The Economic Crisis Of 2008 Never Ended...
ZeroHedge.com Tue, 10/29/2019 - 09:15
Authored by Rob Bennett via ValueWalk.com,
There have been many articles appearing in recent months suggesting that the economy might go into a recession within the next year. Many have focused on whether the Federal Reserve should cut interest rates to stop this from happening. There also has been a lot of speculation as to the effect that an economic downturn will have on the 2020 Presidential elections. I have not seen anyone talk about how today’s high stock prices will likely cause an economic collapse.
There have been numerous suggestions coming at things from the opposite direction, making the case that a recession will likely cause stock prices to fall hard. But I view that way of thinking about things as a holdover from the Buy-and-Hold Era. If stock price changes are caused by rational assessments of economic developments, it would make sense that economic bad times would cause stock prices to fall. But I believe that Shiller’s research showing that valuations affect long-term returns is legitimate research. If that is so, then high stock prices are caused by irrational exuberance and the inevitable disappearance of irrational exuberance causes trillions of dollars of consumer spending power to leave the economy, causing a contraction.
If that’s the way things work, the economic crisis of 2008 never came to an end. Employment numbers improved and businesses stopped going under. So, in a surface sense, economic conditions certainly improved. But the economic numbers improved only when CAPE levels returned to the dangerous levels that applied prior to the onset of the crisis. We pumped up stock prices to make people less fearful of spending but at the cost of insuring that a follow-up price crash would be coming in not too long a time.
So the economic crisis never really ended. It went into remission. If the economy was booming with stock prices at reasonable levels, we could take comfort that good times really had returned. But I don’t feel able to trust a recovery that is financed by an overpriced stock market. Overpriced stocks makes us feel that it is safe to spend again. But the financial security pushing spending forward is illusory. There is no “there” there when stock prices could fall to fair-value levels at any moment and trillions of dollars of spending power could be taken off the table again.
I am not a fan of illusory stock prices. I think that we all should be doing all that we can to keep stock prices at something close to fair-value levels at all times. All of our financial planning decisions depend on us knowing how much wealth we possess and it is not possible to know this for so long as stocks are priced at two times their real value, as they are today.
We cannot even form reasonable assessments of the merit of the actions of policymakers at times when high stock prices are causing the economic numbers to look better than they would look if stock prices were at reasonable levels. President Trump naturally says that it is his policies that have brought on good economic times. But how can we know how the economy would be doing if the entire stock market were priced at one-half of the level at which it is today priced. And I of course do not intend to make a partisan comment here. President Obama’s policies looked better because of the effect of high stock prices as well.
It is the Federal Reserve’s job to keep the economy from contracting too hard. Does that mean keeping stock prices from crashing? I get the sense that there are times when Federal Reserve members take this factor into consideration. But keeping irrational exuberance going at some point becomes a futile endeavor. We can’t just create money out of thin air by pushing stock prices upward. At some point the market insists that prices reflect real value (this is Shiller’s core finding). Pushing prices up is a holding action. Sooner or later we have to accept that fair-value prices will prevail again and that the economic pain that follows from a return to fair-value prices must be endured.
High stock prices are a lie. That’s what I am saying. They are not just a lie that affects stock investors. They are a lie that affects everyone who is living in our economic system. The Pretend Money that is created when stock prices rise above fair-value levels always disappears down the road a bit. And the net result is a negative because of the disruption experienced when businesses that appeared to be doing well go under and when workers who appeared to be headed for decent retirements find themselves far short of achieving their financial goals at a time in life when it is too late to do anything about it.
I reject the idea that we may be seeing a new economic crisis in the days ahead. To my way of thinking, we will be seeing a resumption of a crisis that we experienced for only a few months in late 2008 and early 2009 and then put off for another time. We put that crisis off because we did not look how out stock portfolios looked when fair-value price levels were restored. But the put-off was a temporary thing. To achieve more permanent solutions to the problems that received national attention in late 2008, we are going to have to come to terms with the primary cause of those problems -- the high stock prices that still apply today.
Three Things You Didn't Know About The Crash Of 1929
ZeroHedge.com Tue, 10/29/2019 - 09:55
Authored by Simon Black via SovereignMan.com,
October 28, 1929 - 90 years ago this week - is known as ‘Black Monday’ in financial circles.
The US stock market had peaked the previous month, on September 3, 1929, with the Dow Jones stock index reaching a record high of 381.
But throughout September and October, nervous investors began pulling their money out of the market. And over a three day period in late October (including Black Monday), the market lost more than 30% of its value.
Ninety years later, I thought it would be prudent to look at three key insights from that historic crash, starting with:
1) Stocks are more overvalued today than they were in 1929
Back in 1929, the price/earnings ratio of the average company trading on the New York Stock Exchange was about 15.
In other words, investors were willing to pay $15 per share for every $1 of the average company’s profit.
That’s not high at all. In fact, a Price/Earnings ratio of 15 is completely in line with historic averages.
Coca Cola’s Price/Earnings ratio back in 1929 ranged between 15 and 18. Today it’s 30… meaning that investors today are willing to pay roughly twice as much for each dollar of Coke’s annual profit.
Coca Cola is actually quite an interesting case study.
If we just go back a few years to 2010, Coca Cola’s annual revenue was $35 billion. By 2018 the company’s annual revenue had fallen to less than $32 billion.
In 2010, Coca Cola generated $5.06 in profit (earnings) per share. In 2018, just $1.50.
And Coca Cola’s total equity, i.e. the ‘net worth’ of the business, was $31 billion in 2010. By 2018, equity had fallen to $19 billion. So over the past eight years, Coca Cola has lost nearly 40% of its equity, sales are down, and per-share earnings have fallen by 70%. Clearly the company is in far worse shape today than it was eight years ago. Yet Coke’s share price has nearly DOUBLED in that period.
It’s not just Coca Cola either; the Price/Earnings ratio of the typical company today is about 50% higher than historic averages. (This means that the stock market would have to drop by 50% for these ratios to return to historic norms.)
It’s clear that investors are simply willing to pay much more for every dollar of a company’s earnings and assets than just about ever before, including even right before the crash of 1929.
2) Stocks fell by nearly 90% in 1929… and it took decades to recover.
The ‘crash’ wasn’t isolated to Black Monday.
From the peak in September 1929, stocks ultimately fell nearly 90% over the next three years. The Dow bottomed out in 1932 at just 42 points. 42 is lower than where the Dow was trading in 1885… so the crash wiped out DECADES of growth. And it took until November 1954 for the Dow to finally surpass its high from 1929.
If that were to happen today, it means the Dow would fall to just 2,700… a level it hasn’t seen since the early 1990s. And it wouldn’t return to today’s highs until the mid 2040s. Most people think this is completely preposterous. And to be fair, I think the government and central bank will do everything in their power to prevent a severe crash.
The Federal Reserve has already announced that it will print another $60+ billion per month, which should be favorable for the stock market in the short term. But just because we can’t imagine something happening doesn’t mean it can’t happen. In fact it’s happening right now in Japan:
Japan’s stock market peaked in late 1989 with its Nikkei index reaching nearly 39,000.
Within a few years the Nikkei had lost half of its value and would ultimately fall by 80%.
Even today, thirty years later, the Nikkei index is still 40% below its all-time high.
There is no law that requires the stock market to go up. It can fall. And it can stay low for years… even decades.
3) Adjusted for inflation, stocks have returned just 1.7% per year since 1929.
It’s best to think long-term about any investment. Businesses take time to grow and expand, and patient investors who understand this tend to do well. But when thinking about the long-term, it’s imperative to consider the extraordinary effects of inflation.
Every single year your money loses around 2% of its value. But over time those small bites of inflation fester into a major chunk of your investment gains. Consider that, even according to the federal government’s monkey math, the US dollar has lost 94% of its value since 1929.
So even though the Dow is more than 70x higher than it was in mid-1929, when you consider the effects of inflation, stocks are only about 5x higher over the past 90 years. That works out to be an average annualized return of just 1.7%.
Even over the past 20 years– if you go back to late 1999, the stock market has only returned about 2.2% per year when adjusted for inflation.
Think about all the risks and wild market swings that investors have had to deal with over the past 20 years– all for a measly 2.2%.
It’s interesting to note that, when adjusted for inflation, GOLD has outperformed stocks over the long run.
When adjusted for inflation, gold has averaged a 1.8% return since 1929 (slightly higher than stocks), and a 6.7% return since 1999– more than 3x as much as stocks.
But unlike stocks, people who own gold haven’t had to put up with the same risks. No shady brokers. No WeWork BS. No Enron scandal.
They earned 3x more than the stock market– with the added benefit of being able to hold their investment right in their own hands.
44% of Consumers Have Expenses Exceeding Incomes
Yahoo finance / Bloomberg.com
Jamie Dimon has been quick to trumpet the strength of U.S. consumers. Federal Reserve chief Jay Powell calls them a bright spot that is countering weakness in the manufacturing sector.
But there are signs that U.S. households are starting to feel stretched, possibly making it harder for them to continue propping up the economy.
The evidence is showing up on the debt side. Serious delinquencies on credit cards and auto debt have been creeping up in recent quarters. That’s pushed some banks to set aside more money to cover bad loans and tighten lending standards for credit cards and other consumer loans.
Adding to the concerns was an unexpected drop in retail sales in September, the first decline in seven months. While economists don’t see any serious problems yet, the numbers showed that consumers, who power some 70% of the U.S. economy, may be on shakier footing. That’s a potentially worrisome sign when the manufacturing sector slipped into a recession in the first half of the year and businesses broadly are cutting back on investments.
“We’re in a more fragile situation where consumers are more skittish,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “They’re more susceptible to negative news shocks even though we’ve got what should be these great underlying fundamentals.”
Many banks are already reacting. Even as JPMorgan Chase & Co. Chief Executive Officer Dimon was calling the consumer “quite strong” earlier this month, his bank increased the money it was setting aside for loan losses in its consumer and community banking division to $1.3 billion, from $980 million a year earlier. It did so even as the amount of loans in that unit’s books fell.
Discover Financial Services lifted loan loss provisions by 8%, saying consumers were “holding up well” but the company was being “disciplined and conservative and credit because it feels late cycle.“
American Express Co. also increased the amount it set aside for loan losses by 8% for the three months ended in September, because it had to write off slightly more bad loans, and more borrowers are falling behind on their obligations.
Across the U.S. in the three months that ended in June, auto loans that were 90 or more days late made up 4.6% of total balances, near the highest level since 2011. In credit card lending, 5.17% of loans turned seriously delinquent in that period, the fastest rate since 2012, according to Federal Reserve Bank of New York data.
Those rates remain well below levels seen during the financial crisis, but represent an uptick from earlier years in the recovery when banks were reluctant to lend to all but the most creditworthy borrowers.
“Why would firms go out there and take a big swing on risk?” said Brett Ryan, a senior U.S. economist for Deutsche Bank.
Smaller banks have been competing aggressively for new card customers, helping delinquencies on those loans spike to 6.3%, compared with 2.4% for accounts tied to the 100 largest lenders, according to Fed data.
Some bank research analysts are now raising more questions about how any weakness among consumers will affect finance companies. JPMorgan equity analysts said they were turning more conservative on firms including Ally Financial Inc. and Santander Consumer USA Holdings Inc., citing a potential economic slowdown and signs of weaker labor markets.
Wage growth has been strong for much of the last year, but it’s since slowed to its lowest level in more than a year, to about 2.9%.
Some corporate executives are also growing more wary. Gene Lee, chief executive officer of Olive Garden parent Darden Restaurants Inc., said in a conference call last month that “there’s some uncertainty entering into the consumer” despite strong wage growth and employment.
Cracker Barrel Old Country Store Inc.‘s CEO Sandra Cochran said last month that the company had turned “more cautious” on consumer demand as they begin to feel the effects of tariffs and higher gas prices.
UBS Group AG analysts said they’re growing worried about lower-income consumers who are showing signs of weakness in an otherwise strong market. A survey conducted by the bank found that debt burdens for many of those households have grown, and more are reporting credit problems like loan application rejections.
Of the people surveyed, 21% said their mortgage loan applications aren’t completely accurate, up 2 percentage points from a year ago. That’s a sign that banks’ credit tightening is “substantial enough to require some consumers to falsify part of their loan application,” the analysts wrote. And fewer households reported that their financial condition had improved in recent months.
About 44% of consumers are not meeting their expenses, the UBS report showed. That’s just a tick above the level a year ago but still the highest in five years.
“This is a two-tier economy,” said Matthew Mish, a credit strategist at UBS.
Europe's Spending Binge Is Slowing Its Economy
ZeroHedge.com Thu, 10/24/2019 - 02:00
Authored by Daniel Lacalle via The Mises Institute,
The idea that governments can’t lower taxes because there is a deficit, but are free to raise all expenses even if there is a deficit can be found in many political manifestos these days. Central planners always see the economic challenges as a problem of demand, and as such cringe at the idea of prudent investment and saving. When GDP growth, gross capital formation, and consumption are lower than what Keynesians would want, they always blame the alleged problem on “too much saving.” This is a ridiculous premise based on the perception that economic cycles and excess capacity do not matter and if companies and citizens don’t spend as much as the government wants, then the public sector should spend a lot more.
That is why tax cuts are hated and government spending plans are hailed. Because tax cuts empower citizens while government spending empowers politicians. An extractive view of the economy in which politicians and some economists always consider that you earn too much and they spend too little.
The big bet of the huge increases in spending and taxes that we read about all over the eurozone is that:
a) these will not have an impact on growth,
b) they will improve public accounts and
c) they will exceed budget expectations.
However, we have empirical evidence showing that massive government spending plans and tax hikes generate the opposite effect: weaker economic growth, higher debt and larger imbalances. The probability of attacking potential growth, worsening public accounts and breaching optimistic estimates is more than high.
The empirical evidence of the last fifteen years shows a range of fiscal multipliers of public spending that, when positive, is very poor (below 1) and in most countries, especially with open and indebted economies, the fiscal multiplier of higher government spending has been negative.
Fiscal multipliers are particularly negative in times of weakness in public finances, and nobody can deny that the eurozone has exhausted its fiscal space after more than three trillion euro of expansive budgets in a decade.
More government spending will not spur growth in economies where the public sector already absorbs more than 40% of the GDP, and where the previous large stimulus plans have generated more debt and stagnation.
Adding tax hikes to the formula is even more damaging. The IMF analyzes 170 cases of fiscal consolidation in 15 advanced economies from 1980 to 2010 and finds a negative impact of a 1% increase in taxes of 1.3% in growth two years later. Additionally, the vast majority of empirical studies going until 1983 and especially in the last fifteen years, show a negative impact of tax increases on economic growth and a neutral or negative impact of increases in spending on growth. Moreover, studies on the effect of bigger tax hikes on tax revenues reveal a negative impact on receipts. In fact, a 1% increase in the marginal tax rate may reduce the taxable income base by up to 3.6%.
The risk for the eurozone is huge because one of the main reasons for its stagnation is precisely the chain of massive fiscal stimulus plans implemented in the past two decades. To say that Germany should copy the fiscal strategy of France, a country that has been in stagnation for three decades defies any economic logic. There is no evidence that Germany is spending or investing ñless than what it needs, rather the opposite.
The problem of the eurozone is not lack of government spending or taxes, but the excess in both.
The string of spending increases announced daily in Europe disguise an extremely dangerous bet: that the ECB will bail out the eurozone forever, especially because the diminishing effects of monetary and fiscal policy are evident.
Tax cuts will not work either if those are not matched with efficiency improvements and red tape cuts precisely to ensure that public services continue to exist within thirty years. Burdening the private sector with more taxes and increasing an already bloated government spending may lead the eurozone to the Argentine paradox. By ignoring the sources of wealth generation as well as job creation and expelling them with confiscatory and extractive policies all that is achieved is unemployment and stagnation.
The eurozone cannot expect to achieve the growth it has not delivered repeating the same mistakes, further weakening an economy that needs to bet on attracting investment, reinforcing growth and improving technology and the competitiveness of companies.
When politicians charge an economy with large and growing fixed costs, without prioritizing investment attractiveness, productivity and economic freedom, they jeopardize the welfare they pretend to defend.
The problem of productivity, growth, and employment is not solved by putting obstacles to investment and increasing extractive measures.
Growth and the welfare state are not strengthened by putting up political spending and debt as pillars of an economy.
How a major U.S. farm lender left a trail of defaults, lawsuits
HARROD, Ohio (Reuters) - After completing a credit review in a half-hour phone call, a BMO Harris Bank underwriter cleared $12 million in loans for Ohio corn and soybean producer Greg Kruger in 2013.
Kruger had initially asked for a $2 million loan to build a grain elevator. But the Chicago-based bank, one of the largest U.S. farm lenders, ended up selling him a $5 million loan for the elevator and another $7 million to finance crops, machinery and debt consolidation, according to documents in the Ohio foreclosure case the bank filed to seize Kruger’s farm.
When Kruger offered to supply receipts of sold grain and other standard documentation, his loan officer told him not to bother. “‘Don’t worry. We’ll make the numbers work’,” Kruger, 67, recalled the officer saying.
Five years later, after aggressively expanding its U.S. farm loan portfolio, the bank called in Kruger’s loans as corn and soy prices collapsed and the United States was starting a trade war with China. As the U.S. agricultural economy sours and farmers’ financial woes pile up, BMO Harris is leaving behind a trail of farmers such as Kruger who have lost nearly everything.
The bank, a subsidiary of Canada’s Bank of Montreal (BMO.TO), has struggled to recoup some of its investments through a slew of bitter legal fights, according to a Reuters review of court documents and bank regulator data, as well as interviews with dozens of U.S. farmers, bankers, and former and current BMO Harris employees.
“BMO Harris did push for growth, and they’ve had some of those deals blow up spectacularly in their faces,” said John Blanchfield, founder of Agricultural Banking Advisory Services, a consulting firm.
The plight of BMO Harris and its customers reflects broader distress in the U.S. farm sector. Farmers are struggling to pay back their loans or obtain new ones. Shrinking cash flow is pushing some to retire early and a growing number of producers to declare bankruptcy, according to farm economists and legal experts.
BMO Harris may yet face more defaults, judging by its high level of delinquent loans. At the end of June, nearly 13.1% of its farm loan portfolio was at least 90 days late or had stopped accruing interest because the lender doubts the money will be paid back - compared to 1.53% for all U.S. farm loans at banks insured by the Federal Deposit Insurance Corporation (FDIC). BMO Harris had the highest rate among the 30 largest FDIC banks, according to a Reuters analysis of loan data the banks reported to the regulator.
Ray Whitacre, head of BMO Harris Bank’s U.S. diversified industries unit, said in a statement that the bank’s distressed loans do not represent ”the overwhelming majority” of its borrowers’ experiences. The Bank of Montreal and its U.S. businesses have been in farm lending for more than a century, he said. The bank takes a long-term view of helping farmers through “all stages of the economic cycle,” Whitacre said.
The bank’s exposure to the farm sector reached a peak of $1.59 billion in 2018. Most other major banks have been scaling back their farm-loan portfolios since about 2015, as prices fell due to a global grains glut, according to the Reuters analysis of FDIC data.
Among the BMO Harris deals that went belly-up was $43 million in farm operating loans to McM Inc, run by Ronald G. McMartin Jr. in North Dakota. The farm filed for Chapter 7 bankruptcy in 2017.
BMO Harris secured a $25 million loan with McM’s grain, cattle and other farm crops, along with other assets. McM agreed to use the sale of these crops to pay the bank back, according to a copy of the loan.
During the bankruptcy proceedings, BMO Harris’ attorneys told the court it was unable to locate all the crops backing its loans, alleging that McM had sold some of the crops to pay other creditors first. Court documents also show the bank had not audited some of the farm’s financial statements. An outside consultant later found McM’s accounts receivable and inventory was overstated by at least $11 million, according to court filings. Neither McMartin nor his attorney responded to requests for comment.
Some experts and bankruptcy attorneys representing former BMO Harris customers say the bank issued too many loans for too long that farmers simply could not pay back. The problems, they said, stem from the aggressive practices of some loan officers and a lack of oversight by bank auditors.
‘DON’T WORRY. IT’LL BE FINE’
The Indiana-based BMO Harris banker working with the Robinsons and Kruger, Thomas “T.J.” Mattick, found his customers through farm magazine advertisements, word of mouth, at church gatherings and from rural loan brokers who were paid a finder’s fee, according to interviews with 10 farmers and one loan broker.
“I thought I could trust him,” Kruger said. “We would talk about church and faith all the time.”
When the Robinsons were looking to expand their corn and soybean operations, Mattick convinced them to buy two new farms instead of one - with BMO Harris financing 100% of the deal, said Michael Morrison, the Robinsons’ farm bookkeeper and a former agricultural banker.
Morrison told Reuters he was concerned by how the bank’s underwriters valued the family’s grain in storage, on the premise that its value would continue to rise - even as grain prices were starting to soften at the time.
“We used to say that T.J. never saw a loan he didn’t like,” Morrison said. “I kept telling them, ‘Don’t do this. Don’t take on the debt.’ But T.J. kept telling them, ‘Don’t worry, it’ll be fine’.”
Mattick, who no longer works for the bank, denied that he encouraged borrowers to take on more debt they could pay back. In written answers to questions from Reuters, Mattick said “extensive underwriting and analysis” were conducted on the loans for Kruger and the Robinsons, as with any other file.
Mattick denied telling Kruger that he would “make the numbers work” without standard documentation such as sold-grain receipts. And he said BMO Harris would not have given the Robinson’s 100% financing on their farms unless they pledged additional collateral. BMO Harris declined to comment on Mattick’s statements regarding individual loans and bank policy, and Reuters could not independently verify them.
“I worked with clients to help them determine what they could afford and never would have counseled them to incur debt beyond what they could afford,” Mattick said.
Mauldin: Social Security Is Screwing Millennials
ZeroHedge.com Fri, 10/11/2019 - 14:52
Authored by John Mauldin via RealInvestmentAdvice.com,
Social Security is a textbook illustration of how government programs go off the rails.
It had a noble goal: to help elderly and disabled Americans, who can’t work, maintain a minimal, dignified living standard.
Back then, most people either died before reaching that point or didn’t live long after it. Social Security was never intended to do what we now expect, i.e., be the primary income source for most Americans during a decade or more of retirement.
Life expectancy when Social Security began was around 56. The designers made 65 the full retirement age because it was well past normal life expectancy.
No one foresaw the various medical and technological advances that let more people reach that age and a great deal more, or the giant baby boom that would occur after World War II, or the sharp drop in birth rates in the 1960s, thanks to artificial birth control.
Those factors produced a system that simply doesn’t work.
A few modest changes back then might have avoided today’s challenge. But now, we are left with a crazy system that rewards earlier generations at the expense of later ones.
I am a perfect example. I’ve long said I never intend to retire, if retirement means not working at all. I enjoy my work and (knock on wood) I’m physically able to do it.
Social Security let me delay collecting benefits until now, for which I will get a higher benefit—$3,588 monthly, in my case.
Now, that $3,588 I will be getting each month isn’t random. It comes from rules that consider my lifetime income and the amount of Social Security taxes I and my employers paid.
That amount comes to $402,000 of actual dollars, not inflation-adjusted dollars. (I also paid $572,000 in Medicare taxes. Again, actual dollars, not inflation-adjusted dollars.)
What did those taxes really buy me? In other words, what if I had been allowed to invest that same money in an annuity that yielded the same benefit? Did I make a good “investment” or not?
That is actually a very complicated question, one that necessarily involves a lot of assumptions and will vary a lot among individuals.
In my case, if I live to age 90 and benefits stay unchanged, the internal real rate of return on my Social Security “investment” will be 3.84%. If I only make it to 80, that real IRR drops to 0.75%.
While this may not sound like much, it actually is. Even 1% real return (i.e., above inflation) with no credit risk is pretty good and 3.84% is fantastic. If I live past 90 it will be even better.
But this is not due to my investment genius. Four things explain my high returns.
They paid less and received more. But we Boomers are still getting a whale of a deal compared to our grandchildren.
Now, consider a male who is presently age 25, and who earns $50,000 every year from now until age 67, his full retirement age.
Such a person is not going to get anything like the benefits I do, especially with benefit cuts, which my friend Larry estimates will be as high as 24.5%.
So, if this person lives an average lifespan and gets only those reduced benefits, his real internal rate of return will be -0.23%.
I suspect very few in the Millennial generation know this and they’re going to be mad when they find out. I don’t blame them, either.
The Next Quadrillion
The reason Millennials won’t see anything like the benefits today’s retirees get is simple math. The money simply isn’t there.
The so-called trust fund (which is really an accounting fiction, but go with me here) exists because the payroll taxes coming into the system long exceeded the benefits going to retirees.
That is no longer the case.
Social Security is now “draining” the trust fund to pay benefits. This can only continue for so long. Projections show the surplus will disappear in 2034. A few tweaks might buy another year or two. Then what?
Well, the answer is pretty simple. If Congress stays paralyzed and does nothing, then under current law Social Security can only pay out the cash it receives via payroll taxes. That will be only 77% of present benefits—a 23% pay cut for millions of retirees.
And please understand, there is no trust fund. Congress already spent that money and must borrow more to make up the difference.
This IS going to happen. Math guarantees it.
These problems would be less serious if more people saved for their own retirements and viewed Social Security as the supplement.
There are good reasons many haven’t done so. Worker incomes have stagnated while living costs keep rising.
But more important, telling people to invest their own money presumes they have investment opportunities and the ability to seize them. That may not be the case.
The prior generations to whom Social Security was so generous also had the advantage of 5% or better bond yields or bank certificates of deposits at very low risk.
That is unattainable now. And let’s not even talk about mass numbers of uninformed people buying stocks at today’s historically high valuations. That won’t end well.
So, if your solution is to put people in private accounts and have them invest their own retirement money, I’m sorry but it just won’t work.
It will have the same result as those benefit cuts we find so dreadful: millions of frustrated and angry retirees.
So, what is the answer if you are in retirement or approaching it? The easiest answer is to raise the retirement age. Yes, that’s really just a disguised way to cut benefits, but making it 70 or 75 would get the program a lot closer to its original intent.
Today’s 65-year-olds are in much better shape than people that age were in 1936 or even 1970.
(Note, I would still leave the option for people who are truly disabled to retire younger. I get that not everybody is a writer and/or an investment adviser who makes their living in front of the computer or on the phone. Some people wear out their bodies and really deserve to retire earlier.)
The Founders Warned Us About Central Banking
ZeroHedge.com Tue, 10/08/2019 - 18:45
Authored by South Carolina state Rep. Stewart Jones via SchiffGold.com,
The Federal Reserve just lowered interest rates for the second time this year and announced more quantitative easing by injecting even more US dollars into the market. The days of cheap money will soon come to an end, and I fear that many people won’t realize what’s happening until the rug is pulled out from under them.
As economist Henry Hazlitt wrote, the practices of the Fed distort the real-world market indicators of cost, future prices, investments and production. A recent study from the National Association for Business Economics showed that 72% of economists now predict that a recession will occur between 2020 and the end of 2021. Some have even warned that the US is on the brink of the biggest bubble in world history — not just a correction of a business cycle or another recession, but a complete collapse of the US dollar.
Yet the dangers of centralized banking are not new knowledge. For centuries, people — including many of our founding fathers — have tried to warn us of the numerous threats posed by institutions like the Federal Reserve.
Today, it’s understood by many that the recklessness of the Fed allowed for the subprime mortgages that caused the Great Recession of 2008. With over $22 trillion in debt, $120 trillion in unfunded liabilities, and, soon, an all-time high debt-to-GDP ratio (comparable to World War II levels), however, it’s not overstating it to say that the Fed-facilitated out-of-control federal government spending constitutes the greatest threat to the American way of life in history.
To understand the full extent of the debt and the destruction of the dollar, it’s essential to realize that paper money has a history of being printed as bills of credit to finance runaway government. In 1775, the founders attempted to use paper money without gold or silver backing, and they found that the inflation robbed them of any value.
In 1788, Thomas Jefferson wrote:
Paper is poverty. It is only the ghost of money, and not money itself.”
The Coinage Act of 1792 then set specific ratios for gold and silver coinage, placing gold and silver in control rather than a central bank. This lasted until the passage of the Federal Reserve Act of 1913, which allowed for the formation of the Federal Reserve System just two decades before Pres. Franklin D. Roosevelt started to come after private ownership of gold and silver in the 1930s. In 1944, the Bretton Woods system made the US dollar the reserve currency of the world, when it was still partially backed by gold and silver.
Finally, in 1971, the Nixon Administration suspended wages, issued price controls, and canceled dollar-to-gold convertibility, completing the final step in ending the “gold standard.” This gave the central government planners — and the federal reserve — the power to print money without restraint. This is how the national debt has been able to reach the levels that it has. The only thing backing the US dollar today is public debt.
Remember when Coke was a nickel? In 1913 (the year the Fed was founded) a bottle of Coke cost five cents. Today, a bottle of Coca-Cola costs an average of $1.79. While there are many factors (like supply and demand, cost of goods, etc.) that help set prices, inflation plays a critical part. At an average inflation rate of 3.12% annually, inflation alone accounts for $1.30 of the actual cost of Coke.
The addition of more US dollars doesn’t mean that anyone is more wealthy; in fact, it means that the dollars you have are worthless. You will need a higher amount of dollars to buy the same goods and services. Hence, saving inflated dollars, in many cases, is losing value. Those who save money are being robbed.
With the continued decline of the dollar, there could also be hyperinflation on an unprecedented scale. Both James Madison and Thomas Jefferson warned that “the greatest threat to be feared” was the “public curse” of “public debt”, and that “banking establishments are more dangerous than standing armies.” The founding fathers understood the dangers of centralized manipulation of the money supply, the hidden taxation of inflation, and the control of buying power.
They understood that gold and silver are real money.
Furthermore, if we look at the history of money, we can see that precious metals, mainly gold and silver, have been used for coinage for over 2600 years; in one way or another, gold and silver have been used by people for over 6.000 years.
American revolutionary leader Christopher Gadsden said in September 1764:
The evils attending a wanton exercise of power, in some of the colonies, by issuing a redundancy of paper currency, has always been avoided by this province, by a proper attention to the dangerous consequences of such a practice, and the fatal influence it must have upon public credit.”
People across the US should heed his warnings by allowing gold and silver to be used as legal tender once again. Some states like Utah have done just that. While this won’t stop the Federal Reserve’s destruction of the dollar, it will allow people to convert dollars to sound money before a collapse. Sound money, like gold and silver, acts as a check and balance on big government, a hedge against inflation, and a way to combat manipulation by the Fed.
This is exactly why, in my home state, I will soon be filing the “2020 South Carolina Sound Money Bill,” allowing South Carolinians to use gold and silver as legal tender. I will also introduce legislation to exempt gold and silver from capital gains tax, both of which are already exempt from sales tax in South Carolina. We the People can restore sound money by using the Ninth and Tenth Amendments to the US Constitution.
It is my hope that, with the success of these bills, other policymakers elsewhere will become inspired to lead by example on this vital issue as well. The key to protecting the American way of life from the federal reserve’s obliteration of our currency rests with the legislatures, but we must heed the lessons of history now.
What Hyperinflation in Venezuela Really Looks Like
by J.G. Martinez D.
The intention of this article will be to describe how the prices went wild, and what you could expect in a hyperinflation scenario. Perhaps softer, or perhaps worse, that is not possible to know for an amateur like me, not being an economist. But something similar to this is what could be expected in the real world, not in some hypothetical scenario of the theoretical economy.
For some reason that I will try to elucidate afterward, the salaries stopped being useful for buying anything other than food. The prices I will publish in our national currency, the Bolivar already were rounded by taking 3 zeroes by Uncle Hugo´s command. A few days ago, this was done…again, now by command of the bus driver, in an attempt to make the hyperinflation look less threatening. Go figure.
One Bolivar is worth 0.000020 USD. The minimum wage is $5.21 or 1.800.000 Bs for a month. Now, how could we expect someone to live under these conditions? It is entirely unexplainable to me that this has not generated massive riots…yet.
Here are the hyperinflation costs of basic items in Venezuela
Remember, many people are paid only 1.800.000 Bolivars for a month:
One of the most amazing things I have seen is that people are in total denial, and they refuse to accept that the money is not worth even the paper it is printed on. They won’t innovate changing to cryptos easily, nor will they accept silver coins, much less other precious metals. They won’t barter, they won’t trade their labor time (I mean major cities, in my small town things are a little different). We had a good supply of silver coins in the 60s, but that changed.
They talk and talk, complaining about the government, but they just don’t do anything. I have seen some small plots in our subdivision with tomatoes plants and other vegetables, but that is just a salad for one lunch. And the people passing by will take whatever is within their hand’s reach.
The electronic money has been devaluated much more than cash. Something with a price in cash, if you try to pay with debit card or money transfer via internet the price will be 2 or 3 times the cash price. Illegal? Yes, it is. But there is no way to control it.
The main problem arises because it is the military taking over the supply chain. They have an agreement with the gangs, and they deviate the production of the plants that are under military control, to the street sales. The gangs are armed, and they protect the retail sellers from thieves and turmoil. This is in the most populated cities, where the money is, and therefore the products don’t make it so often up to the smaller towns.
The black market offers of tires, food, car spares, engine oil, and all kind of medicines and goods are rampant, and the social networks are full of resellers. You may expect a morality crisis, in parallel with this economic crisis. I asked a granny how much was charging for some hand towels she had for sale, and I did not have enough money in my pocket to buy even one towel…I apologized but saw she was upset. It was a sad, awkward moment indeed.
Senior citizens are taking a beating. Their pension is not enough for one week worth of food. Jeez, maybe once this is published it will be not enough even for a couple of days…the clowns that tried to sell the “petro” just realized that this snake oil did not work. The calculated inflation is 13.000%. Without money from the IMF, having paid the debt, and kicked them out of the country…the disaster arrived anyway. The government just does not want to do what they have to do. There are too many military personnel involved in the black market and an uprising is more than possible that will launch the gangs in power off to the ground if some of them are disturbed.
How people survive
To find a medium of exchange, and at the same time capable of holding its value until you actually need to exchange it is not easy. Cigarettes, chocolates, all kind of commodities have been used, and there is a small but growing trade with this stuff. Not at the dimensions one would imagine, but generally speaking, the financial culture in our society is almost unknown. There is no such thing as a stock exchange (but there was one, in the past), and whatever other things that smell like the free market, the gov carefully removed. People clamor for “price control” without even realizing that it is not the price but the lack of production what is starving them.
I have known some people that even received satoshis as a medium of payment for food or car parts. However, as the BTC has been going down these last weeks and the amount of satoshis to receive is calculated based on the USD price, this trading has been slowing down.
As I have mentioned, the country is already collapsed. Those self-employed that could adjust their fees for their service from one day to another, and that could receive, say, a bag of sugar for their valuable services are those who are not overly stressed to leave the country. This is one of the most important lessons, I think. Someone with manual, valuable skills, that could provide basic goods or services, will be able to survive. They will just adjust their prices…and if the customer can´t pay, then most likely they will trade in their service for something to barter. People with low maintenance trucks, that have received meat as payment in a farm for transporting a load of hay (many farmers have to buy hay down here in the dry season because they don´t have the machines to compact it and there is no rain for the pastures to grow). They exchange the remaining meat for cheese, poultry, and fish. Or the electrician like my dad got paid with half a pork for one day of work at his friend´s farm rewiring an old corn mill. He took the excess as a gift to one of my cousins, and got back 6 kgs of pasta, and 2 of sugar.
This is how we, in the small community I was born and raised and my family is lucky to live yet, are dealing with the criminals that have imposed the crisis. These are the places where people support each other because we know everyone since we were small kids. We grew up together, went to school, and celebrate birthdays, Christmas, Mardi Gras together. We cried when our elders were gone, all together. I have found people from my hometown in the opposite side of the country that I did not remember, and they had gone to basic school with me, and after a few anecdotes, we were laughing and shaking hands. This is the kind of community that will struggle but will survive.
The other ones?. The big city dwellers?…
The hardworking father of three, with a minimum wage, is starving, and watching their family starve too. Some of them quit their jobs and started a life of crime. Other ones leave their families behind and don’t come back. Other have been kind enough to tell their families that they will be in this or that country, and never appear again.
Many have committed suicide.
Elders do it because they don’t want to be a burden nor an additional weight for their family.
Youngers because they don’t see themselves in such apocalyptical scenario. Normal stuff in other countries like buying a car, a house, having children, graduating from college, seem to be impossible tasks, no matter how hard you work for that.
The official rate of suicides is not something that can be trusted. The gang that claims to be a government is covering up even the starvation deaths of the children in the hospitals, in an attempt to avoid further international sanctioning.
They are forcing doctors to fake the cause of the deaths in the reports.
And this, ladies and gentlemen, is what hyperinflation and a collapsed country looks like.
Could it happen in the United States? Absolutely! Think about it!
Which are the least tax-friendly states in America? California doesn’t crack the top 10, but Illinois sure does
This week, the personal-finance publication Kiplinger’s released its list of the most — and least — tax-friendly states in America. To draw its conclusions, it used a hypothetical couple with two kids and $150,000 in income a year plus $10,000 in dividend income, and then looked at the income-, property- and sales-tax burden that family would face.
Illinois took the No. 1 spot on the list, thanks in large part to its high property taxes. The Land of Lincoln was followed by Connecticut and New York, both of which have pretty high-income taxes.
The 10 least tax-friendly states:
3. New York
5. New Jersey
Meanwhile, the most tax-friendly states (in order) were Wyoming, Nevada and Tennessee. The first two don’t levy an income tax; Tennessee has an income tax, but it only applies to interest and dividends and not to salaries and other wages.
The 10 most tax-friendly states:
7. South Dakota
8. North Dakota
10. New Hampshire
One surprise? California, widely considered a high-tax state, didn’t crack the top 10 least-friendly tax states. (Of course, it’s important to point out that this Kiplinger’s ranking would look different if the hypothetical family and its income and dividends were different.)
Rocky Mengle, the tax editor for Kiplinger’s, told MarketWatch that’s because many people “when they talk about California tax, they focus on the 13.3% [income tax] rate, which is the top rate — but that is for people making more than $1 million.” For many others, the rate is much lower, he said, adding that “California has a fairly progressive income tax, with nine brackets.”
Mengle added that these kinds of analyses are often useful to people looking to relocate, such as in retirement. He said retirees should “pay attention to what type of income they are going to be relying on in their golden years.” That’s because states can tax income, Social Security, money from an IRA or 401(k), rental-property income and other sorts of income differently.
For example, Social Security income is not taxed in most states, but 13 states do tax it: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Even then, they don’t all tax it the same.