One of the more pressing challenges these days to is be reading the news headlines on a daily basis and to not feel depressed. As I write this, the Drudge Report is saying that oil went up 2% today. A check of the precious metals markets shows gold at a record high and silver is over $40 an ounce for the first time since 1980. Higher energy prices translates to higher food costs, and in an economy where no one is getting a pay raise of any significance (if they get one at all) I can sense that a lot of people are feeling squeezed right now.
I have one close friend who is thinking about pulling funds out of his 401K and paying off his house. He knows he'll be penalized for an early withdrawal but his thinking is that the money that's in his 401K right now will not be worth anything when he retires and so he may as well spend it while he can and not have to worry about a house payment. I have to add that there seems to be some rationale to that thinking; if my house were paid off all I'd have to worry about is the property tax and medical. However, that of course does not mitigate any concerns about inflation, and the question I wonder about the most as far as inflation goes is, are we headed for a Zimbabwe type of situation?
There are some cold harsh realities to contend with. The entire global economy, when you stop to think about it, is nothing but a big giant numbers game. That's all it is. I don't know of anyone who is being paid in gold and silver, which at one time functioned as money. For several years of our nation's existence the dollar was pegged to gold and the rate was $20.67 per ounce. FDR changed that in the 1930s with a devaluation that resulted in $35 per ounce, and private citizens were no longer allowed to own gold. I realize that there are some who will make the argument that this was a necessary step in a series of steps to save the economy, but I'm not sure that this really did anything but to help get us in the mess we are in today. The instant creation of more dollars can give the illusion of a stronger economy, but if the dollars aren't worth as much as they used to be then all you've done is change the numbers.
Still not convinced it's a numbers game? Then ponder this.
In 1972 the Dow Jones Industrial Average broke the 1000 barrier for the first time in history. I remember that day; I was in junior high school and I remember it being the lead news story for that day. My recollection is that the economists and politicians were happy about that.....I mean that barrier had been broken, and that meant that things were good, right?
Well what do you think the sense would be right now if the Dow was at 1000? It's at 12380 as I write this. The economists aren't going to like it if it's below 10000, which is ten times the amount of the 1972 barrier. We have this number and we want it to go up. It makes us all feel good and rich and we think we'll be on Easy Street when we retire. We cheer when the 10000 barrier is broken going up, and get upset when it is breached going down. Hello? That wealth was on paper all the time in the first place. It's an illusion.
The problem with the illusion is, is that once it's recognized for what it was, panic and chaos can set in. The dollar is accepted as payment because it is legal tender and the most convenient medium of exchange in a transaction. It is worth something as long as the buyer and seller think it's worth something, and how much commodity it can purchase is again driven by the perception of how much that commodity is worth. With record deficits and the debt ceiling about to be hit again, and a government that's promised everything to everybody without having figured out how to pay for it, the perception on the world financial markets is that the dollar is deteriorating into Monopoly Money, when it's been Monopoly Money since it was decoupled from gold.
How much longer can the illusion go unrecognized?
I don't know. The collapse of the economy has been predicted by the doom-and-gloomers for decades now. I'm sure that when President Nixon severed the link between the dollar and gold, that set off a lot of Chicken Littles and created some survivalists.
One thing I have observed.
If there's a sense of optimism, then the economy picks up, people go back to work, and life goes on. I don't sense a whole lot of optimism out there and that has me concerned about the future. My own job situation is not resolved and I'm now talking to hiring managers in Colorado where I'm told there is some work in my field. You're not going to see me running out to a car dealer anytime soon to buy a new truck.
Even if we do regain optimism, some other harsh realities have to be dealt with. We can't keep printing money like we have been. The government has to stop its drunken spending spree. We can't provide state of the art health care to everyone who wants it. We can't have 12 million illegal aliens here straining the fiscal infrastructure. We can't be fighting three wars at once.
The entitlement mentality that many of our politicians have foisted upon us can not be sustained for very much longer.
But look who's benefited the most from the stock market. It isn't ordinary people, it isn't the middle class. Its the wealthy. We no longer have employer-paid pensions. We have 401(k). That's why the stock market went from 1000 in 1972 to over 12000 40 years later.
ReplyDeleteFor the vast majority of people, their only contact with the stock market is the 401(k). Those who had the means to invest in the stock market in the 1970s wanted it to get better. They wanted their stock options to do better. The business executives wanted their performance bonuses to be bigger. Companies did away with pensions and created 401(k)s so that the employees would have to invest in the stock market, but not enough to really get rich (unlike the wealthy and business owners).
So yeah, we all cheer with the stock market does better, our 401(k)s increase a few hundred, maybe a couple thousand. But the rich, who can really invest disposable income, really get the benefits of the millions of small 401(k)s that keep the market chugging along.
Plus they get lower tax rates to boot! They only have to pay 15% on capital gains for their investments (which can be offset by losses) no matter the amount gained. Yet when retirees subsequently cash in on their 401(k)s, they may still have to pay as much as 28% (and no offset allowed).
I'm sure some areas could use cutting. Maybe we can finish a war or two (or three), that would save a lot. Maybe we can tax those people and businesses who can afford it, so that our country can afford these huge wars.
When people have cut their expenses as much as they can and still can't pay their bills? We tell them to get more income. Sell stuff, get a second job, rent a room in their house. The same should be for our government. Cut spending, but raise your revenue as well.