Saving and Investing Aren't Synonymous!

How is putting money in the bank is the same thing as buying shares of stocks, when one of them can go to zero value and the other can’t? Clue: It’s not. The Mogambo gives us all the details on the plan to "save" Social Security…

Martin Feldstein, former chairman of the President’s Council of Economic Advisors to Ronald Reagan and now a Harvard professor, and perhaps the next chairman of the Federal Reserve for all we know, has weighed in with his essay in the Wall Street Journal, an essay entitled, "Saving Social Security."

In essence, he thinks that he is going to get Congress to stop siphoning off the "surpluses" that the government rakes in from the excess Social Security tax remittances. Hahahaha! So right off the bat we know that this Feldstein character is not a real heavyweight in "how things really work in the real world" department, and he does not explain how in the hell Congress is going to fund its bankrupting, inexcusable, mentally-ill stupid spending excesses if they DON’T have this huge, huge, huge wad of money every month. But this essay is not about that. No, what he wants to do is to explain his plan to, as he says, save Social Security, which is to put this "surplus" Social Security money into people’s "private" accounts, which are set up and maintained by, and you gotta love this part, the Social Security people! Hahahaha! This is priceless!

Undaunted by the sight of the security people dragging me out of the auditorium because I am either 1) creating a disturbance by loudly laughing in scorn and contempt, or 2) my rakish good looks reminds them of a young James Dean at his insolent best, he goes on to note that experience has shown that if you automatically enroll people in a program, see, and force them to go through the hassle and aggravation of filling out forms to let them UN-enroll if they did not want to join in the first place, that more people end up taking the easy way out, and end up being enrolled in the program. Well, duh. But perhaps that feature is its beauty; as he goes on to say "The automatic enrollment feature would also increase national saving, a high priority in its own right. A higher national saving rate would finance investment in plant and equipment that raises productivity and produces the extra national income to finance future retiree benefits."

Martin Feldstein: It’s Not Money in the Bank

It would? Well, maybe. If the money was put in a savings account, then yes, and businesses had to bid to borrow these savings with the banks acting as responsible intermediaries, then yes again. If you are as naturally suspicious as The Mogambo, your internal "rip-off" meter ought to be red-lining, too, and you innocently ask "But where is all this money to actually go?" Well, Mr. Feldstein proposes that we first buy the deluge of bonds caused by Congress desperate to get money, because they do not have as much Social Security "surplus" to spend, since it has all been taken away to put into these personal retirement accounts, managed by the Social Security Administration! Hahahaha! There’s the money back, Congress! They borrow it! Hahahaha!

But wait! It gets better! He says, "These funds would initially be invested in government bonds, but after 2008 could be shifted into broadly diversified stock and bond mutual funds monitored by an independent government agency." Hahaha! For one thing, this guy figures that savings and investing are now synonymous? Hahahaha! Wow! Putting money in the bank is the same thing as buying shares of stocks, even though one of them can go to zero value and the other can’t? Hahahhaa! But apparently Mr. Feldstein thinks so!

For another thing, you would think that someone as old, as educated, as experienced and as theoretically wise as he, would know that there is no such thing as "an independent government agency", and there never will be, and it sounds stupid for him to say such a thing. For yet another thing, it is obvious that this is NOT about saving, but about loaning money to the damned government (as money is used to buy bonds) and also for juicing up the stock market with a big inflow of money. But the stock market is where all the hopes and dreams and retirement accounts of everybody are now attached at the hip, and so the whole financial and economic enchilada for everyone is now on the line, with all the money bet on never rolling a seven, ever again!

As I am being dragged away down the hall, kicking and flailing, my senses are blasted when I hear Mr. Feldstein’s voice grow fainter and fainter as he says that "The aging population means that the existing pay-as-you-go Social Security program cannot by itself provide adequate retirement incomes without a very large increase in the payroll tax rate." Or, alternatively, which he did not go on to say, by cutting benefits and screwing everybody out of what they were promised, which is a distinct possibility, as the government of the United States has never, ever, been reluctant to screw somebody over at the least provocation. Whenever you hear anyone say that something is "good for America", you immediately know that somebody is getting screwed right there.

Martin Feldstein: We Lose Either Way

But, and this may be some important news for Mr. Feldstein; if the government takes our money away via taxes, or takes our money away with these same silly shallow schemes and scams, or causes us to lose the purchasing power of our money through the horror of price inflation, we citizens are going to have money taken from us, either damned way!

But I am here to tell you that allowing the government to take money from you, and allow them to "invest" the money into the stock market and the housing market and the bond market and in the government contracting market, solely at the discretion of bureaucrats, is, probably, the worst and most stupid idea that I have ever heard. And this is really saying something, because being an older-type dude (call me "Armed Geezer-American") I have watched, year after year, as each layer after layer of government does nothing but come up with one increasingly-expensive, doomed-to-fail bankrupting idea after another. But, then again, he is a big shot Harvard professor, so what do you expect? Which only proves my point; not even HIS impressive credentials allow him to come up with a good solution, because there ARE no good solutions to the economic mess we are in. None. There never have been and there never will be. And that is why it is so damned crucially important that we NOT get into this stupid, bankrupting, idiotic mess in the first place, which is why the Founding Fathers were so insistent that money NOT be anything other than silver and/or gold, which is the only way to keep the damned government from creating too much money and credit, and thus getting us into this damned lethal mess.

To prove my point, he sums up with saying that this whole wheeze is "Supplementing the traditional pay-as-you-go benefits with investment-based personal retirement accounts." Note the "investment-based" part. He has, thanks to my yelling and calling him a stupid little jackass, finally abandoned the idea that these are "savings", because they are not. They are investments. And if you are new to this planet or you just woke up out of a coma or something, allow me to contribute to your education by pointing out one of the salient points of savings is that the value of the savings account either stays constant, or it goes up in value as they earn interest. Savings never go down in value in nominal value.

But investment, on the other hand, can also stay the same or go up in price, but they can also go down in price, and so you will LOSE money, and they always go down in price just when you want to sell. So, if the stock market goes down, you will lose the money in stocks. If interest rates soar, which they will, thanks to the profligate spending idiocy of the Congress and the willing complicity of the damnable Federal Reserve to constantly create excess money and credit, then your bonds will fall in value, and you will lose money in bonds, too. These are not "savings."

And let’s not forget that the Social Security was originally a program to save retirees from the suffering of not having enough money to live on. And then, when the government got finished screwing it up, it was not enough anymore. Then retirement plans such as IRAs and 401(k)s were created to allow people to accumulate enough so that, as retirees, they will not have to suffer from not having enough money to live on. Now that the government gotten finished screwing that up, too, people who retire will suffer because it will not be enough to live on anymore. And now, to save the day a third time – A THIRD DAMNED TIME! – we have a proposal for yet ANOTHER big, stupid, government program to save retirees from suffering the pangs of not having enough money to live on. And it will fail, too. Some things never change, and some things can never change. Oooh! How poetic! I like it!

There will, of course, be a lot of people who will make a lot of money on schemes such as this. Just not the people it was supposed to help. So who will benefit? The guys who prosper now, as they wheel and deal, getting us up to our eyeballs in raw speculation. So how much do they make? Well, it must be a lot, as we find from Sean Corrigan, who says "To give some idea of the incredible rate of churn between specialists, brokers, and clients, consider that NYSE dollar volume has averaged $55 billion a day in 2005, while overall securities trading in the US topped $1 quadrillion (a one followed by fifteen zeroes!) in 2004." Yow! This sum is equivalent to about 85 times the total value of the total output of goods and services of the entire country in an entire year! No wonder that the financial industry
makes 40% of all the profits in America!


The Mogambo Guru
for The Daily Reckoning

July 25, 2005

The Mogambo Sez: Things are too, too, too weird. And the historical lesson is that people run to gold when they wake up to the fact that things are this weird. And the good news is that gold is selling at very low prices. The bad news is that you can’t afford to buy it. But the good news is that gold is selling at very low prices, just in case you come up with any extra money.

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.

The only thing worth mentioning in the financial markets is how little there is worth mentioning. Even the Chinese announcement that the yuan would be cut loose from the dollar did nothing to stir up excitement. Traders did not dump the dollar as expected. Nor have investors dumped stocks. Nor have homeowners dumped houses. The dumping is still in the future.

So, there is not much to say…which is a good thing because we have not much time to say it.

Whatever messages the financial markets are sending, it is a coy, confusing one. Stocks have risen to a four-year high. Property prices have never been so high. The dollar is about where it has been for the last year. Gold is right on our buying target of $425.

What can we say?

Ah…we return to the fundamentals…the essentials…the eternal verities: nobody ever lost money underestimating the credulity of the public. People will believe anything. More about that tomorrow…

More news, from our currency counselor:


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

"The move the PBOC made on Thursday was a baby step, and if currency traders will just accept it as such, and start focusing on the floating currencies in Asia, we can stop all this teeth gnashing over when the next adjustment will come…"


Bill Bonner, back in London…

*** *** And this reaches us from Zimbabwe:

"Sent in by John Winter: I reckon that these are the last days of TKM and ZPF. The darkest hour is always before dawn.

"We are all terrified at what they are going to destroy next…I mean they are actually plowing down brick and mortar houses and one white family with twin boys of 10 had no chance of salvaging anything when 100 riot police came in with AK’s and bulldozers and demolished their beautiful house – 5 bedrooms and pine ceilings – because it was "too close to the airport".

"So we are feeling extremely insecure right now. You know – I am aware that this does not help you sleep at night, but if you do not know – how can you help?

"You can’t just be in denial and pretend its not going on. To be frank with you, its genocide in the making and if you do not believe me, read the Genocide Report by Amnesty International which says we are in level seven (level 8 is after its happened and everyone is in denial)…

"We need you to get the news OUT that we are all in a fearfully dangerous situation here. Too many people turn their backs and say – oh well, that’s what happens in Africa. This government has GONE MAD and you need to publicize our plight or how can we be rescued?

"You can’t just say ‘Oh you attract your own reality’. The petrol queues are a reality, the pall of smoke all around our city is a reality, the thousands of homeless people sleeping outside in 0 Celsius with no food water, shelter and bedding are a reality.

"Today a family approached me, brother of the gardener’s wife with two small children. Their home was trashed and they will have to sleep outside. We already support 8 people and a child on this property and electricity is going up next month by 250% as is water. How can I take another family of 4 – and yet how can I turn them away to sleep out in the open?

"I am not asking you for money, or a ticket out of here – I am asking you to FACE the fact that we are in deep and terrible danger and I want you to pass on our news and pictures and don’t just press the delete button for God’s sake. Help in the way that you know how. Face the reality of what is going on here and SEND OUT THE WORD. The more people that know about it, the more chance we have of United Nations coming to our aid.

"Please stop ignoring and denying what’s happening. Would you like to be protected from the truth and then if we are eliminated how would you feel? Surely you would say ‘If only we knew how bad it really was we could have helped in some way’. I know we chose to stay here and so we ‘deserve’ what’s coming to us. For now we ourselves, have food, shelter, a little fuel and a bit of money for the next meal – but what is going to happen next? Will they start on our houses? All property is going to belong to the State now…

"We no longer have [short wave] radio which told us everything that was happening because the government jammed it out of existence – we don’t have any reporters, and no one is allowed to photograph. If we had reporters here they would have an absolute field day. Even the pro government Herald has written that people are shocked, stunned, bewildered and blown mindless by the wanton destruction of everyone’s homes which are supposed to be ‘illegal’ but which a huge percentage of them actually do have licenses for. Please…have some compassion and HELP by sending out the articles and personal reports so that something can be DONE."

The Daily Reckoning