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.” ]