Say Goodbye to Your Retirement and 401K

[radon]

Re: Say Goodbye to Your Retirement and 401K

I'm disappointed in your response, JT. You were winning the debate, but missed the entire point of the book that you submitted for evidence.

The most powerful take away from the book is that you can not trust politicians with your money. They will promises all sorts of things, but at the end of the day, in spite of their best efforts, they just can help themselves from spending more money than they have.

In direct response to Ash and the specific circumstance for which he addresses, I would say that "stabilizing the capitalization of commercial banks" may be the Fed's official stated objective, but history would suggest, that we can not trust them to do what they say they are going to do.

In other words, Ash argues the theory of the Fed's actions and what is suppose to happen according to said theory. JT responds by giving us a real life example of what actually transpires in the real world.

But it is not a real life example of stabilizing bank assets. It is an example of what happens when a government issues new currency and spends it every time they run short of funds.

ASH was saying that creating money to backstop bank assets is not, by itself, inflationary. JT says that creating money to fund the government every time they run short of cash can lead to hyperinflation. They are both right. I'm not really sure what the debate is about.

[dummass]

Re: Say Goodbye to Your Retirement and 401K

But it is not a real life example of stabilizing bank assets. It is an example of what happens when a government issues new currency and spends it every time they run short of funds.

ASH was saying that creating money to backstop bank assets is not, by itself, inflationary. JT says that creating money to fund the government every time they run short of cash can lead to hyperinflation. They are both right. I'm not really sure what the debate is about.

Speaking for myself, the debate is about unintended consequences.

Backstopping the bank's assets will be inflationary, for sure. In a laboratory or text book, the specific mechanism Ash describes should not be inflationary, but the business of politics and the Fed does not operate in a laboratory; they exist in a dirty environment where all sorts of infectious material is constantly upsetting their plans.

Yes, I know...the virus should not have mutated...everything was well contained...there must have been a leak... Who could have known? :rolleyes:

[charliebrown]

Re: Say Goodbye to Your Retirement and 401K

i know your not picking. i am listing. Do you think they will have to argue about this in congress, and we will get some leaked word it is coming?
Or will it just be law one day, no warning.
Is this a head fake? Suppose they scare some people out and just like below they get 35% or more of your money.


I am not 59 yet, so bailing on a retirment fund will cost be 35% (25% income tax and 10% penalty) with certainty. There are some reasons for waiting.

1) If the market crashes, I can extract the equity at a low point.
Some of the rumors I have heard say the trap will be sprung on the
next market crash, in the guise doing some favors for the little people.
BTW I only own GLD, CEF, FXC, DBC in my retirment accounts, but If their is a market crash, I bet these will take a hair cut as well for awhile.
2) If I lose my job, my income will plummit and I can extract the money
and pay less tax. And trust me, my job right now is a week to week thing.
3) I am in the 25% bracket. Since rates are going up next year, I may compute how much I can take out without pushing me into a higher bracket, and back out that amount. year by year.
4) If they pass this, it will be curtains for the dems in 2010, so I don't expect this to happen until november.

I have lowered my 401k contribution, to only the amount necessary to get the maximum match. My employer matches 1 to 1 on the first 5%, So I am getting a 100% return on my money. Even if the gvt takes a lot I may come out ahead on this trade.

Since most 401k programs do not allow in service redemptions, this is probably the money they will target first.

One other thing. If this is really in the cards, I will expect the spin doctors to start attacking the 401k fiduciaries, they will say things like, inappropriate investment choices, high fees, not enough information etc.
That PR machine has not started YET.

I really appriciate your insights. I think you are right. I'm just not brave enough to move in one leap. I do have a hunch that we will see one more deflationary wave (in assets) before the POOM hits.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

I really appriciate your insights. I think you are right. I'm just not brave enough to move in one leap. I do have a hunch that we will see one more deflationary wave (in assets) before the POOM hits.

I can't tell you WHAT to do, I can only tell you what I've told everyone else I think is prudent for them to do.

For the last part, "Yeah though I walk through the valley of the Shadow of FIAT, I will fear no paper, for before me I carry a golden and silver (and brass and lead, too ) cross that shall not FAIL." (Well, at least not in 5,000 years of recorded history, anyway.)

Translation is, I DON'T DO PAPER or TRONS at this point, only COLD HARD metallic items will do.

Good luck and Choose your fate. But remember, you only get to choose ONCE.

P.S. I feel for you. My Father-In-Law is in the same boat. I've been on him for 5 years now (It's okay to get on family I reckon), but he just can't bring himself to take the tax loss ON TOP of the market losses he's had. I KEEP telling him, look if you would have taken my advice 5 years ago, you could have at least avoided the market loss, and would have made up for the tax loss by the 120% rise in the gold price. I'm just saying, I know where you are coming from, can't help, but I get it.

V/R

JT

[charliebrown]

Re: Say Goodbye to Your Retirement and 401K

I don't understand this completely but when I was trying to understand how a bank determines its capital, there are rules in evaluating its assets.
For example cash is counted as 100%,
Treasuries might be 99%,
Prime mortgage might be 90%.
SubPrime might be 80% etc.

Therefore if the fed bought all of the crap off the banks at par with cash,
they might be buying SubPrime, and prime mtg's off the banks balance sheet. So they are actually increasing the banks ability to lend, because their assets are now at a higher valuation %. The fed will not be able to call all the money back, because they cannot sold the dodgy security they bought from the bank at the same price they paid. That is unless the treasury comes up with some new program to buy back non performing mortgages. Again its for the good of the people.

If the banks learn their lesson, and don't go back to the well and make more bad mortages, I guess there would be a limit to the inflation, but with the gvt backstop how likely is that?

======
Oh, and buy the way is there a limit on Fed borrowing? I thought they could create money and buy whatever they want (expand the balance sheet). Their only limits are what the currency will bear.

[dummass]

Re: Say Goodbye to Your Retirement and 401K

No -- I am arguing that if hyperinflation results from the Fed's actions, it will be because they are monetizing Treasury bonds to support government spending, and not because they are monetizing bad bank assets to keep banking institutions solvent.

I feel like I keep repeating myself, but the whole point of my posts is mechanism. It isn't kremlinology (what will the Fed do; will it do what it says it will do?). It isn't a statement about what will happen, or what is happening. It isn't a holistic meditation on money, or human nature, or our economic future. It is simply a statement that A results from B, but not C. B can still happen, and so A can still happen. Shit -- the authorities may say they're doing C but are really doing B. My only point is that A won't happen as a result of C.

This isn't a debate. This is people talking past each other, because they aren't talking about the same aspect of an issue.

:mad:

Well, the subject of this debate has now been made sufficiently narrow that you can't possibly lose.

Don't get mad, I have a serious question for you. At what price do you suspect the Fed will sell the assets they have taken on to their balance sheet? At some point they will have to sell them or will they just wait for them to be redeemed, expire or go into default?

My guess is that they sell/action them to their buddies for pennies on the dollar. If I'm right, how can they mop up the liquidity?

[ASH]

Re: Say Goodbye to Your Retirement and 401K

Well, the subject of this debate has now been made sufficiently narrow that you can't possibly lose.

If you look at how this 'debate' started, it was me making a specific point about mechanism, and JT claiming to dispute that point on the basis of what turned out to be an unrelated historical example. I claim 'squatters rights' on the point being discussed, because I presented it. I have not narrowed the subject of discussion after the fact; it started out narrow. It would be one thing if you or JT said "that's interesting, but the point you're making seems academic, because the Fed is also monetizing Treasuries, and that could lead to hyperinflation." I would have agreed with you. But instead, JT said "I think you're wrong" without getting the point of what I was saying... probably because he's a big picture kind of guy, and the distinction I was making didn't ultimately affect his assessment of the overall picture.

It's funny, because I'm in "violent agreement" with you and JT about most aspects of the big picture. I still don't regard my exchange with JT as being any sort of 'debate' -- I see it as me talking about one thing and JT talking about another.

Don't get mad, I have a serious question for you. At what price do you suspect the Fed will sell the assets they have taken on to their balance sheet? At some point they will have to sell them or will they just wait for them to be redeemed, expire or go into default?

My guess is that they sell/auction them to their buddies for pennies on the dollar. If I'm right, how can they mop up the liquidity?

A lot depends upon what happens in the coming year(s). Despite all this talk from the Fed of winding down their extraordinary monetary stimulus measures, I suspect that they will be unable to withdraw their support without tanking the recovery. That being the case, it might be quite some time before they do a lot of selling. I think the default rate on various loans will need to come down substantially before the Fed unwinds, and that this won't happen anytime soon.

If a long time passes between purchase and attempted sale, then I assume that the market value of the assets purchased by the Fed will fall below the price paid to the banks. As I mentioned elsewhere on this thread, this creates a potential problem when lending eventually picks up, and the Fed wants to drain reserves from the banking system. This isn't as big a problem as it appears, because there are other ways to control the money supply. For instance, adjustment of reserve fraction requirements would accomplish the same thing. The point to remember is that this is all funny money -- it's a matter of rules, and you may have noticed that the rules change when the going gets tough. (Remember how the deflationists said the Fed would never take bad assets onto its balance sheet?) Withdrawing reserves from the system when lending picks up is no more fundamental a problem than supplying reserves to the system to prevent a deflationary spiral was. It's not a question of the Fed painting itself into a corner; where funny fiat money is concerned, you can do all sorts of things. The real question is will you. The dangers we face are that (a) the government wants/needs some significant inflation so may not choose to withdraw liquidity, (b) the government's chosen response to a crisis caused by too much debt is to create even more debt, (c) our control over fiat funny money largely stops at our borders, so we are vulnerable to a currency crisis for foreign exchange that we can't 'magic' away, and (d) the government -- especially a populist future government -- may be tempted to monetize its deficit, giving us the hyperinflationary feedback loop that JT fears. (Big picture, I have always believed that our government's over-commitment can only end in high inflation in the future.)

[ThePythonicCow]

Re: Say Goodbye to Your Retirement and 401K

My point is that money-printing to buy bad assets is balanced by money destruction caused by those assets going bad; it is categorically different than when a central bank monetizes its government's debt without any balancing destruction of money.

Well, I'll make an attempt to respond to your specific comment, but I suspect I'll quickly lose focus and lapse back to the "big picture" . We'll see.

I agree with you that the Fed can print money to buy bad assets without necessarily risking hyperinflation, and yes, it helps that the new money is going to clear bad assets rather than going into the general spending account.

However I would say that this is a matter of degree, not a categorical difference.

What do you suspect would happen, ASH, if the Fed opened up a public window in lower Manhattan to which anyone, with any dollar denominated debt, bond, swap, derivative, annuity, pension, or other promise of future payment could bring that paper and swap it at face value for bundles of cold hard cash? I imagine such an offer might elicit a few hundred trillion dollars (if not a quadrillion or two) of distressed paper. I'd be donning my hyper-inflation flak jacket if that happened and going long cotton or whatever is that fiber in U.S. currency. I suspect jtabeb would be hawking his grandmother to buy more gold.

On the other hand, if the Fed started just printing, out of whole cloth, whatever money it needed for routine office expenses, then I wouldn't expect that to make a material difference to our monetary future. Their office expenses are, I trust, too small to matter much.

So you see what risks hyperinflation is a matter of degree, not category.

The specifics of fractional reserve lending, such as required reserve ratios, asset quality, mark to market versus mark to magic, are all details in my view. Some combination of such details, honestly enforced, is required to throttle the production of fiat money. The essence of a fiat money standard is that money is created in exchange for future promises (be they of an income stream, a one time payment, some other property, risk diversion, or whatever.)

Hyper-inflation occurs when the face value of these future promises exceeds at a rapidly increasing rate the actual value of the promised labor, property and income streams. For hyper-inflation to occur, all affective throttling must fail. The failure of no one specific mechanism of monetary restraint is sufficient, no matter how compelling and natural sounding that mechanism.

In a deeply fraudulent and obfuscated environment, it is neigh impossible for us commoners to know if or when that "last" throttle is about to be thrown wide open.

[ThePythonicCow]

Re: Say Goodbye to Your Retirement and 401K

The point to remember is that this is all funny money -- it's a matter of rules, and you may have noticed that the rules change when the going gets tough.

Ah - we finally dragged you kicking and screaming back to the Big Picture . Welcome!

I agree.

[dummass]

Re: Say Goodbye to Your Retirement and 401K

If you look at how this 'debate' started, it was me making a specific point about mechanism, and JT claiming to dispute that point on the basis of what turned out to be an unrelated historical example. I claim 'squatters rights' on the point being discussed, because I presented it. I have not narrowed the subject of discussion after the fact; it started out narrow. It would be one thing if you or JT said "that's interesting, but the point you're making seems academic, because the Fed is also monetizing Treasuries, and that could lead to hyperinflation." I would have agreed with you. But instead, JT said "I think you're wrong" without getting the point of what I was saying... probably because he's a big picture kind of guy, and the distinction I was making didn't ultimately affect his assessment of the overall picture.

It's funny, because I'm in "violent agreement" with you and JT about most aspects of the big picture. I still don't regard my exchange with JT as being any sort of 'debate' -- I see it as me talking about one thing and JT talking about another.



A lot depends upon what happens in the coming year(s). Despite all this talk from the Fed of winding down their extraordinary monetary stimulus measures, I suspect that they will be unable to withdraw their support without tanking the recovery. That being the case, it might be quite some time before they do a lot of selling. I think the default rate on various loans will need to come down substantially before the Fed unwinds, and that this won't happen anytime soon.

If a long time passes between purchase and attempted sale, then I assume that the market value of the assets purchased by the Fed will fall below the price paid to the banks. As I mentioned elsewhere on this thread, this creates a potential problem when lending eventually picks up, and the Fed wants to drain reserves from the banking system. This isn't as big a problem as it appears, because there are other ways to control the money supply. For instance, adjustment of reserve fraction requirements would accomplish the same thing. The point to remember is that this is all funny money -- it's a matter of rules, and you may have noticed that the rules change when the going gets tough. (Remember how the deflationists said the Fed would never take bad assets onto its balance sheet?) Withdrawing reserves from the system when lending picks up is no more fundamental a problem than supplying reserves to the system to prevent a deflationary spiral was. It's not a question of the Fed painting itself into a corner; where funny fiat money is concerned, you can do all sorts of things. The real question is will you. The dangers we face are that (a) the government wants/needs some significant inflation so may not choose to withdraw liquidity, (b) the government's chosen response to a crisis caused by too much debt is to create even more debt, (c) our control over fiat funny money largely stops at our borders, so we are vulnerable to a currency crisis for foreign exchange that we can't 'magic' away, and (d) the government -- especially a populist future government -- may be tempted to monetize its deficit, giving us the hyperinflationary feedback loop that JT fears. (Big picture, I have always believed that our government's over-commitment can only end in high inflation in the future.)

When I first moved to Panama, years ago, they had a change in the law concerning the ownership rights of island property. Panama has hundreds, if not thousands of uninhabited tropical islands, but they have always been National lands, much like US National parks. Among other things, the new law recognized the rights of squatters that had previously been either living on or working the land. There was a lot of speculation and some excellent prices, as poor farmers, working marginal lands, were quick to sell.

My wife and I had looked at several island properties. After we had made our selection and did our due diligence, we had an appointment with the manager of the bank to coordinate the transfer of funds. When we told her of our intentions, she laughed. She said, "you can't rely on the laws; they can change them tomorrow." Indeed, they have. The "island law" has changed at least three time, that I am aware of.

My point is that I used to share your respect for the rule of law. You have obviously spent some time reviewing fed policy and examining the accounting practices for public entities and so forth. Yet you state yourself, "that the rules change when the going gets tough." Yes, the US is increasing becoming a third world country. You can not rely on the laws; because, they can change them tomorrow. Can anyone trust what they put on their balance sheet? After all the recent accounting scandals, Hardly; they won't even allow an audit. Hell, there isn't a month that goes by around here on iTulip where another government statistic is revealed as a fraud. You have to admit, the whole system is based on confidence (including your analysis) and that depends heavily on what side of the fence your sitting on.

It's all "funny fiat money" as you say, which brings me to another observation. Panama has nothing but brand new US bills in circulation. I kid you not. Every US dollar bill larger than a five is brand new. I purposefully have to crumple them to keep them from sticking together. On another thread, someone with deflation concerns was advising the hording of old US hundred dollar bills. I laughed. You couldn't spend them here. Nobody will accept an old bill. If it isn't brand new with all the new security features, forget about it.

Our port facility has thousands of empty containers in long term storage. They are arranged in squares the size of city blocks and stacked eight high. Before the crises, I was there looking to purchase a container and only had 6 to choose from. I know guys who have worked for the canal as pilots for thirty years. They tell me that it has never been this slow.

Things are changing, my friend, but, as you have said, the fed will not be in any hurry to sell its toxic debt. I watched part of Bernankey's testimony yesterday; he said that the fed is actually making a good return on their MBS purchases. That sounds to me like they are content to keep them on the books. A good investment LOL. Your analysis of the situation requires that we have faith in the system, that they are properly reporting the facts and that they will do what they say they will do. I have my doubts.

[Sharky]

Re: Say Goodbye to Your Retirement and 401K

Lets say a bank over-leverages its capital to speculate by buying what turns out to be a junk asset, such as a MBS with a high loan default rate. Now there is a deflationary problem, because losses recognized on that asset eat into the bank's capital, and threaten the bank with insolvency. Fractional reserve lending (a form of leverage) works in both directions. You can create a lot of money lending against a small pool of reserve capital, but if losses eat into that small pool of capital, the same leverage acts to reduce your ability to lend.

ASH, it's great to hear that you get this and the related concepts you described. I tried to explain a similar concept on a different thread, and was attacked from all angles.

The idea that debt defaults are deflationary in the absence of government intervention seems to violate some basic itulip premise, although I don't really understand why.

[radon]

Re: Say Goodbye to Your Retirement and 401K

Speaking for myself, the debate is about unintended consequences.

Backstopping the bank's assets will be inflationary, for sure.

In a laboratory or text book, the specific mechanism Ash describes should not be inflationary, but the business of politics and the Fed does not operate in a laboratory; they exist in a dirty environment where all sorts of infectious material is constantly upsetting their plans.

Backstopping a banks assets by itself is not inflationary, not in theory, and not in real life. I feel like I'm beating a dead horse. The value of those assets rose in the past and creating money to support their value only legitimizes the inflation that has already occurred, it does nothing to produce new price appreciation. That money has to come from somewhere else.

If you are suggesting that they print money to pay their operating expenses then that is a different matter. It is entirely possible to do one without the other.

These are apples and oranges. Money frozen in the banking system doesn't go anywhere or do anything, just ask the BOJ. They have been pushing on that string for two decades.

[radon]

Re: Say Goodbye to Your Retirement and 401K

The idea that debt defaults are deflationary in the absence of government intervention seems to violate some basic itulip premise, although I don't really understand why.

My understanding, taken with a grain of salt, isn't that Itulip thinks that defaults are not deflationary, but that the government will intervene to prevent a self reinforcing deflationary spiral. And they have.

[c1ue]

Re: Say Goodbye to Your Retirement and 401K

The point to remember is that this is all funny money -- it's a matter of rules, and you may have noticed that the rules change when the going gets tough. (Remember how the deflationists said the Fed would never take bad assets onto its balance sheet?) Withdrawing reserves from the system when lending picks up is no more fundamental a problem than supplying reserves to the system to prevent a deflationary spiral was. It's not a question of the Fed painting itself into a corner; where funny fiat money is concerned, you can do all sorts of things. The real question is will you. The dangers we face are that (a) the government wants/needs some significant inflation so may not choose to withdraw liquidity, (b) the government's chosen response to a crisis caused by too much debt is to create even more debt, (c) our control over fiat funny money largely stops at our borders, so we are vulnerable to a currency crisis for foreign exchange that we can't 'magic' away, and (d) the government -- especially a populist future government -- may be tempted to monetize its deficit, giving us the hyperinflationary feedback loop that JT fears. (Big picture, I have always believed that our government's over-commitment can only end in high inflation in the future.)

ASH,

I must disagree with your view that it is all funny money.

The Fed's balance sheet is largely fictional as is the 'reserves' it creates, true. But said entities spill over into the real world in very concrete ways:

1) Crap MBS assets were paid for with real money at some point.

Real bonuses were paid.

The properties whose loans upon which these MBS' are based on are real, as are the people who bought/live/rent in them and the cash flows that result.

The ownership of said properties when they default - as nearly 14% of ALL mortgages are now delinquent - is also real

2) The reserves which the Fed has given to the TBTF banks is 'funny money' but equally has real world effects. The small banks which are failing left and right are a good example.

The interest paid by the Fed on these reserves is real - as it goes into the cash flow for the TBTF banks and in turn funnels through into pay and bonuses.

3) Even the guarantees the Fed extends are real, because if you were to obtain similar guarantees from a private party - it would cost you money.

4) Lastly I note that there are other links between the 'funny money' and the real world: the US military, for example, consumes huge amounts of natural resources like oil. This must be paid for - and the monster deficits being run mean that the 'funny money' is actively being employed to exchange for tangibles.

To summarize: I don't disagree with your point about monetization of bad assets not itself lending to inflation (as a first order effect). But it is not a thorough analysis to say that there isn't some impact, and likely a waterfall one since the value of the 'funny money' is largely perceptual.

[dummass]

Re: Say Goodbye to Your Retirement and 401K

I feel like I'm beating a dead horse.

Wrong again, this is actually a horse race and it has yet to be determined . You have staked your horse and I have staked mine. If the fed's actions (backstopping the bank's assets) turn out to be inflationary, my horse wins. It's a little bit early in the race for you to be declaring yourself the winner.