Where does it all go?

Thus far, I’ve been writing about the impending crisis caused by retirees. This is not the crisis of Social Security, though there will be one. The crisis I’ve been talking about is what will happen when retirees cash out of the stock market to fund their retirements. Social Security will not secure a free and easy life.

One question that comes up is “where will the money go?” One might normally think that this can’t possibly be an issue. Why? Because the money people cash out of the stock market is being taken out to be spent. We all know that money spent makes us all more money, right?

Well, sorta. It depends upon who you mean by “…us all…” If, by some magic, all of the money stayed in the United States, then there would be no problem. We would simply be rearranging the wealth.

Unfortunately, this is not the case. Why does this matter? As economists note, money flows to places where it can be used more efficiently. In real terms, this means that if it costs $10 to sew a shirt in the US due to the high standard of living of workers, and it costs $2 to make the same shirt in China (due to the lower standard of living), companies will eventually decide to move production to the cheapest – that is the most efficient – location. The same is true of automobile production, technical support hotlines, and airplane reservation systems to name a few. What all of these have in common, though, is a net flow of money from the place of a high standard of living to a low one.

This should sound familiar: A Trade Deficit! We send more money to other countries (and get more stuff from other countries) than vice versa. As of 2005, we had a trade deficit equal to 6% of GDP, or approximately $600 billion dollars per year. What does this mean?
On the good side, it means that we can get cheaper things at the “big, boxy, mega-store at the corner.”
On the bad side, it means that we are transferring money to other countries. Put another way, each adult in the US is writing a check out for $3,000 each year to a foreign country, each year. We are, directly, making other countries richer, and ourselves poorer.

At $3,000 per person per year, we’re giving our money away pretty quickly!

[ This blog has been an outgrowth of work I’ve done as a computational modeler, applying my expertise to answer the question of what the boomers will do to the stock market, as well as discussions based on current-day events. For more information, visit http://www.thecomingcrashonline.com, or read the book “The Coming Crash: How a House of Cards Will Fall as We Pull Out the Foundation.” ]

 

Social (In)Security

I used to think that Social Security was a pie in the sky dream. How can we possibly expect current workers to fund the retirements of the baby boom generation? It simply isn’t possible.

Right now, of course, funds are still pouring into the Social Security Administration. Put another way, more more is being deposited into Social Security than is being taken out. Of course, this isn’t a surprise. As I outline in The Coming Crash: How a House of Cards Will Fall as We Pull Out the Foundation, the first baby boomers will retire beginning in the 2008-2011 timeframe, with the tidal wave crashing a little later. Until the retirements hit, more people will be depositing then cashing out.

I’ve since come to think that the problem is even worse. You see, Social Security checks average $1184 per month. That is about $14,000 per year. That is simply not enough money for people to meaningfully live on.

“So what?” you ask? Well, aside from the fact that it would be nice if our fathers and mothers could actually live in something other than a cardboard box, and aside from the fact that it would be nice if they could eat something other than dog food, it means that these people will need to cash in on their retirements to supplement their Social Security incomes.

In some sense, this is not a surprise: people have been saving in mutual funds, IRAs, stocks, etc., so that they can enjoy retirement.

Of course, this is a known problem. Chuck Hagel (D: NE) suggested raising the retirement / Social Security benefits age. In the UK, they raised the age from 55 to 75 in one fell swoop. Why? The longer we can wait for people to take their money, the fewer are around to take their money out.

The downside is what will happen when they pull their money out. It will be like a leak in a Dutch dike.

There won’t be little boy to plug it with his finger. But will you have a rowboat so that you can float?

[ This blog has been an outgrowth of work I’ve done as a computational modeler, applying my expertise to answer the question of what the boomers will do to the stock market, as well as discussions based on current-day events. For more information, visit http://www.thecomingcrashonline.com, or read the book “The Coming Crash: How a House of Cards Will Fall as We Pull Out the Foundation.” ]

 

Pensions are not shrinking violets

I’ve been writing about the effect of the retirement of the 80 million baby boomers on the economy.

One question that might arise is, what about pensions?

Despite what we say in the news, pensions are still valid. Nearly half – 46% – of Americans are currently covered by pensions. Of course, this is not the higher percentage that was once common, but it is not zero either. Pensions are a meaningful component of expected retirement income for many workers today.

For comparison, do half of all middle-aged folks expect Social Security to contribute significantly to their retirement? Recent polling suggests the answer is “No”, but I will discuss that in another blog, another day.

If so many people rely on pensions, is it a big deal for the stock market? The answer is a resounding “YES!”.

Retirement and Pensions funds currently account for over 40% of all American common stock.

Read that last part again. Nearly half of our common stock is tied up with a single expectation – to fund the retirements – principally that of the baby boomers.

Think about that when you attend your next retirement party.

[ This blog has been an outgrowth of work I've done as a computational modeler, applying my expertise to answer the question of what the boomers will do to the stock market, as well as discussions based on current-day events. For more information, visit http://www.thecomingcrashonline.com, or read the book "The Coming Crash: How a House of Cards Will Fall as We Pull Out the Foundation." ]

 

80 Million

I’ve noted before that the baby boomer generation can and will have a significant impact on the stock market. It already has, and I will blog about that some other day.

The question today, however, is CAN the boomers really have an impact. I could go through economic models and simulations, or historical data and trends to show it to you, but I leave that for the book “The Coming Crash: How a House of Cards Will Fall as We Pull Out the Foundation.”

However, there is a simple way to see that there will be an effect: consider the raw SIZE of the baby boom generation. Boomers consistent of 80 million people in our population.

In this day and age where we throw around the words millions, billions, and trillions, but rarely if ever actually count up past twenty ourselves, what is 80 million?

There are lots of ways to understand what 80 million is, but to see the impact on the stock market, consider the following:

The population of the cities of: New York , Los Angeles, Chicago, Houston, Philadelphia, Pheonix, San Diego, Dallas, San Antonio, Detroit, San Jose, Indianapolis, San Francisco, Jacksonville, Columbus, Austin, Baltimore, Memphis, Milwaukee, Boston, and Washington combined is only about 30 million – less than half the total baby boomers. Why these cities? They are the 20 most populous cities in the entire United States according to the 2000 Census!

In other words, the 20 largest U.S. cities would only account for less than half the baby boomers!

Imagine what would happen if all the people in the 20 largest U.S. cities took their money out of the stock market, and then took out money for someone else too.

The thought is staggering. The effect is large. Detailed computer simulations combined with historical data show it is inevitable, as the tidal wave of retirees hits. The only question is how to best prepare yourself.

 

The Coming Crash: Hello!

Welcome to thecomingcrash.wordpress.com! This is a blog about the topics discussed in the book “The Coming Crash: How A House of Cards Will Fall As We Pull Out The Foundation”

The scenario is simple: baby boomers will effect our future. Boomers account for near one-in-three Americans.

Until now, we have ridden the upside of the boomer wave. The aging of the baby boom generation has led to huge increases in production in the United States. Likewise, the money they earn goes somewhere. Unlike the current generation which exhibits a negative savings rate — Yes, we spend more than we earn — the baby boomers are amongst our greatest savers.

Where do those savings go? They go into the stock market. Over half of all family assets are invested in this new banking system. In fact, the increase in stock market valuation is directly tied to the aging and savings of the baby boom generation.

Now, for the downside. As the baby boomers retire, they will need to withdraw for their retirement. Just as the market spiked upward as boomers saved, it will also fall downward as they pull out.

To find out more, you can

1. read this blog
2. go to the coming crash website at http://www.thecomingcrashonline.com/
3. buy the book, “The Coming Crash: How A House of Cards Will Fall As We Pull Out The Foundation”

And remember — although the tidal wave WILL break, there are things we can do as a country, and things you can do as an individual!

 

Info in the news

Thoughts about the coming crash keep popping up in the news. Just the other day, I saw three somewhat unrelated signs.

In the Wall Street Journal, 8 March, 2007, David Wessel talked about “Great Moderation.” This is fact that the prices of stocks, houses, and other assets have been pushed up due to a placid economy. Of course, as readers of “The Coming Crash” know, this placid economy is the result of riding the coattails of the investments of the baby boom generation.

Of course, this is an idea that is starting to be noticed elsewhere. In fact, John Bogle (the founder of the Vanguard Group) said in a recent WSJ that the stock market in the long term future provide a smaller return than it has in the recent past.

These ideas have even made it to the steps of Congress. Sen. Jack Reed (D-RI), recently said “Continued budget and trade deficits will be a drag on our standard of living and leave us ill-prepared to deal with the effects of retirement of the baby boom generation.”