Tuesday, July 28, 2015

Let’s Talk About . . . Retirement, I: The Problem of Saving

What with low interest rates, the volatility of the stock market, the shrinking “jobs market,” the projected Social Security deficit, and a few other things, significant numbers of people are concerned about their retirement portfolios . . . if they even have one.  Typically, wage earners are told to save X% of each paycheck in order to fund retirement.

"Does this square us, or do I owe interest?"
And what’s wrong with that?  Plenty.  The first choice of prudent savers is inevitably U.S. government bonds: money that the government borrows from people to pay people — you know, what used to be called “robbing Peter to pay Paul.”  Since the government can create money (or so the common theory goes), it can never run out of money to be able to pay the interest on its debt (what interest?), or redeem the debt when it falls due.

The second choice of the prudent investor is blue chip corporate debt, usually short term commercial paper, meaning debt with a maturity of typically 30, 60, or 90 days.  Assuming that a company is generally sound, there’s not too much than can happen in 30, 60, or 90 days to prevent the debt from being redeemed.

Besides, although private companies can’t print money the way the government can, they can and do back their debt with assets that generate the cash to redeem the debt.  All the government can do is try and collect taxes from other people to repay the money it borrowed and spent.  In other words, a private company has to be able to pay its debts out of its own resources.  This makes a private company not as good a credit risk as the government, which has the power to make other people pay its debts out of their resources.

Good deal, huh?  Not if you’re the taxpayer stuck paying for something that benefitted somebody else a couple of generations ago.  John Maynard Keynes had that covered, though.  As he said, “In the long run, we’re all dead.”

"I will gladly pay you never for a hamburger today."
To solve the problems of life, then, hurry up and die so you can stick the next generation.  Don’t worry about having enough saved for retirement, because you’re going to die, anyway and won’t be able to use it.  You can’t take it with you.

So, government debt is the best place for your savings, because, 1) the government never runs out of money, 2) it never has to pay its own debts, and 3) everybody dies eventually.

What about the debt of private companies?  “That’s an even better deal,” he said sarcastically.  With interest rates at record lows, you put your pittance in a savings bank at 0.00000000000001% interest, and the bank takes that money and does one of two things with your money.

1) The bank uses your money to increase its required reserves.  It then creates more money by accepting qualified loan paper at a significant discount.  This makes mucho dinero by leveraging your savings into new commercial loans.

2) The bank takes its “excess reserves” (i.e., your money) and plows it into the stock market.  In this way the commercial bank — which used to be prohibited from owning any shares except for its own — can take advantage of the increasingly wild swings in the stock market by going long if it thinks shares are going up, going short if it thinks shares are going down, or hedging if it thinks shares are going both up and down.

In either event, the bank uses your money to own stuff that generates income (okay, gambling income in the stock market, but still income), and you see an ultra-tiny portion of that.  Your saving benefits somebody else, not you.

For the double whammy, if you are saving, you are not consuming.  Worse, the more you save, the less likely it is that someone will want to borrow your money!

Come again?

"Production equals income."
That’s right.  Commercial loans are made to finance new capital or productive projects of some kind.  A businessman (or child), however, only risks his or her money if he or she thinks people are going to buy what good or service is produced.  If people are saving instead of buying, people in business have no reason to borrow your money to produce more goods and services — you aren’t buying what they’re producing now!  They should produce more?  Face it, you're not going to be able to circumvent Say's Law of Markets.

The bottom line?  “The experts” keep telling you to cut consumption and accumulate what you don’t consume as savings . . . but they don’t tell you that the more you do this, the worse off you are, especially if everybody does it.

For example, suppose an economy produces $1,000,000 worth of goods and services in a year.  Being good little girls and boys, everybody saves 20% of his or her income, or an aggregate of $200,000 — production equals income, you know.  That means that $200,000 remains unsold.

What happens to the $200,000?  Well . . . nothing, actually.  Nobody wants to borrow it to make more goods and services that will just pile up unsold, so it goes into the bank at zero interest, or into a sock under the bed at zero interest.  In the meantime, because there’s no new investment going on, there’s nothing to live on when you retire, anyway.

Tomorrow we’ll look at something even more depressing: Social Security.


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