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Years ago, I bought a domain name: www.NeverSayRetire.com.

I did this because I have long been aware of a crisis that will face tens of millions of Americans. They will not be able to afford to retire.

Every Western government has lied to its citizens, All have promised to provide an old age safety net. These promises will soon be broken.

Americans have long accepted these promises at face value. They have not applied a discount for the high risk of a government default on its IOUs. They have also not applied a discount for price inflation to compensate them for a politically inevitable policy.

Yet they are becoming vaguely aware that the government will in some way wiggle out of its obligations. Anyway, they say they think this. But they take no practical steps to hedge their portfolio of lies.

This is why I conclude that there is enormous self-deception in all adult age groups in the United States regarding the prospects of retirement. This self-deception is so comprehensive and so widespread that I have doubts about people’s ability to make assessments and then make decisions that are consistent with their assessments.

The financial media are beginning to publish articles about how millions of Americans will not be able to afford to retire. Americans have not saved enough money, we are told. This is accurate.

These articles are coming about 45 years too late. It was clear to anyone with an understanding of basic economics back in 1965 that Medicare would bankrupt the United States government at some point. A few critics said so at the time, but they were not taken seriously. The program’s expenses have grown relentlessly. They are going to undermine the solvency of the government. This means that there will be a default at some point. This default will also undermine Social Security.

The writers also report that more Americans than ever before are saying that they will not be able to retire. But the actual rate of retirement indicates that they do not really believe this.

ACTIONS SPEAK LOUDER THAN WORDS

The people being interviewed are telling the reporters one story, but their actions tell a different story. They say that they will not be able to afford to retire, yet the overwhelming majority of people who are eligible to start collecting full Social Security payments at age 66 do retire. This percentage has been increasing over the last decade, but not fast enough. A Congressional Research Service report dated September 2009 summarizes the development. Only a third of men eligible for full Social Security benefits around age 66 are still in the labor force.

In March 2009, 52% of men aged 62 to 64 were employed, compared with 42% in 1990 and 47% in 2000. Of men aged 65 to 69, 33% were employed in March 2009, compared with 26% in 1990 and 30% in 2000. Among women 62 to 64 years old, 41% were working in March 2009, compared with 28% in 1990 and 35% in 2000. Among women 65 to 69 years old, 25% were working in March 2009, compared with 17% in 1990 and 20% in 2000.

What the data reveal is that two-thirds of American men who reach the age of full Social Security payments quit working. Three-quarters of women make this decision.

If Americans were really concerned about their inability to pay for their retirement years, they would not retire. They would stay on the job. By law, they cannot be fired merely for being older. Companies are afraid to fire anyone who reaches retirement age who asks to stay on the job.

My conclusion: there is a deep-seated schizophrenia in America’s older population.

This schizophrenia extends to the younger members of society. For over a decade, pollsters have asked voters if they believe that Social Security will be still be operational when they reach retirement. Over half of all people surveyed say they do not think it will be. Younger workers are even more emphatic that it will not be there.

Yet there are no signs that this age group is saving enough money to provide retirement. They say that the government will not be there with a safety-net program, but they refuse to build a safety net of their own.

Something is fundamentally wrong with the public’s ability to assess economic cause and effect. If we believe their actions, they discount the bad statistical news and take at face value the government’s lies.

BROKEN RETIREMENT DREAMS

The Wall Street Journal published an article on August 21 that dealt with retirement prospects.

The article began with the story of a woman who got trapped by events. Her mother became ill in the 1990s. She needed long-term medical care. This is not cheap. So, the daughter stopped making contributions to her retirement account. Then the “ups and downs” of the stock market dealt her retirement account another blow, the author writes. She calls them ups and downs. This is misleading. The stock market is lower today than in March 2000, and consumer prices are 30% higher.

Today, the 67-year-old woman went back to work part-time as a data-entry clerk. She hopes to retire by age 70.

It’s a sad story. But something is left out: numbers. Exactly how much money did the woman have to pay each month for her mother’s care? For how long? How much had she been contributing to her retirement account before her mother got sick? In other words, is there evidence that she, in fact, would have been able to afford to retire, had her mother not gotten sick? We are not told. We only know that this is her explanation of what happened.

As for the stock market, the financial media did not warn people in the spring of 2000 that a decade-long decline was coming. They did not tell readers to sell stocks. Since then, they have repeatedly said that the best way to achieve a secure retirement is to save more money. They have also said that the best place for this money is the U.S. stock market. They have been wrong for over 11 years.

The woman says she will have a hard time retiring if she cannot sell her home. This indicates that she had regarded her home as her capital for retirement. She is not alone. She knows this. “Like most older people, my money is in my home. … I’m caught between a rock and a hard place.”

But why is she caught? Because she believed the U.S. government and the mainstream media. We now live in the aftermath of Alan Greenspan’s anti-recession policies, beginning days after he took over as chairman in October 1987. The stock market fell 22% in one day. The Federal Reserve responded within 24 hours by flooding the markets with fiat money.

Greenspan always inflated his way out of short-term downturns. This created the housing bubble that he denied even existed. He got away with this because the mainstream media applauded.

The financial media did not warn readers in 2005 and 2006 that residential real estate was a bubble, and that home owners should not put any hope in their homes’ equity as a retirement savings plan. I warned my readers.

So did a lot of other Austrian School analysts.

But we were ignored. Among the few financial media talking heads who did not ignore us, we were dismissed as naysayers, doomsters, and people without vision. Those who ignored us are now living in less expensive homes. Millions of them owe more on their mortgages that their homes are worth.

The bubble-blowers of course mention none of this. They insist that no one could have foreseen the popping of the housing bubble. Their victims are in despair, for good reason.

Another of the lady’s complaints is on target. “Everything is more expensive. I cannot retire, I wish I could.” But this price inflation began in the mid-1960s, when she was a young woman. It did not slow until about two years ago. How is it that she did not see this coming? For the same reason that the financial media did not see it coming. They did not understand Austrian School economics.

Ludwig von Mises warned about secular price inflation from 1912 until his death in 1973. His disciples followed his lead. He took a stand against the entire academic community and the entire financial journalism guild. He was right. They were wrong.

A generation ago, he was asked if he had an inflation hedge. “Yes,” he said. “Age.”

The lady in the article did not see this coming. Neither did the mainstream media, the world of academic economists, and politicians. It is a sad tale, but it was predictable. We Austrians predicted it . . . and were told that we did not understand economics.

The article continues: “Many older people are finding themselves in a position they never expected to be in at retirement age: still working or in need of a job.” This is true. But whose fault is it? The voters. Their parents voted for politicians who voted for the welfare state. They imitated their parents. Now the bills are coming due, as they do in every ponzi scheme. Yet the victims seem surprised. This is a self-inflicted wound.

The article covers recent developments: the fall in stock market prices over the last 30 days, the decline of interest rates since 2008, and falling housing prices. All of this is true, and it is going to get much worse.

Then she cites a statistic. Three-fifths of workers surveyed by a nonprofit organization devoted to retirement studies said that they plan on working past age 65. Of these people, 47% said this is because they have no financial option. They will need health care benefits and income.

If people really took seriously this threat to their futures, they would be saving at 10% per annum, minimum. The older ones would be saving at 20%. They aren’t saving at 6%. They show no sign of panic regarding old age. They may sing songs of woe to reporters. They may tell pollsters that they see what is coming. There is not much evidence that they are taking statistically relevant steps to avoid the grim future which they say they envision.

SAVE MORE AND WORK LONGER

Whenever we read these stories on the plight of the retirees, the author adds the obligatory warning about failing to act now and save more. This article is no exception.

But in this tight labor market, working into your golden years isn’t easy. And you’ll have to make your age and years on the job come across as assets, not liabilities. In addition, with the current market upheaval, you’ll need a financial plan that puts your savings on the fast track and takes into account how Social Security and Medicare benefits could be affected.

But the author does go beyond this ritual response about saving more money. She admits the truth: the best plan is to plan not to retire.

For many older workers, the easiest option may be to continue with their current employer. But that will entail making themselves essential.

Workers should take on new projects when possible. And it’s crucial to stay on top of the latest technology being used; you don’t want to be perceived as the old guy who doesn’t know what’s going on.

This is very good advice. The fact is this: there is no way that most Americans will be able to save enough money to accumulate enough capital to sustain them in their old age, from age 66 to 80 for men and 84 for women. They will not have sufficient capital. This assumes that there will be no mass inflation. That is a low-probability assumption.

Older employees also can put their experience to use — and on display — by volunteering to mentor younger workers either formally or informally.

This is also very good advice. The older worker who can get younger workers up to speed rapidly is a real asset to any company.

If you are working on commission, you are in good shape if you can keep selling. The article interviewed a shoe salesman who is still on the job at age 70. He stated emphatically: “I have to produce or the company wouldn’t let me work out here.” He’s wrong. The company would let him work, but he would eventually starve. The company would not risk a lawsuit over age discrimination. It would let the pressure of falling commission income push him into retirement.

THE ILLUSION OF A SAFETY NET

The governments of all Western nations have promised workers that they will be taken care of by the state in their old age. That promise cannot be fulfilled. Statistically, it is impossible to fulfill. This is why families should be making plans to resume the responsibility of caring for the aged members, as societies have done throughout history.

For as long as you are still in the labor force, you have a chance of being able to afford to care for aged parents. If you are trying to avoid becoming the aged parent who needs care, think through your present employment situation.

If you are in a job where you think the physical requirements will be too much for you, try to get transferred now. Don’t wait for your boss to come to you to suggest this. You had better gain skills in the new position. This takes years.

Some firms offer phased-retirement programs: reduced hours worked. I recommend this strategy, with this proviso: you have a side business to retire into. You plan ahead. You devote more hours to it each week as you get older. You get it profitable, and then you phase out of your present salaried position.

Employers like this option. It allows them to get rid of dying wood without facing a lawsuit. They don’t want oldsters on the payroll. They want younger people who have more years of service ahead of them. Another major incentive for hiring youngsters is this: they will be less likely to negotiate from expectations of high income. They have been battered by Bernanke’s economy. They are happy just to get a job.

CONCLUSION

You are sitting on a portfolio of government lies. I don’t know if you really understand that there is going to be a great default by the government. By “really understand,” I mean this: you are taking steps not to retire.

If you are still planning to retire, you had better have a lot of money, and this money had better not be invested in markets that are going to collapse when the government’s promises are finally exposed as lies.

August 25, 2011

Occasionally, we see an official attempt at a serious discussion of what Federal Reserve System economists would like the public to believe is safe banking. This means safe fractional reserve banking. This means fraudulent safe banking. This means fantasy banking.

All fractional reserve banking rests on a legal promise: you can get your money out at any time. Yet the money that you deposit is loaned out by the bank. This means that your money is gone. Then how can you withdraw it at any time? Only if (1) the money is loaned out on a “repay instantly on demand” basis, or (2) hardly anyone will demand withdrawal at the same time. The bank will pay you out of its tiny slush fund for withdrawals. The first option assumes that the debtor is always in a position to repay at any time, which is of course ludicrous for most corporate and business borrowers. They will not agree to such terms. The second option is equally ludicrous during a banking crisis.

In other words, all fractional reserve banking is based on a legal deception of the depositors. A depositor cannot get his money back when a lot of other depositors want to get their money back. This is called a bank run. All fractional reserve banking systems eventually experience bank runs.

During bank runs, bankers call on the government to bail them out. The government and the central bank bail out only the biggest banks. They let the smaller banks go under. Then big banks buy the assets of the smaller, now-busted banks at discount prices. The government (FDIC) pays off depositors with $250,000 or less on deposit. Taxpayers therefore subsidize the buying spree of the biggest banks. This is justified as “saving the banking system.” The politicians provide taxpayer money every time.

I remember an on-camera testimony of Congressman Brad Miller, a Democrat Congressman from North Carolina, just before the TARP bailout. He said that his constituents were evenly divided between “no” and “hell no.” He of course voted for the bailout, as did most of his colleagues. He was of course re-elected.

The voters did not really care. They screamed about the bailouts, but they refused to impose negative sanctions on all of the Congressmen who voted for TARP. Until there is real pain, they usually re-elect their Congressmen. They perceive, correctly, that their opinions do not count when big banks are asking for handouts in a crisis. The voters want their lifelong bailouts, and as long as their Congressmen bring home the pork, they really don’t care. By “care,” I mean an automatic vote for the challenger at the next election. Congressmen generally understand only one thing: defeat at the next election. Ron Paul doesn’t care, and maybe Dennis Kucinich doesn’t care, but most of them care deeply.

So, the #1 goal of most politicians, all bureaucrats, and all central bankers is to make sure that the voters feel no pain — at least not pain bad enough that might lead to (1) a new Congress, (2) budget cuts for bureaucracies, and (3) the nationalization of the central bank.

A SCARED CENTRAL BANKER

On June 3, Daniel Tarullo, a member of the Board of Governors of the Federal Reserve System, which is a government-owned institution, unlike the regional Federal Reserve banks, gave a speech at the Peter G. Peterson Institute for International Economics. Peterson until 2007 was the Chairman of the Council on Foreign Relations. As such, he was among the most influential men on earth. He served as Secretary of Commerce (1972-73). He was the CEO of Lehman Brothers (1973-84). He co-founded the Blackstone Group. He is concerned about the growing Federal debt, on-budget and off-budget, which he correctly perceives as a threat to the world’s capital markets.

Tarullo’s topic was the systemic risk of the world’s interconnected banking system. This is surely a relevant topic. When I think of the international banking system, I think of Tom Lehrer’s nuclear war song a generation ago: “We will all go together when we go. Every Tom, Dick, Harry, and Every Joe.”

He focused on the Dodd-Frank law’s requirement that the Federal Reserve System establish prudential standards for “systemically important financial institutions or, as they are now generally known, ‘SIFIs.’ My focus will be on the requirement for more stringent capital standards, which has generated particular interest.”

Keep this acronym in mind: SIFIs. It means very large banks, meaning very large, highly leveraged, highly profitable corporations whose collapse would create a chain reaction in the financial markets. In the old days, SIFIs were called TBTF: too big to fail.

Tarullo made a significant admission: “It was, after all, a systemic financial crisis that we experienced and that led to the Great Recession that affects us still today.” That’s the official party line. It was used to justify TARP and the other 2008 bailouts, such as swaps at face value of liquid AAA-rated Treasury debt held by the FED for toxic assets held by the SIFIs. For a skeptical analysis of the party line, read David Stockman’s response.

Tarullo admitted that the old system of regulation failed to deal with systemic risk. Or, to put it differently, the horse got out of the barn, and now the Dodd-Frank law has increased the responsibility of the FED to regulate things better. But the FED regulated the system before. This is the standard government response: reward failure with greater responsibility.

The pre-crisis regulatory regime had focused mostly on firm-specific or, in contemporary jargon, “microprudential” risks. Even on its own terms, that regime was not up to the task of assuring safe and sound financial firms. But it did not even attempt to address the broader systemic risks associated with the integration of capital markets and traditional bank lending, including the emergence of very large, complex financial firms that straddled these two domains, while operating against the backdrop of a rapidly growing shadow banking system.

But things will be different Real Soon Now. The FED is going to regulate large banks on a comprehensive (macroeconomic) basis. This assumes that a committee of salaried bureaucrats who do not own the banks or have any assets of their own at risk will be able to design fail-safe rules that will coordinate the decisions of depositors and bankers inside the United States. Of course, the system is international, so the USA is dependent on decisions made by bureaucrats, bankers, and depositors around the world. But Dodd-Frank did not cover them.

A post-crisis regulatory regime must include a significant “macroprudential” component, one that addresses two distinct, but associated, tendencies in modern financial markets: First, the high degree of risk correlation among large numbers of actors in quick-moving markets, particularly where substantial amounts of leverage or maturity transformation are involved. Second, the emergence of financial institutions of sufficient combined size, interconnectedness, and leverage that their failures could threaten the entire system.

In short, the FED’s economists, who failed to foresee what would happen to a few banks in 2008, are now going to foresee what will happen to lots of banks, including multinational banks that are interconnected with SIFIs all over the world.

He assured his listeners that “No one wants another TARP program.” No one wants hyperinflation, Great Depression II, or both. The question is: What can a bunch of regulators do to prevent this? “In order to avoid the need for a new TARP at some future moment of financial stress, the regulatory system must address now the risk of disorderly failure of SIFIs.”

There is a theoretical problem here. Risk can be estimated by use of statistical analysis. An example is life insurance tables. Uncertainty cannot be estimated, such as life insurance tables during a nuclear war. These are called “acts of God,” and insurance companies write contracts to escape liability.

A systemic failure is triggered by an event that is not governed by the law of large numbers, i.e., risk analysis. It is triggered by an event that is inherently uncertain. That was why Long Term Capital Management went belly-up in 1998, despite its sophisticated formulas based on the work of two Nobel Prize-winning economists.

He referred to an international agreement known as Basel III. That is the successor to Basel II, which was not enforced and which achieved no protection from 2008. “The Basel III requirements for better quality of capital, improved risk weightings, higher minimum capital ratios, and a capital conservation buffer comprise a key component of the post-crisis reform agenda.” It all sounds so reassuring. But what authority does the committee have to impose sanctions? None. “Although a few features of Basel III reflect macroprudential concerns, in the main it was a microprudential exercise.” In short, it ignored The Big Picture.

We need to pay attention to The Big Picture. “We” means Federal Reserve economists who have formulas, but who were not smart enough to win a Nobel Prize.

Here is the problem:

There would be very large negative externalities associated with the disorderly failure of any SIFI, distinct from the costs incurred by the firm and its stakeholders. The failure of a SIFI, especially in a period of stress, significantly increases the chances that other financial firms will fail. . . .

He argued that the SIFIs must increase their capital reserves. Increased capital means lower leverage. It means a reduced ROI: return on investment. So, a SIFI will not do this without regulation. “A SIFI has no incentive to carry enough capital to reduce the chances of such systemic losses. The microprudential approach of Basel III does not force them to do so.” Quite true. So, what is the FED going to do about it? And how, exactly, can the FED get foreign SIFIs to do it?

What has been done so far? Committees have been set up. This is basic to the theology of all modern civil government: salvation by committee. “Together with the FDIC, the Federal Reserve will be reviewing the resolution plans required of larger institutions by Dodd-Frank and, where necessary, seeking changes to facilitate the orderly resolution of those firms.”

Still, we must acknowledge that we are some distance from achieving this goal. The legal and practical complexities implicated by the insolvency of a SIFI with substantial assets in many countries will make its orderly resolution a daunting task, at least for the foreseeable future. Similarly, were several SIFIs to come under severe stress, as in the fall of 2008, even the best-prepared team of officials would be hard-pressed to manage multiple resolutions simultaneously.

I see. “Some distance.” “Practical complexities.” “Daunting task.” In short, they don’t know what they are doing. The formulas are not yet clear. The appropriate sanctions are not yet on the books. So, it’s “pray and patch.” It’s bureaucracy as usual.

“I HAVE A PLAN”

He offered a five-step program. Point one is choice:

. . . an additional capital requirement should be calculated using a metric based upon the impact of a firm’s failure on the financial system as a whole. Size is only one factor to be considered. Of greater importance are measures more directly related to the interconnectedness of the firm with the rest of the financial system. Several academic papers try to develop this concept based on inferences about interconnectedness from market price data, using quite elaborate statistical models.

Oh, boy. Academic papers! Yes, my friends, academic papers, written by Ph.D.-holding economists who have never run a bank or anything else. That will do the trick!

Others have proposed using more readily observed factors such as intra-financial firm assets and liabilities, cross-border activity, and the use of various complex financial instruments.

So, the experts do not agree. Surprise, surprise! Then whose system will win out? None. A committee will decide how to coordinate all these proposed solutions.

Second, the metric should be transparent and replicable. In establishing the metric, there will be a trade-off between simplicity and nuance. For example, using a greater number of factors could capture more elements of systemic linkages, but any formula combining many factors using a fixed weighting scheme might create unintended incentive effects.

You know: transparency. It’s the new mantra. It’s a revision of Woodrow Wilson’s “open covenants openly arrived at.” Trust them!

“Systemic linkages.” “Formula combining many factors.” “Fixed weighing scheme.” Yes! Yes! I believe!

On the other hand, using a small number of factors that measure financial linkages more broadly might reduce opportunities for unintended incentive effects, but at the cost of some sensitivity to systemic attributes of firms. Whatever the set of factors ultimately chosen, the metric must be clear to financial firms, markets, and the public.

Clear. It’s all so clear. Doesn’t it appear clear to you? It does to me.

This is transparency, all right: the transparency of the wardrobe worn by the emperor, who had the best tailors money could buy.

Tarullo went on and on. The fifth point was the corker: international cooperation with independent agencies, all according to Basel III standards, which will be imposed by 2019. They promise!

Fifth, U.S. requirements for enhanced capital standards should, to the extent possible, be congruent with international standards. The severe distress or failure of a foreign banking institution of broad scope and global reach could have effects on the U.S. financial system comparable to those caused by failure of a similar domestic firm. The complexities of cross-border resolution of such firms, to which I alluded earlier, apply equally to foreign-based institutions. For these reasons, we have advocated in the Basel Committee for enhanced capital standards for globally important SIFIs.

Achieving and implementing such standards would promote international financial stability while avoiding significant competitive disadvantage for any country’s firms. I would note in this regard that it will be essential that any global SIFI capital standards, as well as Basel III, be rigorously enforced in all Basel Committee countries.

I have summarized half of his speech. The rest of it is equally concrete, realistic, and inspirational. You can read it here.

CONCLUSION

This is the best the FED has to offer. This is one Board member’s proposed solution to systemic risk, which is in fact systemic uncertainty. It is a salaried bureaucrat’s proposed solution to the inherent uncertainties imposed by fractional reserve banking — a system whose major players are politically protected from failure, and which therefore subsidizes high leverage and high returns . . . until the day the dominoes begin to fall.

We are asked to believe that Federal Reserve economists can design a coherent, enforceable system of controls to protect the world from leveraged banks that overestimate the ability of their formulas to protect them from uncertainty. We are asked to believe that salaried economists at the FED and all other major central banks can produce a better formula, and then impose it in ways that profit-seeking bankers cannot evade.

My conclusion: we will all go together, when we go.

June 8, 2011

From LRC, here.