Agora Financial’s Rude Awakening

Jump to Comments

Baltimore, Maryland

• The greatest social Ponzi scheme of all,
• The problems with demographic bulges,
• Social Security’s worst kept secret and more…

Joel Bowman, with a few quick words from Taipei, Taiwan…

Six and three years ago, Bill Bonner and Addison Wiggin published, respectively, the books Financial Reckoning Day and Empire of Debt. The ominous titles of these two polemics illustrate, succinctly and eloquently, exactly what the two authors predicted for the greatest economic powerhouse on earth.

Put simply, the ending was not to be a favorable one.

Now, as the foretold financial crisis unfurls around us, Addison and Bill return with updated versions of their commentaries; freshly refurbished with additional chapters and recast in light of facts unknown, though predicted, at the original penning.

We’ll be featuring excerpts from these two works in the coming weeks to celebrate the release (and vindication) of their updated versions. The first such essay appears below. Please enjoy…

— Breakthrough Technology Alert —

URGENT RELEASE: Incredible Ultra-Wealth Is Your Destiny —But Your Window’s Closing Fast

Write Down Today’s Date…Years From Now — You Could Remember It As the Day Your Ultra-Wealth Took Flight

However, you must act quickly…

Only those who take action NOW will reap the largest life-changing gains…

Because even as I write, news is breaking…

Here’s why this once-in-a-generation wealth explosion deserves your full attention…Read On

——————————————

Social Security? Not Exactly
By Bill Bonner and Addison Wiggin

The first public retirement pension scheme was created by Otto von Bismarck in 1880 Germany. Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States. As we’ve seen, the number of people expected to reach the retirement age of 65 was not considered to pose a threat to future funding. Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical US worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a ” hidden debt ” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

And to the retiring boomers’ other doubts and insecurities, we might add that US health care costs are expected to rise by 7 percent of GDP over the next 40 years – a rate that is more than twice as fast as other developing nations. The “old old,” – those aged 80 and over – are predicted to rise sharply through 2050 and will dramatically increase long – term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the US government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the US economy.” Adding projections for Medicare and Medicaid ’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.

The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 – two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. Medicare would have to deposit $ 13.4 trillion – $ 1 trillion higher than last year’s estimate – into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’ earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties – indeed, because of the difficulties – it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the US hold onto its AAA credit rating?

“The US government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, ” but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation ‘ s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage – backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Joel’s Note: Both of Bill and Addison’s works are available, in updated, second edition format, at the links below:

The New Empire of Debt and Financial Reckoning Day Fallout.

— BRIC MarketSafe CD Offer Ends Tomorrow —

Gain exposure to currencies of emerging BRIC countries-and don’t lose a dime on market risk.

Don’t let market risk get in the way of potentially rewarding exposure to the BRIC currencies. Our three-year MarketSafe® BRIC CD shields you from any market risk and provides 100% principal protection on deposits held until maturity.

* Four BRIC currencies: Brazilian real, Russian ruble, Indian rupee, Chinese renminbi

* High upside potential

* No market risk to deposited principal

* Low $1,500 minimum deposit

Some experts believe these four countries may become economic powerhouses in coming years. Now could be the right time to add these currencies to your portfolio. And you can do so — safely — with the U.S. denominated MarketSafe BRIC CD.

Don’t miss this unique opportunity. Deadline to buy the BRIC MarketSafe CD is August 18, 2009. Apply today or learn more here.

—————————————–

[Rude Endnote: Finally today, we offer a thoughtful email from Michael, a fellow reader:

“The article “Vandal Economics” in the Rude Awakening, 8/17/09, by Bill Bonner was a great read and nice to see good old economic “truths.” His quotes from Hayek and Bastiat (especially Bastiat) reminded me of a quote by Dean Russell (the translator of Bastiat’s “The Law” in the mid-1950’s at F.E.E.).

“Here’s what Dean Russell wrote about economics in a socialist economy (remember, ‘we’re all socialists now!’):

“‘Economics deals with consumer and producer choice in a market economy; socialism deals with the arbitrary edicts of officials in a controlled society. Economics is to socialism as astronomy is to astrology. Economists are scientists who search for cause and effect in their field without prejudice. Socialists, without exception, have a preconceived notion of what a society of men should be. Thus, without exception, the socialists always advocate the use of the police powers to force men into their ‘ideal society.’ Socialists are necessarily authoritarians.’

“If one accepts Russell’s premises, then one can logically conclude that socialist economies are arbitrary and that “economists” can no longer deal with consumer and producer choice, as they could in a market economy. That is why we’re seeing a bull market in a depression economy – its not the effect of the market but an effect of the government. The problem for socialists is that the inexorable law of cause and effect continually shows them the error of their ways, but they will continue to ignore it.

“Thanks for the great articles and I’ll continue to read them if you remain ‘true’ economists as defined by Russell (As I’m sure you will).”

We’ll do our best, Michael. Thanks for the words.

If you’d like to add any of your own thoughts, shoot us an email at the address below. We’ll be back tomorrow with more Rude views.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com