Sunday, March 28, 2010

Inflation Is The Name Of The Game, Tough Times Lie Ahead

People getting ready to retire have put about 17 trillion dollars in their retirement savings. Our government borrowed and spent 12 trillion of that. The banks have 4 to 8 trillion in bad real estate loans that the government will make whole again (roll the presses). This retirement money the government borrowed has been spent on consumption. Whereas the money from the sale of real estate was deposited in the home seller’s account. That money made from the real estate market is still in play—the house isn’t.

What does all of this mean? By saving money, you defer consumption to a later date. The government borrowed and spent it.  The IOU’s are there, but the option to consume 12 trillion dollars worth of product at a later date is gone.

There is no real problem yet, the people getting ready to retire are not going to withdraw the 17 trillion dollars all at once. We are probably looking at a 6 to 8% withdrawal rate per year for retirees. The unemployed/employed won’t be a replenishing source for these retirement funds because of the economy. In fact, they will be drawing down any saving they have available.

The country is producing less and spending down their savings. Forget the equity home loan. People are tapping their savings, mutual funds and stocks owned.

The stock market has been immune to this mess so far. The market keeps on going up. All the shares of a single stock are valued at the price it last traded at. Sounds a little like how it used to work in the housing market. So if you need cash to pay the bills, you sell the winners and keep the dogs, hoping that they too will turn around.

Bonds are another item of concern. Low interest rates are not what an investor wants. If you are buying a house, low rates are a good thing. The banks have been writing 30 year home loans at low fixed rates. Isn’t this what happened to the Savings and Loan’s of the 1990’s? They loaned dollars long term at low rates, when their deposits were short term. Rates doubled and depositors moved their money to a bank with a better rate. The net result, the Saving & Loans went to Hell in a hand basket. This time, it won’t be about interest rates, people will withdraw their savings to pay bills.

Two years ago, 60 percent of our taxes went to entitlements. What is it now, 120%, 160%, 220%? (Pick one, your choice) These created dollars are just as good as the ones I get from working 40 hours a week.

With Bernie Madoff’s Ponzi scheme, it was the lack of dollars to fund withdrawals that spelled the end. The government doesn’t have that problem; it can’t run out of dollars. The San Diego Union news paper was only a dime a few years back, now it’s 75 cents (that’s what I use to pay for the Sunday paper). Obama claims that health care costs are unfordable, well maybe that’s a result of printing too many dollars (AKA inflation). There are no COLA raises for Social Security this year, kind of makes you wonder. T Bone steaks at $9.89 a pound are a little unfordable for me, but they taste better than Obama’s health care. At least you get to spend your [hard earned \food stamp] (pick one) dollars on what you want, not on what the government says you need.

The sad thing that is no joke, the elderly are living on a fixed income. Tough times lie ahead, for everyone.


Anonymous said...

Daily paper in San Francisco is $1.
Sunday paper is $3.
Pensions for public employees will bankrupt most small cities and school districts. You can retire at 53, at 90% salary,with free medical care for life. Oh, and a 3% cost of living raise,each year.
Why should someone making $50,000. a year, have to pay increased taxes to pay for a public employee's $85,000. a year pension.? see

Anonymous said...

We're heading into The Great Correction. Major changes are on the horizon. Resourcefulness, intelligence, real world education, stamina and other key virtues or codes of conduct will be the determinants of how each individual in America fares (as well as the rest of the world). Only the strong survive.

I believe man continues to grow and evolve. His advancement is unstoppable. A "crisis" gives the apparency of "failure" yet order will prevail.

These occurrences are all brief episodes in the big picture of our evolution. What an adventure. Sure will be interesting.

Tyrone said...

$9.89 per pound, huh?

At my local butcher, good prime cuts of meat are $17.89 per pound. We're not talking the Safeway "choice" cuts. Just a few years back it was in the $9-11 range.

Jim in San Marcos said...

Hi Anon 6:51

San Diego has just reduced the budget for the fire department by about 11 million. No news on any pensions being cut.

Given time, there will be change, bankruptcy is one of the options.

Thank you for your comments.

Jim in San Marcos said...

Hi Anon 7:17

Or is it Anon on a California Mountain?

The Great Correction fits, and I have heard government officials currently refer to our present mess as the Great Recession.

It may be a great adventure for some, but for others in retirement, it may bring on a severe case of adrenaline poisoning.

Take care

Anon On A California Mountain said...

Yes, it was Anon On A Calif Mtn. (Something went screwy and my message posted as just Anon.)

It's an adventure for all, including retirees... whether they like it or not. Those who don't have a positive attitude and who aren't resourceful and adaptive will suffer I'm afraid to say.

The USA bloomed like a beautiful flower and made economic history. There will be a slide downwards now and once we hit bottom a long sidewards motion.


Jim in San Marcos said...

Hi Tyrone

At our house, when we shop, we only look at what is on sale. So the steak price I quoted is a tad on the low side.

How do people pay those prices for beef??? Some of these steers could die of old age if demand drops.

Tyrone said...

How do people pay those prices for beef???

I have no idea. I don't buy it. The sausages and brats are climbing higher, too. This is my 'canary in the coal mine'. The butcher can't (or shouldn't) reduce quality to keep prices the "same", like the big grocery chains, so he has to price it appropiately.

In case your curious:
Dittmer's Gourmet Meats & Wurst-Haus

And they are not struggling for business. The place is regularly crowded with european transplants.

Jim in San Marcos said...

Hi Tyrone

Thank you for the link. It made me hungry--I guess I'll mosey on down to the fridge for a cold cut or two--or three --or four

Take care

Anonymous said...

We noticed an interesting trend in our food shopping. The cheap sandwich brands, oscar mayer, for instance, are now more expensive than the butcher's hand cuts of high quality meats. Hard to explain that one. We noticed the same thing in the organic area. Prices of base goods ran up so fast that the organics look cheap. So, we bought some organic joice for the same price/oz as welches.
At Toys R Us, the dollar bins are now mostly 5$ bins. Small jar of Bubbles for a dollar? forget it.

Jim in San Marcos said...

Hi Anon 12:07

I guess you shop at the more exclusive places. Oscar Mayer is top of the line for me. Their bacon and hot dogs are tops in my boat.

As for prices, we shop around. We go to one store for meat, one for coupons, and another for vegetables. You really have to look at your newspaper for the sales. Times are tough. I could be the only one getting a newspaper on our block.

I have notice when shopping that a lot of people buy stuff that is already prepared, and they pay no attention to prices.

Can't vouch for Toys R Us, our son is headed for college. There are no $5 items on that invoice.

Take care.

Anonymous said...

Jim --

I've seen estimates for what annual inflation may be in the next several years that range from 8% to triple digits.

I was wondering if you have an opinion as to what level of annual inflation we may see?


Jim in San Marcos said...

Hi Anon 4:39

I don't think that it is possible to actually calculate present inflation. From a historical point of view, it is measurable.

Gasoline, food, water, energy, and medications seem to be items that can be used as a yard stick. They have high velocity, low unit price and can be tracked weekly by anyone.

The thing to remember is that inflation can have a time lag of several years. The Spending of the Johnson Presidency in the 1960's with Vietnam and "The great Society" reforms, probably caused the interest rates to top out in 1980 at 20%. I tend to think that the money printed by government at that time was saved for say 12 years. When it was spent by the saver, it then became a problem.

We have the same situation now. Baby boomers are still socking this printed money away. 10 years from now, a spending binge of savings could create the same sort of inflation.

Savings are just a way of deferring consumption into the future. When everyone defers consumption to the future, production slows and there is no real inflation. The printed money stays hidden. If everyone decides to consume at a later point in time, then the lack of product to satisfy the large demand creates the inflation.

So using food, gas and utilities, my best guess for the inflation rate, would be somewhere in a range from 8 to 15% a year.

Movie tickets have doubled in the last 5 months so anybody gets a free swing here.

Thank you for your comments.

JMS said...

I went to see Alice in Wonderland in 3D last week. My ticket was $15.50. Thats the last time I go.

I had a serious WTF moment.

Jim in San Marcos said...


You forgot to mention the cost of popcorn and drinks. There's that idiot feeling you get, when you fork over six bucks for a large popcorn and four dollars for each drink.

raptor said...

So if we are even a pessimistic :
1. Entitlements 60-80%
2. Interest on the debt 20-30%

What is left is that all the infrastructure, gov., states employees, military is paid with printed&borrowed money..

Is there a place where we can see the exact %-wise paid for entitlement programs.
I know that 2008 Income was 2.2T, interest payments were something like 395B, GDP 14T.