Southern Bread » money

Traditional Retirement Is a Myth

Dave — Thu, 25 Mar 2010 19:46:55 +0000

I’ve been wanting to do this post for a while, but it takes so much research that I had to assemble it in little bits and pieces over a couple of months. The argument I’m going to present is that, if you go through life with an average salary, starting today, you will not be able to retire in the traditional sense. Let me be clear. I’m not making some type of blanket statement that starting now, retirement is over. No. I’m saying that what happened over the past 40 years is no longer possible, because it was all predicated on an unsustainable, exponential rise in the supply of money and credit. If you want to think of it as a ponzi scheme I wouldn’t necessarily argue with you. As we all know, the defining characteristic of a ponzi scheme is that the people who get in and invest early reap huge benefits while the latter groups get screwed.

Let me try to prove my point. I took historical data since 1970 and charted it all out in order to get 40 years worth of baseline data. Here’s what the 1970-2010 numbers looked like:

Start Career: 1970
End Career: 2010
Starting Salary: $9,000
Ending Salary: $50,000
Years Worked: 40
IRA Contributions Maxed Every Year
Invested in: S&P 500 Index Shares (SPY)
2010 IRA Portfolio value: $912,154

So, if you started working in 1970 at age 25 and immediately started maxing out your IRA contributions each year until age 65 you would end up with $912,154 because of compounding dividend re-investments. This may sound like a lot of money, but there are caveats. If you had retired in the year 2000 instead of 2010 you would have retired with only $903,269. Huh?! How is it that 10 years can go by and your portfolio only grows $9000. Well, it’s because the stock market has been so volatile since the dot com bust in 1999. These are the different ending portfolio amounts you would have retired with each year during the 2000′s:

2001: $853,933.42
2002: $743,572.41
2003: $594,285.05
2004: $774,562.06
2005: $832,896.55
2006: $893,126.56
2007: $1,043,059.58
2008: $1,095,382.45
2009: $689,155.16
2010: $912,154.77

As you can see, there have been wild swings in the stock market since ’99. Up until about 1997 or so, there had been a nice gentle sloping curve of compound gains for an S&P 500, dividend reinvested portfolio. Then it all went crazy. But that, in and of itself, is not my point. Of course there are short term technical reasons for this volatility that can be pointed to by brokers and investors. But, I think the root cause is that the fundamental numbers in our economy are eroding. The stock market was able to garner these types of returns based on a huge inflation in the monetary supply that can no longer be sustained.

Here is a chart of our hypothetical worker’s retirement account:

Now we compare this to the increase in the U.S. money supply over the same period:

They track perfectly. If you were to smooth the curve on the portfolio to take out the erratic swings they would match almost exactly. A nice exponential curve upwards. Absent large, consistent injections of money into the capital markets by the Fed, this type of portfolio would not exist. For instance, if you kept the same S&P 500 Index(it used to be the S&P 90) portfolio(this is totally hypothetical since IRA’s didn’t exist then) from 1920 to 1960 with the same contribution percentages, you would have an ending value of about $85,000. The average salary in 1960 was about $5000. With inflation, that retirement amount would have lasted you about 10 years. Contrast that with our $912,000 figure from retiring in 2010. That amount would last you probably 16 or 17 years. Clearly, the numbers have been juiced.

That doesn’t bode well for my generation and beyond. Looking ahead, there will be no more of this monstrous infusion into the money supply. At least, we hope not for the sake of our currency. The fact of the matter is that I will probably not be able to retire at all. And, in all honesty, few people are able to today any way. Most people will simply not be able to afford the large contribution percentages required to fund a retirement plan such as our hypothetical one. The contribution percentage required in the early 1970s was well over 10% of your gross income. That’s just not going to be doable for most folks. A majority of the people you talk to today end up going back into the work force, or putting retirement off until into their 70′s.

And don’t forget that inflation has also tracked this increased money pumping:

That means the steeper the curve gets, the less real dollars of your retirement portfolio will be usable in the years after you retire. What this means for us is that our retirement portfolios will end with less real dollars in the future, and inflation will eat them away so fast that retirement would only last a few years before exhausting our accounts. Therefore, the idea of me retiring at 65 with a traditional retirement plan is not going to pan out.

So, what am I saying? Well, my bottom line is that you cannot trust common wisdom on retirement any more. The financial advisor who gives you the same ol’ shpill about just keep on piling money into that IRA and stick it out long term will never tell you anything different. That’s what he’s selling and that’s the advice you’ll get. But I’m not so sure our modern notion of retirement was ever a good idea to begin with. I’ll finish my thoughts on this in the next post…

Ron Paul: Let’s Bring Competition to Money

Dave — Thu, 21 Jan 2010 17:08:48 +0000

Brilliant as usual:

Money and the Star Trek Utopian Ideal

Dave — Fri, 29 May 2009 17:29:00 +0000

I admit it. Ok, fine – I admit it with pride. I’m a huge Star Trek fan. I’m not sure how many seasons you have to have on DVD in order to qualify as a “huge” fan, but I bet I’m pretty close. Yes I have the first four seasons of TNG. And, yes I rode the Star Trek Experience at the Las Vegas Hilton before they closed it down. I even got my picture taken on the bridge of the Enterprise in the Captain’s chair with my best bud standing in at weapons officer. I was in geek heaven. Except for the $20 salad that is. Ouch! By the way, the myth that everything in Vegas is cheap because they want you to gamble is an absolute lie. Everything in that god-forsaken den of iniquity is overpriced. Even the overpriced stuff is overpriced. But I digress. A lot of people claim to be Star Trek fans because it’s a glimpse at what our future could be. A world where everybody lives for the betterment of man-kind and not for “selfish gain.” It’s a place where the human race has moved beyond such things as disease, poverty and war. In short, it’s a utopian paradise. And the thing that brought this paradise to fruition? Well, I’ll let Picard explain:

Lily: “No money? You mean you don’t get paid?”

Picard: “The economics of the future is somewhat different. You see, money doesn’t exist in the 24th century. The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of humanity.”

–Star Trek: First Contact

Sounds great, huh. Too bad it’s a load of horse crap. It’s a shame that people don’t instintively know this is a load of horse crap anymore. It actually takes research these days to figure out why that exchange is so absurd. Oh well. Let’s get on with it then. The fundamental flaw in Picard’s line of reasoning is that he thinks money is a measure of value. In the future then, they’ve stopped using money to measure worth and value, and moved on to more noble value measures such as scholarship and exploration. Working for the betterment of society is the new measuring stick of value. This is a total misunderstanding of what money actually is though. Money is a medium of exchange. It isn’t a measure of something’s value. Hans Hoppe explains this very well:

Action and exchange are expressive of preferences: each person values what he acquires more highly than what he surrenders – not of identity or equivalency. No one ever needs to measure value. It is easily explained why actors would want to use cardinal numbers to count and construct measurement instruments to measure space, weight, mass and time: In a world of quantitative determinateness, i.e., in a world of scarcity, where things can render strictly limited effects only, counting and measuring are the prerequisite for successful action. But what imaginable technical or economic need could there possibly be for a measure of value?

Second, setting these difficulties aside for a moment and assuming that money indeed measures value (such that the money price paid for a good represents a cardinal measure of this good’s value) in the same way as a ruler measures space, another insurmountable problem results. Then the question arises “what is the value of this measure of value?” Surely it must have value just as a ruler must have value, otherwise no one would want to own either one. Yet it would obviously be absurd to answer that the value of a unit of money – one dollar – is one. One what? Such a reply would be as nonsensical as answering a question concerning the value of a yard- stick by saying “one yard.” The value of a cardinal measure cannot be expressed in terms of this measure itself. Rather, its value must be expressed in ordinal terms: It is better to have cardinal numbers and measures of length or weight than merely to have ordinal measures at one’s disposal.

–Hoppe, How is Fiat Money Possible?

Let me give you an example. Let’s say that you own an old timey hand cranked ice cream maker. It’s really old, like maybe from the turn of the century. You value it highly because of it’s age and it’s quality construction. It also brings back lots of memories from your childhood of your grandmother churning up some ice cream on a summer day. You’d like to pass those same memories on to your kids but somewhere along the way a piece of it broke. It’s an odd shaped gear that made the whole contraption work and it’d be very difficult to fabricate it yourself. If you found one on ebay or in a flea market would you pay $20 for it? I’m sure you would. Would someone else pay $20 for it? Very unlikely. That little gear is not “worth” $20. That’s a misnomer. The technically accurate way to say it, is that you value having the gear more than you value having the $20. This of course relies on the fact that value is subjective. What’s worth $20 to me might be worth $200 to someone else. The facility of money just makes the transaction itself easier to carry out.

Given this, it should be clear now why the Star Trek utopia of a world with no money can’t obtain. Because money doesn’t measure value. People do. And when people value one thing above another there will be trade. And when there is trade there will eventually develop a medium of exchange to make trade easier. And we’re back to money again. Money always develops as a natural occurence in every society. This is what’s called the “natural” theory of money. It can’t be avoided because it’s the logical outcome of normal human behavior. Of course, I guess you could argue that in the Star Trek future they have replicators that can make everything they need, so that makes trade un-necessary. But, ignoring the fact that this is silly, that still won’t get you free of money. Remember, money isn’t a value measure. It’s a medium of exchange. It’s a thing that makes trade easier. So, in this utopian future is there anything being traded? Of course there is.

Watch any episode of Star Trek and you’ll see what’s being traded. Human ingenuity, information, labor, etc. Even if all basic materials can be replicated at will in a magic box, you still can’t replicate the ingenuity and hard work it takes to “better ourselves and the rest of humanity.” Those things are being traded. Picard is trading his time and his talents for the opportunity to do something he loves, which is explore deep space. There was an episode one time where Picard was offered an Admiral rank in Starfleet. He mulled it over during the whole episode and eventually turned it down. He valued deep space exploration more than he valued his time and talents. But he valued his time and talents more than he valued the Admiralship position. The basic usage of money was still in tact, even if it is a little unorthodox to think of it that way. The bottom line is: money isn’t the cause of evil, greed or misery. It’s simply a tool to form an abstraction layer over a barter economy to make it function more smoothly. The basic concepts of trade are universal and necessary. Get rid of physical money and humanity will just replace it with something else. It’s logically inescapable.

Critical listening on this subject:

How is Fiat Money Possible?: