No Rest for the Retiree

Remember the good old days, when people looked forward to retirement, thinking that their IRA or 401(k) would take care of them long into their golden years? Now inflation forces retirees to take on another job, when their days of working should be over. The Mighty Mogambo explores…

Jim McTeague of Barron’s newspaper says in his D.C. Currents column, "Polls gauging the public’s perceptions about Social Security and retirement income prove conclusively what stock and bond salesmen always have known: Americans are soft in the head, especially when it comes to money."

A case in point is provided by one of my readers named Bud, who is retired in Stuart, Florida, and is 75 years old. He is grumpy because he had to go back to work, at his age, delivering pizzas. His desperate situation is caused by, as if you had to be told, inflation: In short, he needs money because prices have risen and his income has not. He writes that he has personal experience with inflation, as he remembers that the price of a new Ford was $900 in 1946. In 2005, a new Ford costs $25,000.

Inflation and Retirement: How Much Inflation?

Being cold sober (was the light in here always this damn bright?), it is easy to see that the price of a new car has increased a lot. And even if I was drunk I would be able to recognize that the price of a new car has gone up a lot. And even if I was so sloshed that I was merely moments from passing out, dying from alcohol poisoning, I would be able to EASILY mentally calculate that the difference between $900 and $25,000 is a lot of money, involving a lot of zeros, which is a Mogambo vital clue (MVC) to determining if something is large and/or expensive, and when combined under field conditions involving alcoholic beverage consumption, it also involves a lot of staggering about, slurred swear words, and probably getting into a fight with somebody who is a lot smaller than me, and a lot older than me, or a lot younger than me, but definitely smaller and weaker. So the body of anecdotal evidence is pretty conclusive that the rise from $900 to $25,000 constitutes a lot of inflation.

I see that the pretty girl in the front row is holding up her hand. I look at her and smile and say, "Yes, my little strudel, what would you like to know?" She says, "Exactly HOW much?" I smile with my best Hollywood face, my voice like buttery velvet, and I lean forward and leer at her like the little pervert that I am, and I say, "For you, I am free! Free, my darling! Take me away with you, and I shall ravish you and drive you to heights of passion hitherto unknown, and maybe order out for pizza, too!" Well, I expected her to blush and giggle, both reveling in the attention and being embarrassed by it, and then sweetly clarify that she was actually asking about how much inflation it was, and then I’d apologize profusely, and then we’d share a laugh, and then we’d go out for coffee, and then out for a drink, where I would try and get her really drunk. But instead she starts gagging and saying, "Ewww. Icky! Ewwww!" which is Earthling female talk for, "Just the thought of you touching me makes my skin crawl, and the smell of your foul breath makes me want to puke!"

You can tell by the way that my breath has become fast and shallow, my face has become ashen with fear and my heart is beating like, oh, about a zillion beats per minute, that I am going to attempt one of the rare Mogambo Mathematical Moments (MMM). And sure enough, I deftly key into a calculator the appropriate data, and after a few abortive tries I stand up and ask the class if there is anybody here who can figure out this damned %##@ math problem, and then one of the smart little punks hands me a piece of paper with the answer written on it, and then I announce that a measly 5.8% inflation causes the price of a new Ford to increase from $900 to $25,000 in 59 years! 5.8%!

Hahahaha! You think that you are going to get real, inflation-adjusted returns from the stock market to equal that rate of inflation? Hahahahaha! What a chump! Hell, your $900 investment is already down in terms of purchasing power, and you haven’t made a dime of real, inflation-adjusted gains yet! Hahahaha! Brilliant investing there, dork!

Inflation and Retirement: Ten Percent a Year to Break Even

And even if you did make enough in capital gains and dividend income to offset the inflation (which is actually deflation in your buying power), you still haven’t paid the damn taxes on the gain! So now it is time for you to get out YOUR calculators, and you tell ME how much you have made on your $900 investment to turn it into $25,000 in fifty-nine years, net of inflation, net of taxes, net of fees, costs and charges, net of commissions, net of "inactivity fees," net net net.

I figure that if you make a profit of about ten percent a year, ought to be enough to just break even! And if you think that you are such a hotshot investment genius that you can do that consistently over 59 freaking years in a row, then hahahahaha!

Thus is it with all of your investments; your gains will be eaten up by inflation, caused by the horrid Federal Reserve, which has created all this money which caused all this inflation by destroying the purchasing power of your money. Just ask Bud. If he put $900 into his retirement savings in 1946 so that he could have a new car when he got to be 75, he might actually get a new car. But his investment would not do so well that he could also afford to afford the insurance, much less the gas to put in it!

And to extend this to your other retirement plans, such as your 401(k) or your IRA or your company plan, you will get, at most, a week’s worth of income when you retire only if you save a week’s worth of income now. It’s one-for-one. There will no compounding of your investment through some magical multiplying effect (MME), and you will not end up with some huge pile of money with which to retire in comfort and style. Life is not that way, and the stock market is not that way, either.


The Mogambo Guru
for The Daily Reckoning
February 14, 2005 — Paris, France

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

We would write on the subject of love, but it is too high a mark for us; we could never hit it. Instead, we aim lower…where we can’t miss.

Right down there, among the soft, fat, slow-moving, old, crippled, blind, and half-wit targets is our favorite columnist, Thomas L. Friedman, with yet another mind-bogglingly moronic idea. Hardly a week goes by that the Great Improver does not offer us his flank – that is to say, another preposterous proposal to take a shot at. This week is no exception. The idea actually originated with his wife, Ann, he tells us: "Free parking anywhere in America for anyone driving a hybrid car."

The specifics of it were, as usual, not spelt out. We doubt that he would like us to park our old pickup in his garage, free of charge, or on the White House lawn at any price. Nor do we know what he meant by "hybrid car." A cross between a Volvo and a hyena? The fruit of the union of SUV with a Greyhound bus? We presume he was talking about a mixture of gasoline and electric power…about which more below….

But we will leave Mr. Friedman for later in today’s commentary and move on.

Last week, economists studied the jobs numbers. As usual, they wondered why the jobs they expected had never turned up. In the month of December, they had been disappointed when the new jobs figure came in at only 157,000 – rather than the 200,000 most anticipated. Then, came news that the number was really closer to 133,000. And then, in January, they had again predicted 200,000 additional jobs. Some even thought the number might go as high as 300,000. But when the month’s employment tally was released, it showed only 146,000.

In December, too, economists thought they saw the long-awaited reawakening of American manufacturing. (You remember, dear reader. "Manufacturing" is where people in work-clothes actually make things, usually in "factories." Someday, perhaps they’ll build a museum where children will be able to see what it was like to make things. But for now, we’ll have to use our imagination.) The numbers showed 3,000 new jobs in the manufacturing sector. That may not seem like many, but it was the first time in a long, long time that the number had not been preceded by a minus sign. So, many people thought it marked a bottom…that, finally, the drop in the dollar had gone far enough to encourage manufacturers to hire new people and make more things.

Alas, then along came the news that there weren’t really 3,000 more jobs in manufacturing, but 7,000 fewer. Not only that, but people in the sector were actually putting in fewer hours!

Alan Abelson, in Barron’s, pointed out that if the "recovery" had proceeded at a normal pace there would be about 10 million more jobs created…and about four million more people in the labor force…

So, we ask ourselves – what is wrong with these capitalists? Why do they not create the jobs they’re supposed to create?

Our answer is part simple…and part complex, or part cyclical…and part structural, or part economic…and part philosophical.

The simple part is this: Businesses are run by people with private information. Economists, analysts, and politicians can tell us that things are looking up all they want. But all that is merely public claptrap. It is nothing more than "theory"…newspaper headlines and TV drivel. What the businessman knows is what it costs to hire someone…how much extra product that person should produce…and how much he can sell it for. If he can’t see a way to make extra money from it, he’s not going to hire more people. That’s the private reality that is holding down employment and wages. It tells us that we are still in a cyclical downturn…which shows few signs of real improvement.

The more complex part is that there are few capitalists left, and many neo-capitalists. A real capitalist might take the long view – investing in a project even if he could see no profits anytime soon. But today’s major corporations tend to be run by neo-capitalist managers, who have a much shorter outlook and whose own interests are often contradictory to those of the actual owners. Thus, a neo-capitalist is to a real capitalist as a neo-conservative is to a real one. The neo-capitalists are eager for mergers and acquisitions. They’re quick to cut costs, because the improvements show up immediately in the quarterly numbers, but loathe to add projects whose profits are likely to come to shareholders, employees, (and new managers) many years later.

But if there is one thing economists get used to, it is being wrong. They scarcely seemed to notice. Instead, they focused on the cheery news that even though new jobs were not being created at the rate they expected the unemployment rate was in decline – from 5.4% to 5.2%.

How did that happen? Apparently, people just tired of looking for work – and dropped out of the labor pool all together.

Now they’re not employed. But they’re not unemployed either. They no longer exist.

So many humbugs, dear reader, and so little time. The employment numbers are a fraud. The neos are a fraud. And then…there’s Thomas L. Friedman.

More news, from our currency counselor:


Chuck Butler, reporting from the EverBank trading desk in St. Louis…

"I would think that a bad TIC tomorrow would be the last nail in the dollar’s you know what! This data is sooooo important to the future of the dollar… So get ready!"


Bill Bonner, with more of our views from Paris:

***More on the "Great Debate" between Denning and Boric. Chris Mayer, editor of Fleet Street Letter, was on the panel in Orlando. This morning, he threw his hat into the ring…

"DR readers will recall that Denning finds no value in U.S. equities. Boric sees a feast…if you stick to small caps, that is. Well, at Fleet, we often serve the two together, like ham and eggs…"

"’Specialization is for insects,’ said Dan. The quote got me thinking. One thing about insects – they have the capacity to survive extraordinary conditions. They are simple, but sturdy biological designs. They are incredibly efficient and prolific. Addison Wiggin relates that 40% of the world’s biomass is made up of insects. I don’t think anyone can say they have not been successful.

"Insects are also undoubtedly specialists – most insects are good at only a few things, but they do these things very well.

"Really, the development of markets and the increase in our standard of living depends on further specialization – it’s the whole point behind Adam Smith’s pin factory. Each person learns one step of the process in making a pin. Collectively, they produce far more pins in the same man-hours than if one person had to do the whole process alone.

"The old golf teacher and best-selling author Harvey Penick also advised readers to keep things simple. ‘If you were asked to imagine what flavor of ice cream would describe your golf swing, I would like to hear you answer, ‘Vanilla,’ Penick wrote. ‘It’s the simple things that last.’"

*** A Daily Reckoning reader: "I got a big kick, listening to an interview with Donald Trump when he was interviewed on CNBC a few days ago. When asked whether there was a housing bubble, his response was that there was no bubble. He then ‘proved’ it by telling her that many of the apartments and houses in a new development (Palos Verdes. CA) sold very quickly and some of them were sold before they were completed. He then continued to talk about two other developments in Florida (if I recall right) with similar results etc. etc!!"

*** And another (why he reads us is a mystery):

"You guys are so full of crap. I think a lot of people are well aware of the unsustainable nature of the current economic situation in the US – budget deficit, trade deficit, devaluing dollar, price of oil, and blah blah blah. But you harp on it endlessly, day after day, and in the final analysis you say absolutely nothing.

"So, when is the axe going to fall? You don’t know and, apparently, no one else does either.

"And, by the way, I like Paul Krugman.

"I also believe in social justice.

"So, why don’t you clowns get real jobs for once in your lives and stop polluting the already overburdened investor with your Prophet of Doom phony baloney based on nothing but strung together predictions that never seem to pan out.

"Oh, by the way, if you say the same thing every day sooner or later it will be true or close to true. Then you can say you were right all along.

"Go jump in a lake."

*** Still more mail:

"It has been my experience, that Americans who are so loath to denigrate Europe or other countries do so out of ignorance. The average American Joe Six-pack who thinks that all there is to life is lite beer, football and Domino’s Pizza is missing a lot. I was a Yankee elitist until I traveled to places like Paris, Berlin, and Seoul. The beauty and charm of Paris, the cleanliness and Mercedes-Benz taxis everywhere in Germany, the digital billboards atop almost every building in downtown Seoul impressed the hell out of this former Yankee elitist rube! If I could afford it, I would move to Paris in a heartbeat!

"America at one point in time WAS a great country, and in some ways still is. But we didn’t have to strut around the world (at the end of a gun barrel, no less) and tell everyone how wonderful we were! The greatness of our deeds spoke for itself. I’m afraid that America’s days of greatness are numbered, yet Joe Six-pack won’t know about it until he’s out of work, living on the street with his obscene subprime-financed big screen TV on the curb because he was foreclosed on his over-valued house, and instead of eating Domino’s Pizzas, he will be DELIVERING pizzas (if he’s lucky) to make ends meet!

"Losers like the guy who whined about Europeans being ‘pathetic’ needs to get off of his lazy, fat Miller-Lite BUTT and do a little bit of traveling. I think his opinions and respect for other parts of the world would change considerably."

The Daily Reckoning