Posted on 12/02/2012 4:07:37 PM PST by betty boop
Middle-Class Wealth Protection, Post-Fiscal Cliff
By Jean F. Drew
I don’t know about you, but I’m a lifelong, middle-class working stiff who has managed to accumulate a certain modest amount of “wealth” designated to be sent to the future, to supply my support and lifestyle needs when I am “old” and no longer have employment income. I’m speaking of my 401(k)s and IRAs.
The way I have assets deployed in these accounts very likely will need to change, given the absolutely predictable outcome of the much-hyped impending fiscal cliff. At least, that is my supposition.
Consider: We get the fiscal cliff if the GOP does not abjectly cave to every demand being made by this ersatz president: a tax hike on the most productive citizens of our society, to the tune of $1.6 trillion dollars over ten years; deficit “reduction” of $600 billion (all “cuts” being unspecified at this time); plus a $300 billion “stimulus package” for “infrastructure investment.” No interest in reforming entitlement programs, such as Social Security and Medicare, which are currently running at least $47 trillion in unfunded future liabilities. Needless to say, such a proposal does absolutely nothing to restore the exploding federal budget to anything remotely sane or within the ability to pay by the increasingly hamstrung (thanks to federal taxation and regulation, etc.) productive capabilities of our nation.
People are fooled if they believe 0bama only wants to tax “the wealthy.” Allowing the top tax rate to rise to 39.6 percent on the “top 1 percent” of taxpayers yields only about $86 billion dollars (over ten years). The federal government spends $86 billion on its current operations every eight days. So, how serious a deficit reduction proposal is that?
The middle class, meanwhile, thinks it will not be touched by tax increases in any way. But please do note there is a vast difference between the $86 billion that can be wrested away from “the wealthy” by means of a rate increase on the top 1 percent, and the $1.6 trillion in new revenues that the president’s plan proposes. Guess who gets stuck with paying the difference?
If the GOP fights the president over his insistence on raising tax rates, while showing no deficit savings in his proposed budget, then the president will blame them for hiking taxes “on the middle class.” For if the GOP holds the line, tax rates will rise on everybody, to the tune of about $2,000 per year per middle class household.
0bama doesn’t mind this result in the least. So, what is the possible basis of any “compromise” between 0bama and Speaker Boehner? 0bama believes he “wins” either way, whether we go over the fiscal cliff; or have to live with some entirely unprecedented new reality designed to avert it.
Elections have consequences, as he likes to remind us. Since he feels he has a “mandate,” not only will he not back off; he will double down. As he has done — to the extreme discomfort of the roughly half the American populace who did not vote for his reelection. The other half — the morons who voted for him — are about to find out what they actually voted for. I doubt they will like it.
For so many reasons, this last election was unprecedented, and of lasting historical significance, I daresay. Which brings me back to certain investment decisions I will have to make soon.
Making investment decisions necessarily involves making predictions about the economic and investment climates as they evolve in the future. It would be very helpful to me to know, as an investor, whether we as a nation are on an inflationary, or a deflationary course, mid- to long-term.
Two years ago, I was pretty much convinced that the future course was decidedly inflationary. So I put 20 percent of my investment portfolio into physical precious metals — gold and silver U.S. Eagle Proof coins. Given the history of QE I, II, and III, plus “Operation Twist,” it would seem this was a good move: For when the Fed prints money out of thin air in order to buy totally crappy mortgage-backed securities, just to “juice” the money supply and the stock market in the short-term (coincident to an impending presidential election), then any sane person would have to say, there is something terribly wrong going on here. The effect is, We the People had our pockets picked to buy tons of crappy mortgage-backed securities. What value did we get in return? How did we get “money out of nothing?”
We didn’t. We were mugged, and our wealth stolen — perfectly “legally,” I hear.
Did you know that, at the time of the Federal Reserve Act of 1913, a U.S. dollar was worth exactly 100 cents??? But that now, 99 years later, that same U.S. dollar is worth exactly 2 cents? So much for the “good stewardship” of the Fed as the regulators of the money supply and, thus, of the value of money.
One saves for a lifetime, only to have his wealth SUBTILY, silently stolen in this manner? But where did the wealth go? Wealth is the by-product of human creative activity and, once created, it doesn’t just “magically disappear.” It can only be transferred from one person’s pocket to another person’s pocket, by means fair or foul.
But I digress.
My investment portfolio is geared to inflationary conditions, what with the precious metals, and its around 70 percent commitment to equities; i.e., the stock market. Historically, on a long-term basis, both asset categories have been shown to be excellent performers in terms of the preservation and growth of the purchasing power of invested capital.
My late research, however, suggests that what we as a nation face is not inflation, but deflation. Massive deflation, on a 1930’s depression scale.
If the recent activities of the Fed were the only determinative principle of the value of money, then, taken in isolation, we face an inflationary future. And my precious metals purchases are entirely warranted.
However, recently I have been drawn to demographic considerations, which may very well be the main driver of future economic developments, which the force majeur of Fed action cannot overcome.
The story goes this way: The Baby Boom (of which I am a card-carrying member) is the single biggest generation, demographically speaking, in the history of our nation. Roughly around the Clinton years, this generation was in the prime of its earning and spending capabilities: It could afford the big-ticket purchases that fuel the economy — bigger houses or second homes, nice cars, “lifestyle” purchases of all descriptions, etc.
But as any generation ages, sooner or later, its spending on lifestyle needs declines in favor of saving behaviors. That is to say, Baby Boomer monies increasingly are being diverted from current consumption, to long-term savings designed to provide for a “comfortable” retirement.
In other words: This biggest generation is now in hunkering down mode. Their consumption is down. If their consumption is down, then the business enterprises that had heretofore catered to this demographic will lose customers. If they lose customers, they lose revenues; if they lose revenues, this will shrink manufacturing capabilities; if manufacturing capabilities are shrunk, then this necessarily entails less demand for commodities and labor.
Looks like a depression to me.
The generation following the Baby Boom is typically characterized as “the Baby Bust.” Comparatively, demographically speaking, there is not any comparable spending power to drive a flourishing economy in this demographic cohort.
And so, given the perfectly calculated ministries of Captain Zero and Friends, We the People are about to reap the whirlwind.
But we can all console ourselves with the “truism”: Elections have consequences.
Speaking for myself, I’d rather experience death by a “coup de gras,” than death by “a thousand cuts.”
And so I say: The sooner this fiscal cliff is “realized,” the better.
Let the people actually see what they voted for. Let them “feel the pain” of it; for pain is surely coming.
And pain is often an excellent teacher.
And yet I must say, as a human creature, that I wish to avoid pain. To that end, my best friends are personal experience and lessons to be gleaned from human history.
Short-term predictions: No "Santa Clause effect" in the stock market this year. I am referring to the typical short-term bump in stock prices that more often than not follows Christmas most years.
This year, stock investors have a prime incentive to dump their holdings under the present tax regime (the so-called "Bush tax cuts") than wait 'til next year, when the rates will be much higher.
Look for a sell-off by year's end.
Illusory, all of it.
The Marxists in power will never rest until all assets are the property of The State.
On one pretext or another, and usually under the rubric of “the good of the people,” The State will slowly but inexorably seize all assets until everyone is dependent on The State for the necessities of life, at which point The State insures its hegemony on political power forever.
This reality is currently striding down main street with a neon sign on its head, but few amid the hungering mob choose to see it amid the glories of government handouts.
in a total economic collapse the most valuable commodity will be ammunition, not food, not gold, not guns , not nothing else.
the police will not be any help and civilization will disentegrate into chaos
Paying off debt when great inflation is coming is a foolish thing. Wait until you can pay back $1 of debt with a dollar that is only worth $0.25. Pay off all debts, such as your home mortgage and credit card debt. This has a guaranteed rate of return equal to the interest rate you were paying.
I think owning rental property is a good move. Inflation is your friend when you are renting living space. And, you get to pay back the mortgage with inflated dollars again.
I, personally, have benefitted greatly from inflation, both as a homeowner and as owner of rental properties.
Some stocks do well in inflationary times, some not so much. About all one can say for sure is that stocks beat money in a bank account over the long term.
I thought it was $86 Billion/year??
The repayment of debt in devalued currency requires you to have large amounts of the devalued currency. Since high inflation tends to cause higher unemployment, I’d rather own my home outright than worry about having the money to make the monthly payments. And if inflation is high, even a slightly higher pay check may be stretched just to cover food, utilities and a few necessities.
then again you have govt workers of all stripes, who never gave anything for most of them into their fat defined pension plans....MAKE THEM FIX THAT PROBLEM FIRST~
All my investments are in an IRA and a 403B, and it’s almost two years until I’m 59 1/2 so I cannot merely ‘dump’ them now without paying a big penalty and taking a tax hit. It’s too bad there isn’t more content to this article regarding people in my position, since the author goes on about baby boomers quite a bit.
What could go wrong with that???
Investment-wise, seems to me we baby boomers will make certain businesses solid for the next 20-30 years: retirement homes, assisted living homes, skilled nursing facilities and funeral homes.
Convert to assets that hold their value:
1. Precious metals (primarily gold coins)
2. Good quality rifles and handguns
3. Fertile land
I also recommend stocking barterable items such as tools and seeds, and if you can store it safely and securely, bulk propane and gasoline.
(( ping ))
I’m buying me a ‘Brown Coat’.
Communist Obamanation File.
BTW IMHO, the Obama Administration is ONLY interested in achieving the REVENGE of the late Communist Party Member Frank Marshall Davis, Obama’s Uncle/Dad Frank.
My late research, however, suggests that what we as a nation face is not inflation, but deflation
What he doesn’t address is confiscation.401’s and IRA’s nationalized to prop up Social Security. It is on the table
I don't think the poster was referring to cashing in the retirement funds, but rather going to all cash. You can certainly buy money market funds in these accounts.
A research firm I much admire suggests that what we as a nation face is an impending "roller coaster ride" of first, a massive asset deflation (read, collapse of equity prices), followed by a vicious hyperinflation.
This seems to stand to reason; for whether or not any "compromise" is reached between the House Republicans and the president, we're still going over the fiscal cliff. That's because, among other reasons, no proposal addresses the critical need to cut real government spending — the proposals only modestly slow the future increase in spending. If the president gets what he wants, we'd still be experiencing trillion-dollar annual budget shortfalls as far as the eye can see.
They're still "kicking the can down the road" vis-a-vis the Social Security, Medicare and Medicaid programs — which are conservatively estimated to be running $47 trillion of actuarially determined unfunded future liabilities, and (surprise, surprise!!!) NO MONEY in their respective "trust funds" to pay for them.
To my way of thinking, the president's plethora of new taxes, including excise taxes on investment, real estate sales, plus the application of the AMT with a vengeance to a vastly larger pool of taxpayers (with retroactivity to 2012 income), etc., etc., will have a devastating impact on economic activity. People are being systematically looted by the government — first, by taxation, and second, by the devastation of the value of the U.S. dollar by Bernanke's money-printing operation — e.g., "QE Infinity." Hyperinflation makes us poor, but it allows the government to pay off its obligations with cheaper dollars.
But impoverish the people this way, and you have less discretionary money, less demand, in the overall economy. Businesses may well retrench against this background, cutting payrolls, production, etc. It's "a perfect storm" in the making.
Figment, you are absolutely right about the threat to the private retirement assets of the American people — the 401(k)s and IRAs, 403(b) plans, etc. I recently read that there are a couple-three trillion dollars sitting in such accounts — all privately held (which is anathema to a socialist!). There are politicians in Washington right now who are simply licking their chops over the prospects of getting a piece of this action....
So, I did somewhat exaggerate my decision to go "all cash." I continue to hold precious metals (gold and silver). However, I am withdrawing from stocks for a while. I do expect a sell-off by year's end, as investors take their profits at this year's lower tax rates.
Anyhoot, I fully expect that "2013 is going to be a wild ride." I cannot predict the future with any great specificity, though roughly next year looks like a return to recession to me (maybe even a worse one than the 2008–2009 recession). But inevitably, the effects of the Fed's Qualitative Easing (limitless increase in the printing of new dollars) cannot fail to be hyperinflationary before too long.
Inflation: the "hidden tax," the cruelest, most universal tax there is.
Though 0bama assures us he's "helping the middle class," which is why he has to "ask" the "rich" to pay their "fair share," the fact is We the People at all income levels, of whatever financial condition, are being systematically looted by the federal government. It's that simple. One has to do what one can to try to protect one's self.
Thanks so much for your astute observations, Figment!
Yes you are right, Mike Darancette! I stand corrected.
Either way, that number is just a teensy drop in the vast ocean of unpaid (and I'm beginning to believe, unpayable) federal liabilities. There isn't enough money in the entire world to pay off the promises the American political class has made to the American people.
And evidently, we're just too stupid to realize this. And so, having reelected the criminal to office, we get to join the ranks of the PIIGS, and experience the wonders of the ensuing social chaos.
Have you considered that the interest rate you’re paying will shortly be less than the rate of inflation?
This is just my opinion, obviously. And what I think doesn’t necessarily apply to everyone, because everyone’s situation is different.
My belief is that economic collapse doesn’t look like Mad Max, it looks like a third world country past its prime. Which means to the naked eye, everything looks normal, it just isn’t. People have short memories, and they adjust, and your kids or their kids grow up thinking this is how its always been. Particularly if they are public school educated, they will accept a view of why things are the way they are that is simplistic and wrong, but they won’t care to think past it.
1. I think its important to have your house paid off. If you are in reach of it, I would consider cashing out a 401k to finish paying it off.
2. If you are upside down, or you owe more than what your 401k could pay off, you might consider cashing out to buy a small house that you could conceivably pay cash for. If you live in an area that is high-priced, you might look at buying in an area that is cheaper with the idea of owning it mortgage free (like trading the north-east for a place in the south-east).
I don’t like the idea of walking away from a mortgage you took on in good faith but at some point you may have to. If possible you need to own your home outright even if its a smaller one in a smaller town.
3. More and more I like the mormon idea of a year’s groceries in the basement. I like to watch the prepper shows, and they usually show rather nutty people doing what they do for its entertainment value. But you don’t have to believe in imminent nuclear war to prepare. For me, its an easy question. If you lost your job today, how long would it take to find another one? Thats how much you need in your pantry.
4. Friends and family have to stick together to help one another through. Probably, you wind up being the one everyone else relies on, so you have to expect that whatever you have for yourself, you’ll need a little more to cover the odd niece or aunt that winds up on your doorstep. But being that person puts you in position to ask a favor from time to time too.
5. Others have pointed out that in hard times it gets hard to buy a house, which oddly enough makes rental property more valuable. In collapsed economies people have oft times rented out their primary dwelling and moved into a smaller one or with relatives. Owning a piece of rental property isn’t for everyone and isn’t even an option for everyone, but if you are handy and can deal with the problems that go with it, it could provide an income when you have no income.
So, again, you have to make a judgement. You might consider using your 401k to buy a piece of rental property if you can pay cash. If you don’t have a good handyman in the family, though, you could wind up with more problems than you want. Its just something to consider.
I’m not so sure about holding cash if that cash is losing value. I know, some say we’re headed for deflation, others for inflation. Flip a coin. I like having your money in several places if you have the money (including stocks) precisely because you don’t know which way it will go. But have the basics covered first which means house and hard assets. I wouldn’t try to outguess the market until you’ve covered those first.
It doesn’t take a world-wide systemic collapse to bring you to the brink. It just takes losing your job in a market where you can’t find another one. In my opinion, all this talk about the “cliff” is nonsense. We already ran off the cliff.
“But impoverish the people this way, and you have less discretionary money, less demand, in the overall economy. Businesses may well retrench against this background, cutting payrolls, production, etc. It’s “a perfect storm” in the making.”
This is already happening, plus businesses ( and horror of horrors, academia) all see the handwriting on the wall with respect to Obamacare and are taking anti-recovery steps to make sure they don’t have to pick up the tab.
Also as Figment mentioned, the RATS are salivating over all the “private money” in 401k’s etc. Left to their own devices, they will “steal” these monies, give the “owners” a piece of crap annuity that will give us a pittance back, spend all the money, and leave us with Social Security II (another bankrupt government program). They will crank up the “death panels” to try and “off” the recipients to minimize their “exposure.”
If you wanted to devise a system to make bums out of a once productive society, you could not do better than what’s being attempted now.
Just hope the nutless House GOP grabs what’s left in their crotches and stands up against this assault on our lives and liberties.
I’m a Dave Ramsey fan. We’ve simply focused on paying off debt, since it has a great return if we have deflation and reduces our risk in case of layoffs.
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