Monday, December 22, 2008

New York Times Aims to Destroy Your Pension

In a December 22 editorial the New York Times openly advocates inflation as a "cure" for unspecified "ailments" in the economy. Goldbug Howard S. Katz, who runs an investment newsletter, brought the article to my attention earlier today. Katz has been tracking the rapid expansion of Federal Reserve Bank Credit, monetary reserves and the money supply and argues that the safest way to secure your retirement is to take a pro-gold, anti-dollar position despite recent run-ups in the dollar. The stimulus the Fed is providing will lead to a bull market in stocks but a super-bull in commodities. Katz also argues that the current "crisis" has been a media phenomenon fabricated in response to bankers' demands for extra liquidity in order to extract additional wealth from America's declining economy (by declining I mean suffering from long-term, century-long misallocation of resources due to Federal Reserve and "Progressive" policies).

Allow me to quote the from the December 22 article entitled "The Printing Press Cure":

"The Federal Reserve as much as admitted last week that lowering the benchmark interest rate — even to zero — would not be powerful enough medicine to revive today’s ailing economy. And so it has opted for the printing-press cure, pledging for the foreseeable future to pump vast sums into banks, other financial firms, businesses and households.

"Economic history — of the Great Depression of the 1930s and Japan’s lost decade in the 1990s — suggests that the Fed is doing the right thing. Confronted then, as now, with the twin scourges of deepening recession and incipient deflation, governments did more damage with too little intervention than they would have done with too much.

"But that doesn’t make such intervention 'good.' It’s a big and unfortunate risk in itself."

One of the outcomes of inflationary Fed policy will be the destruction of retirement benefits based on wages earned prior to the inflation (that is, pensions of people who retired prior to the inflation during the coming 5-10 years). Many boomers will likely fall into this category. As boomers retire on annuities, traditional pensions or hold assets in Guaranteed Investment Contracts, savings accounts, safe bonds or other dollar-denominated assets, their well-being will be destroyed as the Times and Wall Street cheer on.

As well, wages do not typically keep pace with inflation. Thus, the already stretched worker will be stretched ever tighter in a Wall Street drawn noose. Employment relations, already weakened by past rounds of inflation, regulation, and globalization, will become weaker. Employers will find it in their interest to terminate post-retirement medical insurance and other benefits that keep pace with inflation. During the 1970s and 1980s employers resented indexing and escalator clauses that caused wages to keep pace with inflation. It is likely that they will be encouraged to reduce or terminate benefits just at the time that health care costs go under exponentially increasing pressure because of the retirement of the baby boomers. The problem cannot be solved by nationally sponsored health insurance because the cost pressures are demographic. All nationally sponsored insurance can do is ration care so that none of the fingers will be sewn back on, just as they wouldn't be in Cuba or France.

The Times does not say exactly why it thinks the economy is in so much trouble that inflation is necessary. Is there a law of economics that states that a few years of excessive mortgage lending necessitates inflation? Why was late nineteenth century America able to produce rising (instead of falling, as the Times advocates) wages, rising productivity, rising employment levels, absorption of massive amounts of immigration and the very deflation that the Times so dreads? Why was it possible to thrive before the Fed was founded, and why are we now in so much trouble after a century of the Fed's existence?

Two of the funnier sentences in the editorial are these:

"To jump-start the economy requires getting money to those who will spend it fast and in full. That includes unemployed workers, low- and middle-income families, and state and local governments."

Back in the 1940s and 1950s the Times supported urban renewal on the pretext that it would lead to better housing for the poor and middle class. Instead, the funding, which was huge in New York City, was given to developers, some of whom were friends of the Times's owners, the Ochs Sulzbergers. The developers used it to exercise extensive private-use eminent domain, banishing factory jobs from New York, destroying low-income neighborhoods and building expensive office buildings and co-ops for millionaires. The middle class was set up in dreary suburbs on Long Island like Levittown under the same programs (of Title I and Title II) and high-crime urban ghettos for minorities were established featuring dreadful public housing projects built with the Times's glowing support. Yes, the Times always has the interests of the poor and middle class in mind.

Now, the Times tells its readers that there is a "crisis" (what it is is never specified) and that Barack Obama's leadership in the interest of inflation is essential.

I do not normally pay attention to what the Times has to say, and this article sums up why. There are two categories of people who read the Times. The first is the people who take them seriously as an information and opinion source. Such people are lost souls at the fringes of society, and I feel sorry for them. The second is the people who read the Times in order to find out what the lost souls are thinking. But the lost souls are headed for the poor house, and the times when the Times's opinions mattered are passed. Let us bury the last copy of the Times in Adolph Ochs's grave.

As far as your own retirement goes, I would seriously consider gold, gold stocks, silver, agricultural commodities, the "DBC" and Swiss Francs. Keeping your money in US dollars is akin to flushing it down the drain.


Ugur Yilmaz said...

Fed's so-called monetary policies appalls me. In my opinion, the Fed has difficulty to get what the reason behind the latest financial crisis is.
The world is much more integrated than ever before. We are not living in the 60s or 70s. Any narrow-sighted bad economic policies spread out the whole world, as this is the case in last financial crisis, which has turned out to global economic crisis. In the last 8 years, US dollars continuously pumped into the markets by the Fed to stimulate markets, which in turn caused the bubbles. As a result of this policy, US Dollar is depreciated all around the world. Nobody wants US Dollar outside the US, because if one earns or keeps US Dollar or Dollar-denominated assets one's purchasing power is wearing out without parachute.
My point is excessive and successive rate cuts by the Fed generate bubbles and these bubbles spread out the world due to globalization. The Fed seems obsessed with the rate cuts. The problem is that the markets are never going to get enough of it.They always demand more cuts. This is a vicious circle.

And, I aggree that the Swiss Francs may be the safe heaven.

Mitchell Langbert said...

Thanks, Ugur. Ugur was my student at Brooklyn College and is now in the doctoral program in economics at George Washington University. He is an "A+" negotiator too!