Monday, September 03, 2012

Slow Money Vs Fast Money

Believe it or not, there are two types of money. It sounds implausible, but it’s true. If you live paycheck to paycheck, you have “fast money;” it’s here today and gone tomorrow. “Slow money” is the funds socked away for that rainy day, years in the future.

Enter someone like Bernie Madoff. His investment program was a Ponzi scheme. The money he was using was "slow money,” investors didn't need for several years out. Rich people are rich as long as they don’t spend the money, which goes without saying. Notice though, Bernie’s rich investors were rich up and to the day the scheme was uncovered, they didn’t get poor slowly over time--it happened immediately. What did him in was a bad economy. His investors needed funds to cover losses. As a group, their increased withdrawals, was the monkey wrench that fell into the gears. Bernie’s “slow money” accounts were turning to “fast money” obligations before his eyes.

Our government “borrowed” the 2.6 trillion in the Social Security trust fund and spent it. Then Congress purloined 4 trillion to cover the housing mess and it's gone. Then there is that 8-10 trillion in IRA savings that we have loaned indirectly to the government, spent also. So long as everyone doesn’t decide to retire at the same time, there isn’t much of a problem. The trouble is, that is just what is happening. People unemployed and 62 years old, are not going to wait until age 65 to 70 to retire and they are cashing in their IRAs. These people are no longer paying taxes; they are now receiving tax money (i.e. Social Security benefits). The government’s financial pain is further exacerbated by high unemployment, low tax collections and legislative fiscal irresponsibility.

It's becoming more obvious that the present system cannot last without reducing the massive government spending. “Kicking the can down the road” or “Rearranging deck chairs,” both point to that moment in time where things get real. It’s a little like promising to quit smoking. Everyone quits eventually--- For most, it’s not a planned event.

Our national debt is comprised mostly of “slow money” borrowed from financial institutions worldwide. With the deteriorating economy and the higher than normal redemption of funds, the government needs to borrow more, or an option not available to Bernie, print more dollars.

People are beginning to dip into their “slow money” accounts. As long as the money wasn’t needed, the government had no problem. Everyone assumes that FDIC insurance is to protect the depositor. It isn’t, it’s there to keep depositors from withdrawing their funds from the banking system in times of financial stress. Our government has already borrowed and spent a great deal of this bank money and needs access to the banks in order to borrow more.

Lack of "slow money" was the problem that Bernie Madoff faced. The system works perfectly as long as more is being deposited than is being withdrawn. All of this “slow money” that the government borrowed and spent will suddenly turn to fast money obligations. How do you pay back 17 trillion when you are borrowing an extra trillion a year to add on to it? Just like Bernie Madoff’s clients, you have a piece of paper stating how much you have in your accounts. It isn't a cash balance, its an IOU. The money was spent.

Reality is when your wife puts 170k on the family credit card. There is a complete disconnect when the Federal Government puts 17 trillion on plastic. We don’t have to pay that one—do we??? Bottom line, your retirement funds paid for the party that is still in progress. Learn the full particulars sometime after the next election.

Copyright 2012 by Jim Brubaker


dearieme said...

If it were only the USA that indulged in such stuff, it would be OK. But almost every country in the old First World has played similar tricks. And it increasingly looks as if China has introduced its own variants.

I've spent the last couple of weeks reading Dark Ages histories, so that I'm prepared for the future.

Anonymous said...


Can you describe what you see happening after the election?

Anonymous said...

Another great article! You stated that "People unemployed and 62 years old, are not going to wait until age 65 to 70 to retire and they are cashing in their IRAs. These people are no longer paying taxes; they are now receiving tax money (i.e. Social Security benefits)." Traditional IRA withdrawals are taxable at the income-tax rate, but you are correct, that many retirees are probably receiving more in government benefits through entitlement programs, than they are paying in taxes from their IRA withdrawals (if they even own an IRA).

Jim in San Marcos said...

Hi Anon 9:18

Thanks for the complement. I have a tax problem also. I'm 66 putting money in my IRA and plan on working past age 70 and my wife is 13 years younger.

I will be paying taxes, in an even higher tax bracket, when I am forced to withdraw money from my IRA at age 70. Kind of sucks. It sounded great when I started.

Jim in San Marcos said...

Hi Dearieme

I agree

Italy, Spain and Greece have all of their bank depositors lined up withdrawing funds before their currency is devalued. I wonder what is the status of a bank that has had all of their depositors money withdrawn? It appears to be a possible event if the government supports the banks to the end.

I think is what we are finding in Europe is a conversion to gold and silver. The Euro is toast.

As for China, they built a hell of a lot of product for us. For us as a debtor to tell them to go fly a kite could make for some big waves.

The dark ages was a very fascinating time. I can't visualize the youth of our time accepting that as a part of their future.

Things are never as bad as we imagine them to be. So I think you might be a little too prepared.

Take care

Anonymous said...

As long as humanity has gas, oil, and coal, the only Dark Ages you are going to find is at a renaissance fair near you. What we are seeing is a shifting of wealth, but the wealth of humanity is still here.

dearieme said...

The "gas, oil, and coal" was present in the Dark Ages too. In fact there was rather more of them. It matters how society is organised. After all, nothing stopped the Anglo-Saxons building Roman roads and central heating. But they didn't.

ATP said...

The media loves to get in your head with images... here's one for you. Imagine Obama at the community pool, dog peddling in shallow end while being bullied by a 7 year old trying to get her floaty back. This is the Eunuch we have as a leader. November yet?

Anonymous said...


After today, you'll need a bigger wheelbarrow.

Jim in San Marcos said...

Hi Anon 6:45

Wouldn't a bigger wheelbarrow imply an improving economy?

Shopping cart seems to fit. I was going to suggest a bigger shovel for all of the political BS out there, but for that , we only need a "virtual" shovel, not a real one.