Pension Pains

News from the financial world seems to be getting worse with each passing day…and you know it’s especially bad when even our Mighty Masked Economist is so shaken he can barely force out a maniacal laugh.

If you want something that ought to send you screaming down the street, in an article, Optional Reading, Edgar J. Steele writes, "As of June 15, the value of stock options must be expensed by American business firms. With stock options, never is there a financial statement hit taken by the company. The hit always is borne by existing shareholders, whose stock values become diluted as the company merely issues new stock to employees exercising their options, a non-event for income-statement purposes."

So is there really a new economy, where stock options allow everybody to win and nobody loses? No. He goes on to say, "A direct lift from existing shareholder wallets, in other words."

But now (cut to a video of an asteroid smashing into the earth where dinosaurs are hurled into the air and they all have these surprised looks on their faces) all that has changed. Starting June 15, "The accounting entry is: Debit expense and credit liabilities, just like wages, which is what stock options are, after all." Wow! Talk about taking a hit to the income statement!

And not only that, which is plenty, but also he goes on to say, "P/E (Price/Earnings) ratios, already stratospheric by historical standards, will evaporate altogether for many firms (divide by zero or a negative and get infinity)." His advice? "Get out of stocks and bonds and do it now."

And it gets worse from there! According to an article by Dan Roberts in The Financial Times, "Actuaries at Towers Perrin estimate the average Fortune 100 company is now storing up more than $3bn in deferred pension costs that have yet to show up in published profit and loss figures." Three billion apiece! They go on to note: "Towers Perrin, an independent consultant, calculates that the deferred cost for the 81 largest defined benefit pension schemes in the United States grew approximately five percent in 2004 to $252bn."

And of course, no day is complete without somebody showing me that inflation is roaring back to life and is consuming us all. In his spare time, he has figured out, "In 2002 dollars, the Dow actually has gone from 8,000 to 6,000. You actually lost 25% of your nest egg over the past two years!" So, as an example, if you had $100,000 in purchasing power two years ago, and now you have only $75,000 in purchasing power, thanks to the devaluation of the dollar by 25%, and you want to privatize Social Security by forcing people to put money into the stock market? Hahahaha!

Social Security Reform Stupidity: Why Paul Krugman Is Wrong on Social Security Reform

And speaking of reforming Social Security, not that it is such a hot topic; everybody wants to run their mouths about it, including the horrid Leftist Paul Krugman, who recently penned A Fake Solution to a Made-up Crisis.

First off, he admits that Social Security is "running a surplus, thanks to an increase in the payroll tax two decades ago." Well, duh! Let me write this down! If you increase taxes, a government program will get more money, and if they get enough money, then they will run a surplus. Wow!! It seems so obvious when it is pointed out to me like that! I slap my forehead ("ouch!") at the revelation! Why didn’t I realize that all you need to do to get more money (and I laugh at the utter simplicity of it all) is to raise taxes!

Taking the Krugman Economic Miracle ("increase taxes, show a surplus!") he announces, "As a result, Social Security has a large and growing trust fund." Then he hits us with the laughable line: "When benefit payments start to exceed payroll tax revenues, Social Security will be able to draw on that trust fund." Hahahaha! See, the way that he thinks it works is that this surplus goes into some trust fund, see, sort of like this big ol’ box with a lock on it, and it is loaded with lovely cash or something, and then you just stick your hand in there and grab a fistful when you need some money.

Now that he has established the "facts" to suit himself, it isn’t until a later paragraph that he reveals, with a slap at the people who want to privatize Social Security, "Privatizers say the trust fund doesn’t count because it’s invested in U.S. government bonds, which are ‘meaningless’ IOUs." Wrong, bonehead! It isn’t just privatizers who recognize that the trust fund has no money! It’s everybody! Those IOUs are gigantic, unfathomably huge, overwhelming amounts of money owed to lots of people, who are all counting on getting that money back, and so it is therefore FAAARRRR from being "meaningless." Being IOUs, yes, but meaningless, no. Huge, yes; meaningless, no.

He never admits that the surplus in the Social Security system has been spent by Congress, and there is nothing in that stupid lockbox except those IOUs, although he does try and put a pretty face on it when he says that those IOU’s "have the same status as U.S bonds owned by Japanese pension funds and the government of China." And that the taxpayer is required to pay off those IOUs, just the same as, "The bonds in the Social Security trust fund are obligations of the federal government’s general fund." In case you were wondering what a "general fund" is, it is (and I am pointing right at you) you. Much like soldiers are called G.I.s, which is short for "Government Issue," you are "G.G.F." because you are expendable "government general fund" trash, and they are going to get money out of you. But, if it makes you feel any better, at least you are higher on the hierarchy above Mogambo Trash (MT), so at least you have THAT going for you.

Later on in the article, he admits that the problems of Social Security pale to insignificance beside the other two financial horrors, namely the current monstrous fiscal deficit and the Medicaid/Medicare nightmare, which rhymes, making it easy to remember in case this shows up on a pop quiz in class today. He doesn’t mention, strangely enough, the $650 billion trade deficit, which is also a financial horror.

Social Security Reform Stupidity: Laura Tyson’s Wrong Too

And, of course, we have Laura Tyson, the economist who was one of Clinton’s insiders when he was running the country into the ground, and who is now the dean of the London Business School, running her little mouth in the Economic Viewpoint column in the January 17 issue of Business Week, in article entitled, "Social Security Crisis? What Crisis?" While first noting how many old people depend totally on Social Security (20%) and how many get a "majority" of their income from Social Security (67%), she notes that Social Security would be on sound footing with a decrease in benefit payment amounts and an increase in taxes. Hahahaha! This is the brilliant thinking that got her where she is today? Cut benefits and increase taxes? This is the best she can do? This is the fabled Leftist compassion? Hahahahaha! Such is the idiocy of the Left, who first create a huge government program, impose taxes to pay for it, continually raise taxes to expand the program and increase benefits. Then finally, after it has grown to be a huge, suffocating part of the economy where may people are dependent on it, and it predictably falls apart, that’s when you decrease benefits and raises taxes! And then they wonder why I have so little respect for them that I write them hate mail (For example, "Dear Leftist jerk, Kiss my butt. Signed, Angry Stranger Who Is Not The Mogambo (ASWINTM)").

Then she says that the present value shortfall in the Social Security revenues over the next 75 years is $3.5 trillion. Hahahaha! Adjusting for inflation, that piddly $3.5 trillion over the next 75 years will balloon to hundreds of trillions of dollars, if not quadrillions of dollars, or whatever in the hell is beyond a trillion. Remember; the current dollar has lost 96% of its value in the last 92 years, thanks to the Federal Reserve. Now that they have really gotten the hang of it here lately, I am sure that they will devalue the dollar at an increasing rate from here on out. I will save you the trouble of laboriously computing the deficit over the next 75 years as the dollar loses ANOTHER 98%, or 99%, or 99.999% of its value. It is a lot, and future historians will look at Tyson’s $3.5 trillion dollar estimate and laugh at her and anybody who listened to her.


The Mogambo Guru
for The Daily Reckoning

January 17, 2005

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. If you’re inclined to read more, you’ll find the whole Mogambo here:

It just gets curiouser and curiouser.

Bonds not only fail to fall; they actually go up! Even though the currency in which they are denominated has been falling for the last three years.

The falling dollar was meant to "rebalance" the world economy – which has gotten dangerously out of kilter. But last week the mystery deepened as we discovered that instead of getting back in kilter, the trade imbalance is still getting worse. Sixty billion was the latest and greatest monthly measure – the amount by which exports fell short of imports in the good ol’ U.S. of A.

When trade balances get out of kilter, the currency markets are supposed to set things straight. A falling dollar was supposed to make U.S. exports more attractive and imports less so. The result was supposed to be fewer imports and more exports…and a smaller trade gap to worry about.

But the Chinese failed to play along. Years ago, they shrewdly figured the safest thing to do would be to tie their yuan to the money of their best customer – the U.S. dollar. So, as the dollar goes down, so does the yuan. Instead of getting .2 euros per hour, the average Chinese factory worker gets only .18. But he hardly notices, because his prices too are in yuan.

The Chinese are very chary of letting currencies go wither they wilt. And for good reason; they’ve seen how a currency can wilt when a man with a printing press has the right to print as much as he wants.

"When war with Japan broke out in 1937," writes Richard Ebeling in The Freeman, "the total quantity of money in circulation…was 3.6 billion yuan. By December 1941, when the United States entered the war, the Chinese money supply had increased to 22.8 billion yuan."

The Japanese were defeated in 1945, but the civil war continued – financed largely by increasing the money supply.

"In August 1948 the new money supply stood at 296.82 billion yuan…in April 1949, it has been increased to 5,161,240 billion yuan."

The dollar, in comparison, was almost as good as gold. In June of 1937, before war with Japan began, you could buy a dollar for 3.41 yuan. If you wanted to buy a dollar 12 years later, it would cost you 23,280,000 yuan.

Ebeling’s report is silent as to what happened to the Chinese trade balance during this period. We can presume, however, that if there were buyers of yuan-denominated bonds in 1941, they were so benighted that they deserved to lose their money.

Of course, some time in the future, the same might be said of today’s purchasers of long-dated U.S. government debt. Who really thinks the inflation rate will stay below 3% for the next 30 years? Who really thinks the dollar of 2035 will be anywhere near as valuable as the dollar of 2005?

Still, the markets tell us that U.S. bonds are okay – they’re going up in price. And if we can’t trust the markets, who can we trust? Bond buyers are supposed to be the most sophisticated, perceptive investors. They see no threat of inflation. Nor are they concerned about the widening trade gap and the falling dollar.

And maybe they’ll be right – at least for a while.

Why has the falling dollar not corrected the out-of-kilter trade figures? Why are bonds going up, rather than down?

We don’t know. But we have a hunch.

America can’t readily increase exports. Our manufacturing sector has fallen to only about 10% of the economy. We just don’t make enough things that can be sold overseas. And for each item that we sell overseas, we import half as many from overseas. Most of these imports have little domestic competition, so consumers do not switch from foreign-made to domestically produced items.

Also, while the dollar probably has further to fall, it can’t decline too much…because too many people owe too much money, in dollars. People need dollars to pay their bills. And prices in the United States are already very low, when compared to much of the rest of the world.

What, then, will it take to "rebalance" the world economy? It will take a recession. Higher real rates of interest. Hard times. U.S. consumers need to stop spending so much money. A lower dollar alone is not likely to be enough.

In short, our hunch is that we’ve been right all along – that the U.S. really is still on the Japanese trail…towards a long, soft, slow slump.

More news…if there is any…


As the stock market is closed today, there will be no Rude Awakening, nor Daily Pfennig…but never fear; we have this from our friend Steve Sjuggerud to sate your financial appetite:

"The typical difference (specifically, the median) has been for Big Macs in Britain to be 19% more expensive than in the States. So the fact that a Big Mac costs 20% more in Britain right now doesn’t mean Britain’s pound is 20% overvalued. It’s about in line with history – which is NOT what most experts would tell you right now."


Bill Bonner, back in Paris…

*** "Life was better 50 years ago," said a French woman on Sunday. It was our gardener’s 41st birthday. He invited us to lunch…and introduced a woman who still works at the orphanage where he was raised.

"I remember those years. It was a different world. We didn’t have all the luxuries that we have today, but it seemed healthier. At least, in so far as the family and the society are concerned. Now, we see all kinds of problems. I probably shouldn’t say this. But back when [our gardener] came to us, we got a different kind of kid – good kids whose parents just didn’t have the money to raise them. Their hearts broke when they brought them to the orphanage. But what could they do?

"Back then, mothers didn’t work. They stayed at home and raised the kids. And the fathers knew they had to support the family. The kids didn’t have a lot of material things, but they were happy. And to tell you the truth, in all my years in the orphanage, I’ve never heard a kid complain about not having enough money. They don’t care about that. What they care about is having a solid home.

"But now, both mother and father often work – and the kids are left to watch television. And then, they get these payments from the government. So, then the father or mother or neither of them works. Instead, they get into trouble…get divorced…drink…take drugs…or just sit around. The family breaks up…and the kids come to us. Often, they’re brought in by the police.

"And you know in France, the government pays about 1,000 francs (about $150) per child per month. It is not a lot of money. But if you have a lot of children, it adds up. And the more kids you have, the higher the payments for each one – because the government tries to encourage people to have more children. And with all the other assistance poor people get, they can get by without working. But, unlike in the old days, they don’t want to give the children up – because they get money for each one. So, they often have these terrible family situations where the children are completely neglected…but not given up. They don’t come to us until the police pick them up."

*** We have been invited to give a speech in San Diego. The occasion is the 25th anniversary of "International Living," the beginning of March.

"Join Bill Bonner" begins the invitation, "and all of International Living’s in-country office representatives and other experts from around the world… to learn how you could be living your dream life overseas. In a whirlwind, 72-hour insider’s tour of the world’s best locations you will find out where you can live in pampered luxury for $2,100 a month… reduce your tax burden… own world-class property at 30 cents on the dollar… and much, much more. You’ll meet experts on global real estate and international banking, plus lots of ‘regular folks’ already doing what you’d like to do. Come with your ‘dream life’ in mind, and let our speakers show you where in the world you really can make it a reality."

I’ve lived overseas for almost a decade. It’s a pleasure and a challenge. International Living has found a way to reduce some of the challenge…while actually increasing the pleasure. I’ll be there…hope to see you too. Please click on the link below for more information.