates.
Take a quick glance at this weekly chart of the Shanghai stock market:
1. Uptrend broken: check
2. MACD rolled over into a sell signal: check
3. Stochastic breaks down: check
Any questions on what's happening to the Chinese stock market bubble?
Those still entertaining hopes the bubble hasn't burst might want to ponder the frantic flailings of Chinese authorities as A Desperate China Cuts Key Policy Rates.
When financial authorities are in full-blown panic, they cut rates. When financial authorities are in full-blown panic, they deny being in a panic, which proves they are in a full-blown panic.
A reasonable technical target is the 200-week moving average, roughly 50% of the recent high. "Impossible," say recent buyers of Chinese stocks. Yes, of course it is. The authorities will never let the market decline by 50%. As always, this time it's different.

Thank you, Herb H. ($100), for your outrageously generous contribution to this site-- I am greatly honored by your steadfast support and readership.

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