Human Nature and the GRA, Part I

A very bright reader extrapolated from two very different recent articles and asked, “Linda…? Have you considered what can happen when forced GRAs are implemented and the consequences to those who refuse to play and sell out before the deadline?” Blush. No, I hadn’t; I talked about the proposed GRA swindle in one piece and the other was on home war-gaming as an investment aid.

Most of you have an IRA or a 401(k) and have at least heard rumors that Congress is scheming to coerce you into rolling the funds into a Government Retirement Account filled with freshly-printed treasuries backed by the full faith and credit of the folks who brought you Social Security and Medicare. It sounds like a grand idea to appropriate somewhere between $7.5 trillion and $14.5 trillion (depending upon the estimator and where the Dow is) if you are a rapacious government official seeking whom you might devour.

Is it, though, really? That is, can the ploy actually work? Bearing in mind that fewer than 8% of those associated with Mr. Obama have any business experience at all, and given that it is difficult to make most of us who are aware of danger behave to our disadvantage, let us consider two very simple scenarios covering 1. Those who geek and let the government appropriate their savings; and 2. Those who take their lumps via taxes and fines quickly and wrest what they can from the clutches of the Feds.

1. Okay, Messires Bernanke, Geithner, Reid, and Obama, suppose you have managed to claw half of all such retirement accounts from their unhappy owners. We’ll be conservative, as always, and estimate that you are now in possession of $3.5 trillion in the form of stocks, in a very hinky market. What are you going to do next? “Well, uh, we’re going to replace the stocks with government bonds, just like the non-negotiable ones in the so-called ‘Social Security Fund,’ and spend the money.”

That’s nice, gentlemen. What will you do with the stocks themselves? That is, how do you plan on converting them into cash?

“Why, we’ll…we’ll…uh. Oh.” Uh-oh, even. No, indeed, you really don’t want to dump that sort of load on the trading floor because such a course would almost certainly crash the market and burn out softwear while triggering shutdowns. (Note that there are those in government who would approve of this idea.) Trying to sell that much stock would be an even bigger disappointment than recent auctions of treasuries. What is the point of stealing bearer bonds you can’t exchange other than proving you can and impoverishing the citizens, worthy Statist goals though those may be? True, you could be the Tyranosaurus Rex terrorizing Wall Street by your ability to fling individual companies down, but what does that get you other than the fun of pulling the wings off flies and McDonald Douglas? Short of making George Soros Stock Tsar (deep shudder) and running a gigantic government mutual fund/ retirement plan for Congress and unions, what are your options? I’m not at all certain that George, T-Bone, and the entire Agora hierarchy could cope with an “asset” of that magnitude. It would add whole new dimensions to “cornering the market,” one on the order of shoving Israel into an untenable corner. For those of you who will let your retirement plans be confiscated meekly, I suggest reading my “Son of Social Security.”

2. Many of us grimaced and cashed out long ago. Sure, it hurt to pay higher taxes and penalties, but what we retrieved is now ours to do with as we please, and in general we benefited well by missing the crash of ’08. We will suppose that a quarter of the investors say to their accountants, “No. Enough is enough. I don’t care what it costs, just do your best and get me out of this.” (We are postulating that the final quarter didn’t get the word or dithered past the point where compliance is required on pain of enormous fines and/or jail time.) Here’s our potential situation: the Feds will then own 3/4 of all stocks and bonds currently in private pension plans, and a quarter of the mutual funds, for an easy description, will be in the hands of private investors. Have you looked recently at what your grossly over-paid fund manager has loaded you up with? You would never have chosen many of those things, most of us are bearish, and it will seem like a good time to clean house. If individuals decide to cash in even a trillion dollars’ worth of such dogs — or blue chips — if it can be done at all, what will happen to the market? A Keynesian will reply, doubtless, that it will go up, igniting a true recovery, and laying down St. Augustine sod as far as the eye can see.

Snicker. SURE it will, in one giant white elephant sale.

“Well, in that case we’ll step in and equalize the markets to protect our holdings, rather like Quantative Easing,” sounds like a probable Bernanke response stripped to basic meaning. Hey, great idea, why didn’t I think of that? You can print even more trillions to bid stocks up artificially or purchase them, thereby increasing the national debt, raising M1, and further skewing discerned value.

Don’t those of you who have already bitten the 7.62 NATO round get smug too soon, because even if you start selling NOW you’ve got problems over and above what is going to happen when a bunch of ham-fisted eggheads start mucking around in stocks and bonds when they haven’t got the skills to drive a pig to market. Let’s suppose you manage to sell everything you have and receive a nice six-figure check representing your hopes for a secure, dignified future. Note, for starters, that if you no longer have an IRA/401(k) the proposed legislation includes a provision that all who are employed WILL start a GRA which will be funded with 5% of earnings. That’s a mild issue, however. You can afford a 5% pay decrease, can’t you? The real difficulties will be where to put the money to preserve current value, stocks and bonds having become even less safe abruptly, and the sheer physical process of receiving greenbacks in return for your check. You can’t just walk into your bank and say, “I’d like the entire $248,679.31 in small used bills, banded, stamped, dated, and initialled, please.” (Those precautions will give you faint cover if the SWAT team raids and claims they are confiscating drug money.)

It is almost impossible to get a banker to disgorge more than $20,000 in cash because he hasn’t got it on hand. Most bank managers have an excellent idea of the usual amount needed to cover typical daily disbursements; larger amounts must be arranged for ahead of time. Be prepared to have to make multiple trips to multiple banks to rescue your cash, and do go spend a thousand bucks on a big heavy safe, first. I still like to pull large amounts out late in the week, lest there be a Friday Surprise, on the theory I can always redeposit it on Monday if the bank is still there…a condition subject to change another way.

It gets harder every month to keep up with all the taxes slipped into other bills (such as requiring gold dealers to file forms on every purchase of $600 or more so the Feds will know who is buying gold), so you may have missed a cute little 1% “transaction tax.” EVERY time you have dealings with a bank — hitting the ATM, depositing a check, writing a check for cash, paying bills by check — you will be hit for one per cent. Isn’t that clever? At a bare minimum you will lose another 2% from your IRA just depositing the original check and getting it out. If you want to turn some into cashiers’ checques, that will be an additional transaction, of course, and no doubt traveler’s checks are, too, plus the premium charged for them. Just the simple nuts and bolts of turning your paycheck or SS into usable funds will give you a new net loss of 2%, and we can only suppose that quite a few bank charges for insufficient funds will result until people learn to adjust to the new rules and annotate their check registers accordingly. Ya gotta love it; if there is a more regressive tax to be found, I don’t know what it is, not that I have anything against regressive taxes. Forty-five per cent. of citizens and almost all illegal aliens pay no taxes at all other than sales taxes. They need to have some skin in the game, too.

This means your Social Security (and for all I know, welfare checks; why shouldn’t they be covered?) just took a 2% loss, which, in my case, is more than twice as large as the proposed $250 “voters’ bonus” Nancy Pelosi proposes to give us in lieu of COLA. (There are some great quotes from the Dems about supporting our senior citizens and being certain we don’t suffer from not receiving COLA again, for the second of three years scheduled. What frosts is that the troops and military retirees aren’t getting COLA, either…but Congress sure did.) Hey, the check goes into the bank, and if I don’t take money out I can’t spend it, right? Most of us here at W&G are past the point of defining change we find under sofa cushions as “gas money at the end of the month,” but $16.00 is significant to someone on the average $800 SS, just as $24.00 is to a lady on $1200 SDS and receiving $15.00 “too much” to receive any other sort of assistance; this charge won’t increase her income at all, just make life much harder. I’m cynical enough to believe the underserving “poor” on welfare will get additional food stamps and cash.

My, the taxes do add up, don’t they, Mr. Obama? 3.8% for ObamaCare, 2% for bank transactions, 5% to start a GRA, and if the Bush tax cuts aren’t extended another 5% for those at the bottom of the tax-paying structure. That comes to 17.8% in new taxes (not counting those on liquor and tobacco) for those currently in the 15% bracket who sure aren’t pulling in a quarter of a mil, plus another third for Capital Gains and higher taxes for the rest of us…if nobody dies with an estate of over 1.5 M, very easy to do these days in terms of over-valued houses and land. The safest choice I could find is to stash the cash in assets which do not show taxable gains or income, some of which produce useful deductions. Chortle…I didn’t pay a dime of income tax this year and I did it completely honestly with ample to spare, although we won’t discuss my iniquitous property taxes, currently eating nearly two months’ income a year.

Next time we’ll look at the effects (both ways) on banks (increased cash/interest-bearing accounts, e.g.), velocity, the behavioral consequences of rule 1099 on gold sales, M2, stressing banks via possible runs, and sexy stuff like that. For now, I suggest that you do some serious thinking about how to get your money under cover before all the new taxes, rules, and regulations are passed or implented completely.

Never forget that Bulls make money and Bears make money but Hogs get slaughtered…and that the slowest, fattest antelopes are devoured by the lions.

Linda Brady Traynham
Whiskey & Gunpowder

October 19, 2010

The Daily Reckoning