The 202 million Americans born between 1940 and 1994 look forward to retirement, but to retire they will need financial stability. The assets required for retirement amount to roughly $540,000 for a middle-class professional who wishes to retire at age 67 on $70,000 per year including social security benefits. Unfortunately, though, 401-k, pension plans, annuities and other financial arrangements fail to protect retirees from a trio of financial risks—inflation, stock market volatility and deflation. These risks reduce Americans’ prospects for a comfortable retirement.
The steps that the Federal Reserve Bank has taken recently to eliminate deflation and depression may prove to weaken the dollar and cause inflation. In the 1970s, stagflation, the combination of unemployment and inflation, saw inflation rates of 13.3% in 1979 and 12.5% in 1980. That could happen again—and worse.
This past year, according to the Federal Reserve Bank, M1, currency and demand deposits, increased at a seasonally adjusted rate of 37.6% in the three months from August to November 2008. M2, which includes savings deposits, increased 13.9%. In comparison, in the five years that preceded the 1979-80 inflation, from November 1973to December 1978, M1 increased about 37%. In other words, since last summer the Fed has increased the money supply by an amount equivalent to the amount it increased the money supply during several years preceding the 1979-1980 inflation. More ominously, according to the St. Louis Fed, the monetary base grew from $873.8 billion on September 10 to $1,671 billion on December 17, an increase of better than 90%. These fluctuations suggest inflation risk.
Moreover, the recent panic in the financial markets reminds us that 40 or 50 percent fluctuations in stock market prices are to be expected over any twenty year period. No matter what, retirees face the risk of stock market declines.
Those facing retirement also face a third risk: fluctuating commodity and house prices. For instance, oil has descended from $145 to $37 and now back to the $40s per barrel over the past few months. Someone who purchased a year’s worth of heating oil last July suffered losses. Dollar depreciation, stock price depreciation and commodity price depreciation all threaten retirees, but of the three, the least threatening risk is depreciating commodity and house prices. Many retirees would benefit from deflation because deflation would stretch their consumption budgets. But the federal government has made prevention of deflation a key objective. Monetary policy is at loggerheads with retirement policy. Yet, none of the interest groups associated with retirees has emphasized this crucial issue.
Potential retirees thus face three risks. First, they face the risk of inflation, which would significantly erode the value of dollars that they hold and so devalue traditional annuity, savings and money market accounts. Second, they face the risk of stock market fluctuation. Third, they face the risk of price depreciation in commodities and real estate.
Dollar-Based Retirement
Much has been written about retirement in financial terms. Many experts argue that an annuity that replaces 60 to 80 percent of final average income is necessary to retire. In private industry, the old fashioned defined benefit pension plan used to accrue benefits of one to two percent of final average salary per year of service. That would mean that an employee with 35 years of service would get about 50% of pay, often partially reduced for primary social security benefits upon normal retirement age. When social security was added to the pension the result was about 70% of pay. With respect to today’s more popular 401(k) plans, an employee who earns $100,000 and aims to retire at 67 with 70% of pay including social security would need roughly $540,000. But what if the $540,000 is eroded to $400,000, $300,000 or less in real dollar terms over a 2-3 year period? In the late 1970s there were accounts of retirees forced to sell their homes or eat pet food in order to make ends meet because of governmentally-induced inflation.
Commodity-Based Retirement
It is time to rethink dollar-based retirement. Retirees need to pay for a stream of goods and services whose dollar value fluctuates. The most important risk that they face is diminution of the stream of goods and services, not their fluctuating dollar value. A steady dollar income in an inflationary environment poses a greater risk to retirees’ well being than a stream of commodities that meets retirees’ needs in a deflationary environment, even if the dollar value of the commodities is declining.
Retirees need to consider the commodity value of retirement income rather than its dollar value. That is, retirees need to compute their budgets, translate the budgets into commodity equivalents, and then annuitize a stream of commodity consumption into a flow of forward commodity futures contracts. Then, they need to fund the stream. Today, this can be conveniently done with exchange traded funds. Excess assets over and above the required commodity stream could be invested in traditional financial instruments, CD’s, precious metals or other hedges.
The reason this is necessary is the Federal Reserve Bank’s risky, potentially inflationary monetary policy.
In 2003, the average white retiree’s budget was $26,341. Social security, which is indexed for inflation, covered roughly half of this amount. The average retiree spent 15 to 17% of this budget on food, eight to 13% on utilities, 17% on transportation, 2.6% on gasoline 30-35% on rent, and 9-10% on healthcare.* Were inflation to escalate, the average retiree would face risk over and above social security. Commodity contracts could insure this risk.
But if a retiree earns twice the average wage, or about $80,000, and wants to retire at age 67 with an annuity of $56,000, then at today’s low interest rates he needs a pool of goods and services (net of social security) of at least $360,000 upon retirement. At a median October home price of $218,000, home ownership would account for 60% of this fund unless house prices continue to fall. If the retiree wishes to avoid a reverse mortgage or borrowing to fund his retirement (which would create yet an additional risk), he would need the full $360,000.
The $360,000 would need to be allocated as something like $56,000 for food (agricultural futures), $56,000 for energy (energy futures), about $50,000 in materials for home repair and new car costs (materials futures), with the remaining amount in cash, precious metals or other hedges against deflation and inflation to purchase a range of other items. It would be easy to develop more refined budgets that could be annuitized with forward commodities futures using exchange traded funds.
Retirees should not have to fear deprivation. However, for millions of Baby Boomers, the Federal Reserve Bank is creating that very risk. In order to sidestep the financial system’s uncertainties, Boomers need to stop thinking in dollar terms and start thinking in consumption terms. They need to re-conceptualize their retirement planning in terms of a commodity rather than a dollar stream. There is no reason why insurance companies and pension funds cannot furnish such arrangements.
Theoretically, money provides a store of value as well as a unit of account and medium of exchange. Our monetary system’s inability to do so deserves re-consideration. In 1913, when the Federal Reserve Bank was founded, life expectancy was only 52 years for males and females combined and planning for retirement was not an important issue for the average American. To this day retirement planning is not one of the Federal Reserve Bank's priorities. Americans continue to hope for retirement, but recent events suggest that Fed policy and the monetary system may encumber rather than facilitate their goals. Today’s economic theories were developed at a point in time when erosion of fixed incomes affected the wealthy and helped debtors. Today, inflation primarily harms the middle class and poor elderly.
*Pierre Bahtzi, “Retirement Expenditures for Whites, Blacks and Persons of Hispanic Origin. Monthly Labor Review, June 2003, pp. 20-22.
Tuesday, February 3, 2009
Henry Clay and the Panic of 1819
Henry Clay was the founder of the Whig Party and Abraham Lincoln's mentor. The Whig Party was antecedent to today's Republican Party. Born in Virginia, his family moved to Kentucky when he was 14 in 1791. Clay became a lawyer and was a Democratic Republican, that is, a follower of Jefferson. Although the Democratic Republicans opposed the Federalists' plan to support business at the federal level, some Democratic Republicans favored government support for manufacturing and banking at the state level:
"Though Republicans generally rejected federal assistance to economic development, they debated whether state governments should establish or subsidize banks, transportation companies, or other corporations. Henry Clay's first major effort in the Kentucky state legislature was to come to the defense of just such a corporation, the embattled Kentucky Insurance Company."*
The Kentucky Insurance Company was given a monopoly to insure all Mississippi River cargoes in the state of Kentucky but it was also given the power to make loans and issue notes, i.e., paper money. Many Kentuckians opposed this proposal. However, Henry Clay, who had been elected to the state legislature in 1803 favored paper money because, according to Watson**:
"men like Clay were convinced that the availability of credit for new investments and a plentiful currency that could expand in volume with the needs of local business were absolutely essential for regional prosperity. When an effort began in 1804 to repeal the company's banking privileges, Clay leaped to its defense."
The opponents of the Kentucky Insurance Company won a Pyrrhic victory in that the monopoly of paper money issuance was withdrawn from the Kentucky Insurance Company but it was granted to several other banks. Paper money issuance proceeded handsomely in Kentucky.
Clay was elected to the House of Representatives in 1811. He was an advocate of aggressive military action against the British in 1812 and a mild opponent of slavery (he himself owned slaves). Participating with John Quincy Adams in the peace negotiation with the British in Ghent in 1814, Clay returned to Congress at a time when the Federalist Party gasped its final breath due to its opposition to the War of 1812. Watson notes that***:
"the lessons of the war had persuaded many leading Republicans that some of the Federalists' favorite measures had merit after all, including a national bank, a protective tariff and federal aid to internal improvements. The new policies appealed strongly to Henry Clay, and the congressman from Kentucky was in the forefront of efforts to adopt them."
The First Bank of the United States's charter had expired in 1811, but the War of 1812 motivated support for a Second Bank. The war also increased support for federal subsidies to manufacturing because many felt that military strategy required manufactures. Difficulties in transporting troops and men led to support among future Whigs for road building. John C. Calhoun, later the advocate of state veto power and state's rights (over slavery), argued that improved transportation would make the Republic smaller and so overcome Montesquieu's and others' concern that republics in large areas cannot survive. "Let us then...bind the Republic together with a perfect system of roads and canals."+ However, many Americans were++:
"worried about the corrupting power of monopolies and feared that the creation of a new class of moneyed capitalists based on paper wealth would undermine the moral and political fiber of the republic."
After the War of 1812 American trade with Europe grew rapidly, in part because of a famine in Europe+++:
"Inexperienced in the fluctuations of an unregulated market economy, government officials and officers of the newly chartered Second Bank of the United States cooperated merrily in feeding the boom, often profiting from banking and land speculation on their personal accounts.
"The party ended abruptly, however, when the BUS had to collect enough specie to make the final payment on the Louisiana Purchase.++++ Loans were suddenly called in, and the Bank demanded specie in exchange for its holdings of state bank notes. Suddenly deprived of credit, numerous urban businesses collapsed and discharged their employees. Thousand of borrowers could not pay their loans and lost homes, farms and businesses to the sheriff's auction. Coincidentally, a bumper crop in Europe cut demand for American foodstuffs and drove farm prices even lower. From a heyday of prosperity and expansion, the American economy was plunged into the rigors of high unemployment, widespread bankruptcy and the suspension of specie payments by banks.
"The panic struck in 1819, and parts of the economy continued to be affected throughout the first half of the 1820s. Fortunately, most Americans still lived on subsistence farms that provided food for their tables, regardless of the level of commodity prices or the prospects for waged labor...Banks demanded strict repayment of their loans but refused to honor their own obligations to pay specie...At the center of everything, the Bank of the United States was the strictest creditor of all, seeking to pay its own debts by pressing state banks and private customers with equal severity. Among the many lawyers who did a handsome business suing delinquent borrowers and foreclosing lands for the BUS, Henry Clay was one of the most active, with a heavy case load all over Kentucky and Ohio."
*Harry L. Watson. Andrew Jackson versus Henry Clay: Democracy and Development in Antebellum America. Boston: Bedford St. Martin's, 1998. p. 46.
**Ibid., p. 48.
***Ibid., p. 52
+John C. Calhoun, "Speech on Internal Improvements", February 4, 1817, in Robert L. Meriwether, ed., The Papers of John C. Calhoun, vol 1, 1807-1817, 23 vols, p. 401.
++Ibid., p. 55
+++Ibid., p. 56
++++Note that this government policy of Jefferson's precipitated the panic, as did the excessive paper money issuance which would not have been possible without government legalization and support of fractional reserve banking and banking monopolies.
"Though Republicans generally rejected federal assistance to economic development, they debated whether state governments should establish or subsidize banks, transportation companies, or other corporations. Henry Clay's first major effort in the Kentucky state legislature was to come to the defense of just such a corporation, the embattled Kentucky Insurance Company."*
The Kentucky Insurance Company was given a monopoly to insure all Mississippi River cargoes in the state of Kentucky but it was also given the power to make loans and issue notes, i.e., paper money. Many Kentuckians opposed this proposal. However, Henry Clay, who had been elected to the state legislature in 1803 favored paper money because, according to Watson**:
"men like Clay were convinced that the availability of credit for new investments and a plentiful currency that could expand in volume with the needs of local business were absolutely essential for regional prosperity. When an effort began in 1804 to repeal the company's banking privileges, Clay leaped to its defense."
The opponents of the Kentucky Insurance Company won a Pyrrhic victory in that the monopoly of paper money issuance was withdrawn from the Kentucky Insurance Company but it was granted to several other banks. Paper money issuance proceeded handsomely in Kentucky.
Clay was elected to the House of Representatives in 1811. He was an advocate of aggressive military action against the British in 1812 and a mild opponent of slavery (he himself owned slaves). Participating with John Quincy Adams in the peace negotiation with the British in Ghent in 1814, Clay returned to Congress at a time when the Federalist Party gasped its final breath due to its opposition to the War of 1812. Watson notes that***:
"the lessons of the war had persuaded many leading Republicans that some of the Federalists' favorite measures had merit after all, including a national bank, a protective tariff and federal aid to internal improvements. The new policies appealed strongly to Henry Clay, and the congressman from Kentucky was in the forefront of efforts to adopt them."
The First Bank of the United States's charter had expired in 1811, but the War of 1812 motivated support for a Second Bank. The war also increased support for federal subsidies to manufacturing because many felt that military strategy required manufactures. Difficulties in transporting troops and men led to support among future Whigs for road building. John C. Calhoun, later the advocate of state veto power and state's rights (over slavery), argued that improved transportation would make the Republic smaller and so overcome Montesquieu's and others' concern that republics in large areas cannot survive. "Let us then...bind the Republic together with a perfect system of roads and canals."+ However, many Americans were++:
"worried about the corrupting power of monopolies and feared that the creation of a new class of moneyed capitalists based on paper wealth would undermine the moral and political fiber of the republic."
After the War of 1812 American trade with Europe grew rapidly, in part because of a famine in Europe+++:
"Inexperienced in the fluctuations of an unregulated market economy, government officials and officers of the newly chartered Second Bank of the United States cooperated merrily in feeding the boom, often profiting from banking and land speculation on their personal accounts.
"The party ended abruptly, however, when the BUS had to collect enough specie to make the final payment on the Louisiana Purchase.++++ Loans were suddenly called in, and the Bank demanded specie in exchange for its holdings of state bank notes. Suddenly deprived of credit, numerous urban businesses collapsed and discharged their employees. Thousand of borrowers could not pay their loans and lost homes, farms and businesses to the sheriff's auction. Coincidentally, a bumper crop in Europe cut demand for American foodstuffs and drove farm prices even lower. From a heyday of prosperity and expansion, the American economy was plunged into the rigors of high unemployment, widespread bankruptcy and the suspension of specie payments by banks.
"The panic struck in 1819, and parts of the economy continued to be affected throughout the first half of the 1820s. Fortunately, most Americans still lived on subsistence farms that provided food for their tables, regardless of the level of commodity prices or the prospects for waged labor...Banks demanded strict repayment of their loans but refused to honor their own obligations to pay specie...At the center of everything, the Bank of the United States was the strictest creditor of all, seeking to pay its own debts by pressing state banks and private customers with equal severity. Among the many lawyers who did a handsome business suing delinquent borrowers and foreclosing lands for the BUS, Henry Clay was one of the most active, with a heavy case load all over Kentucky and Ohio."
*Harry L. Watson. Andrew Jackson versus Henry Clay: Democracy and Development in Antebellum America. Boston: Bedford St. Martin's, 1998. p. 46.
**Ibid., p. 48.
***Ibid., p. 52
+John C. Calhoun, "Speech on Internal Improvements", February 4, 1817, in Robert L. Meriwether, ed., The Papers of John C. Calhoun, vol 1, 1807-1817, 23 vols, p. 401.
++Ibid., p. 55
+++Ibid., p. 56
++++Note that this government policy of Jefferson's precipitated the panic, as did the excessive paper money issuance which would not have been possible without government legalization and support of fractional reserve banking and banking monopolies.
Saturday, January 31, 2009
Where Do We Go From Here?
In 1776 the nation's population was over three million, yet it produced leaders like Washington, Franklin, Jefferson and Adams. These were men of integrity, inner-directed, with a strong moral sense. Today America's population is over 300 million, 100 times larger, but our leaders lack vision, integrity and understanding. Part of the difference may be the transition from inner to other directedness that occurred beginning in the late nineteenth century as the media and centralized banking became dominant. This transformation led to professionalization of work, increased specialization, larger scale enterprise and personality that tends to be reflecting instead of visionary. Leadership is not a trait associated with fashionableness or consumerism.
America traded its moral vision for a Model T Ford and a radio broadcast.
The question is not so much where do we go from here, but rather what in ourselves inhibits greatness. America is only as great as its people. But a people addicted to mass consumption, groupthink, conformity and fashionable trends cannot be great.
Americas' coming economic decline is a product of the spiritual mediocrity to which America has been committed since the Progressive era. It is a product of the exchange of consumption for morals. It can be repaired only when Americans insist on thinking for themselves; on educating themselves as to liberty; and on freeing themselves from the addiction to fear, consumption and conformity that has dominated urban American society for the past century. From that transformation leadership and greatness will evolve.
America traded its moral vision for a Model T Ford and a radio broadcast.
The question is not so much where do we go from here, but rather what in ourselves inhibits greatness. America is only as great as its people. But a people addicted to mass consumption, groupthink, conformity and fashionable trends cannot be great.
Americas' coming economic decline is a product of the spiritual mediocrity to which America has been committed since the Progressive era. It is a product of the exchange of consumption for morals. It can be repaired only when Americans insist on thinking for themselves; on educating themselves as to liberty; and on freeing themselves from the addiction to fear, consumption and conformity that has dominated urban American society for the past century. From that transformation leadership and greatness will evolve.
Thursday, January 29, 2009
Obama Slights Military
Bob Robbins and Larwyn have forwarded this Pajamas Media story about how Barack Obama snubbed the military gala on inauguration day. Since 1953 every president has attended it. Obama was the first to decline the invitation.
Barack Obama's election was unquestionably a positive for race relations and for healing the wrongs of the past. However, few voters were willing to ask questions of substance about Mr. Obama's opinions. Mr. Obama has long been associated with anti-American and left wing activists, to include Bill Ayers, ACORN and Jeremiah Wright. Thus, a snub of this kind reveals an underlying contempt for the US military which the left harbors. Undoubtedly Mr. Obama did not consider this move carefully, as he is usually wont to do. Mr. Wolf, the author of the Pajamas Media article, notes that Vice-President Biden attended. The sponsors of the event put a positive spin on President Obama's absence. Nevertheless, a snub of this kind reveals much about Mr. Obama's instincts.
Barack Obama's election was unquestionably a positive for race relations and for healing the wrongs of the past. However, few voters were willing to ask questions of substance about Mr. Obama's opinions. Mr. Obama has long been associated with anti-American and left wing activists, to include Bill Ayers, ACORN and Jeremiah Wright. Thus, a snub of this kind reveals an underlying contempt for the US military which the left harbors. Undoubtedly Mr. Obama did not consider this move carefully, as he is usually wont to do. Mr. Wolf, the author of the Pajamas Media article, notes that Vice-President Biden attended. The sponsors of the event put a positive spin on President Obama's absence. Nevertheless, a snub of this kind reveals much about Mr. Obama's instincts.
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