2009 February 24 Tuesday
Stock Market Tough For Retirement Savings
A big recent stock dip has me wondering about people saving for retirement.
The Dow Jones Industrial Average plunged 250 points Monday to close at 7114.78, a nearly 12-year low. The last time the stock index closed below that level was May 7, 1997.
The S&P 500 also effectively erased more than 11 years of gains Monday, falling 26.7 points to close at 743.33. The technology-heavy Nasdaq index dropped 53.5 points to close at 1387.72 points, a level not seen since the dot-com bust of 2003.
Someone who started investing in a 401k or IRA starting in 1997 using actively managed mutual funds or index funds is much worse off than if they'd just put their money in bonds and certificates of deposit. In fact, their money is worth less than it was in 1997 once inflation adjustments are considered. The stock market is not always the best place to invest.
My worry is that we do not have good enough ways to save for retirement. If people become more determined to save will we end up in a Japanese style vicious circle of frugal saving and economic stagnation? My guess is that the American people aren't going to become as frugal as the Japanese.
The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japanís economy.
Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming í80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.
We need more productive ways to defer consumption. One of the appeals to me of rooftop home solar panels is that they provide a way for individuals to basically build up capital that will generate wealth for them in future years. Instead of buying consumer goods a person can buy solar panels that will pay back as electricity in the future. Home insulation serves a similar function as an expenditure that reduces future costs.
We need more ways to spend now to provide ourselves with goods and services in the future. People need ways to spend money in the present that creates demand in the present but less immediate benefit to the buyer and more long term benefit for the buyer. The financial markets are not secure enough as a way to do this.
What you want is PRODUCTIVE investment under enhanced market demand. You do that by cutting out the government middleman via a citizen's dividend with trade barriers against national economies that do not do likewise, while harvesting the economic rent stream of the economy for the dividend payments. This is done by a tax on the liquidation value of net household assets at the risk free interest rate. Here's the microeconomic result:
Assume that the investor wants to minimize taxes. The investor will prefer the net household asset tax if:
where LV = Liquidation Value of household net assets
ROR = The household's before tax Rate of Return on its net assets
ITR = Composite Income Tax Rate (income, capital gains, etc. weighted average)
E = Exempted household net assets (nominally a homestead value of around $300k)
ATR = Asset Tax Rate (nominally, short term Treasury rate)
where AITROR = After Income Tax Rate of Return on household net assets
Do the arithmetic and keep in mind that all economic ACTIVITY is tax free. Households that are not yet independently middle class will be encouraged to make low risk investments while wealthy households are encouraged to leave low risk investments for more productive investments.
The DJIA peaked at 343 in 1929 and then proceeded to lose 87% of its value, bottoming at 43 in 1932. If you had invested money at the 1929 peak, it would have taken you 25 years (until 1954) to get back what you put in. If inflation is considered, it would have taken until 1964. Inflation plus taxes, and the break-even point is in the mid-1980's. Of course, this is a worst-case scenerio, but it's still instructive. The stock market rose more or less steadily after the Great Depression until the early 1970's. It then plateaued until the mid-1980's, when the great bull market began. This underwent a few bearish "corrections" but only lately seems to have come crashing down.
So there are no guarantees, certainly not in stocks. Bonds and other fixed obligations can be eaten up by inflation, or the issuing agency can default (California and GM debt instruments were once considered "gilt-edged" - now you can hardly give the stuff away). Gold and other commodities may look good, but commodity prices can drop as well as rise. It is, indeed, a difficult game, with no assured path to success. One thing I will be doing is moving most of my investments out of US dollars. Current US government policies seem certain to debase the currency, damage the economy and cause runaway inflation. The exchange rate of the US dollar isn't bad right now, so time to get out while the gettin's good.
Get out of dollars, and into what, exactly? GBP isn't doing so well. European banks are even more over-leveraged than US banks. Asian economies seem based on exports that a US collapse will take down with it, and China isn't exactly open or fair to foreign investors.
A good question. I certainly wouldn't go into GBP. Swiss francs, NZ dollars and Singapore dollars all have possibilities. I have my doubts about Euros,
Try out various assumptions to see how various households are affected by replacing taxes on activity with a tax on household net assets with this calculator.
James, what happens if you're asset rich but cash poor? I'm thinking retired people.
Engineer is right. Its ironic that once the crash went global, demand for the US dollar increased as the wealthy went liquid.
More Americans Are Saying No to the FED & the National Debt!
Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasuries, the dollar, gold and mining shares.
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