Friday, October 12, 2007

Hillary Clinton Shines Shoes

In 2005 President Bush proposed the establishment of 401-k type stock investment accounts for Social Security. The idea came under attack from the Democrats and was stopped. At the time, the stock market was coming off its 2002 lows. Now, the stock market is reaching new highs. It is therefore curious that the Democrats, notably Hillary Clinton, would choose to propose the very same idea during this presidential primary season. I wonder if there is some kind of financial manipulation lurking behind Clinton's proposal.

In an October 11 editorial, the New York Sun points out that Hillary Clinton opposed establishing Social Security investment accounts two years ago but now she is proposing "private accounts" (separate from Social Security) for all Americans. The Sun editorializes

"Given, this isn't giving workers back the money the government is taking in Social Security taxes as President Bush (and most of the Republican candidates for president) would do, but the accounts — even as add-ons to Social Security — are a huge victory in principle for the Bush view."

I find the Clinton proposal odd for several reasons. First, since 1982 I have been putting previously $2,000, now $5,000 (I believe $4,500 if you're under 50) into Individual Retirement Accounts. The idea was created in 1974 as part of the Employee Retirement Income Security Act of 1974. Paul J. Yakoboski of the Employee Benefit Research Institute notes that:

"The Economic Recovery Tax Act of 1981 (ERTA) extended the availability of IRAs to all workers, including those with pension coverage. The Tax Reform Act of 1986 (TRA '86) retained tax-deductible IRAs for those who did not participate in an employment-based retirement plan (and if married, whose spouse did not participate in such a plan), but restricted the tax deduction among those with a retirement plan to individuals with incomes below specified levels. In addition, TRA '86 added two new categories of IRA contributions: nondeductible contributions, which accumulate tax free until distributed, and partially deductible contributions, which are deductible up to a maximum amount less than the $2,000 maximum otherwise allowable."

Hence, there is absolutely nothing new about retirement accounts for anyone. They are currently available to anyone and everyone, and if you don't have a 401(k) or pension plan, they are tax deductible. It is true that the $4,500 limit is a low percentage of income for anyone earning over $65,000. But there also is such a thing as a SERP, self-employed retirement plan, which serves high earners. As the financially savvy know, Roth IRAs also are available to those who earn less than $150,000. It's not clear to me that the Clinton proposal is more than vacuous, which makes me suspicious. Hillary has to know that IRAs exist, so why would she make this proposal now?

Perhaps Hillary aims to improve benefits for those earning over $65,000 (this is not clear from the Sun article) and doesn't want to say so, but any extensions of the IRA concept will probably have next to no effect on private savings, so this idea would also be vacuous. USA Weekend Magazine pointed out in 2004 when the IRA limits were raised:

>"Even though retirement planning tops the list of Americans' money concerns, astonishingly few people contribute to individual retirement accounts -- a mere 6% of eligible Americans, according to a recent study by the Congressional Budget Office."

Given the small interest in IRAs, what help would extending the IRA concept be? High earners likely save anyway and, more so, typically have access to either a 401(k) (with limits that might bother those earning over $100,000) or a SERP. SERPs have high limits.

An intriguing question that comes to mind is why Hillary would make a proposal which may be a first step toward permitting private accounts in social security at this point in time. attributes the following quote to Bernard Baruch, the Wall Street tycoon, in 1929:

"When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing"

Incidentally, Quoteland also attributes Baruch with the statement "Bears don't live on Park Avenue" (which may explain why I live in West Shokan).

In 2005 the stock market was coming off its 2002 lows. In 2007 the market is at or nearing all-time highs, especially if you have been investing in gold stocks as I have (Randgold (GOLD) courtesy of Howard S. Katz has had a tremendous run and I am breaking out my cigars and champagne.)

The question to ponder is why Hillary would begin to speak about expanding stock market accounts just when the market is reaching all time highs; the dollar is reaching all time lows; inflation is going from very warm to hot; the Chinese are beginning to sell dollars, portending increased inflation; and public awareness of monetary expansion, which has been going on since the 1980s, will result in political pressure to limit monetary expansion aka Fed counterfeiting aka raising the Fed Funds interest rate. That is, inflation will stimulate a declining stock market (the stock market goes up and down because of Fed interest rate policy, i.e., whether the Fed is counterfeiting many new dollars or just a few) because inflation causes public pressure to stop the Fed's counterfeiting; the Fed will then raise interest rates; and the stock market will then decline. Since 1981 the Fed has been counterfeiting many new dollars, which it calls "lowering the Federal Funds rate", and which Howard S. Katz calls "counterfeiting". With increasing inflation, now that the Chinese are tiring of giving billionaire hedge fund managers in the U.S. large welfare subsidies, the risk of a stock market collapse is increasing.

All this makes me wonder why Hillary would begin to think about encouraging small investor interest in the stock market at this point in time.

Several bloggers such as Captain's Quarter's , Cao's blog as well as talk radio have been discussing a nexus between Hillary and speculator George Soros. Whether Soros or others on Wall Street have an interest in seeing an exogenous shock to stimulate stock prices just as the fundamentals are working toward a weakening stock market is a question that deserves some scrutiny.

Another question is what will be the effects, both in terms of actual economic redistribution and in terms of psychology, of the Bush/Clinton proposals to expand stock ownership. The Fed does one thing, increase the money supply. This in turn has two effects: (1)make the rich richer by boosting the stock market because of lower interest rates and (2) make the poor poorer by causing inflation. There is probably some tipping point at which effect (1) becomes outweighed by effect (2) in fact. There is also probably a different tipping point at which effect (1) becomes outweighed by effect (2) in peoples' minds. The two are likely different. If someone has a $100,000 stock account they may be worse off from the net effect of lower interest rates and the higher price of grapefruit, but the higher stock account may be more salient or apparent to them, and they may see themselves as better off. It would not be a far stretch to imagine that Hillary's proposal is linked to the idea of encouraging this kind of wealth illusion, which would have the effect of moderating but not fundamentally changing the effects of Fed policy.

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