News Scary as hell: the looming economic disaster

[gravenewworld]

http://www.usatoday.com/news/nation/2004-10-03-debt-cover_x.htm

 

[aeroegnr]

Yup, time to cut the spending that had its roots in the Hoover/Roosevelt administration.

Chance that that will happen= closer to negative than positive.

 

[selfAdjoint]

Yup, time to cut the spending that had its roots in the Hoover/Roosevelt administration.

Chance that that will happen= closer to negative than positive.

You could zero out all the welfare spending (I assume that's what you meant. Or was it Hoover Dam?) and we'd still be in the soup.

 

[member 5645]

The 'debtdeficiteconomy' is the reason I am still keeping Kerry as an option right now.

 

[chroot]

Every Republican administration in the last 50 years has increased the deficit. Every Democratic administration has decreased it. Bush has caused the largest increase in debt in US history, second only to his daddy. I cannot even imagine that, if the economy is important to you at all, Bush is even a consideration.

- Warren

 

[Gokul43201]

Every Republican administration in the last 50 years has increased the deficit. Every Democratic administration has decreased it.

I don't think this is entirely accurate. The deficit increased by about 20 or 25% under Carter. Damn him !

 

[member 5645]

. I cannot even imagine that, if the economy is important to you at all, Bush is even a consideration.

- Warren

Well to help you imagine it, other things are a concern as well.

 

[aeroegnr]

Okay, kill federal education funding, all subsidies, welfare, healthcare, medicare, social security, etc.

By then, I'll be happy, but that's too bad because I'd also be dead (no chance in hell short of revolution).

 

[selfAdjoint]

Okay, kill federal education funding, all subsidies, welfare, healthcare, medicare, social security, etc.

By then, I'll be happy, but that's too bad because I'd also be dead (no chance in hell short of revolution).

You try a revolution on that platform and your neighbors will string you up.

 

[aeroegnr]

Given the current situation...probably

 

[russ_watters]

Every Republican administration in the last 50 years has increased the deficit. Every Democratic administration has decreased it. Bush has caused the largest increase in debt in US history, second only to his daddy. I cannot even imagine that, if the economy is important to you at all, Bush is even a consideration.

- Warren

Even scarier is that that's peanuts compared to the debt the article is talking about. And I don't see a way out - people are just too attached to their handouts to rationally consider what it is doing to the economy.

I've resigned myself to the idea that I'll never see a cent of my social security - but I'll still pay into it my entire life. That'll be several hundred thousand dollars flushed straight down the toilet.

 

[gravenewworld]

Social Security should be done away with anyway. It was never meant to be permanent, it was only to help out during the Great Depression.

 

[russ_watters]

Social Security should be done away with anyway. It was never meant to be permanent, it was only to help out during the Great Depression.

Yeah, but people are so irrational about it - once you start handing out money, people won't let you stop (via their vote) even if you're taking money out of their pockets with your other hand.

I laugh at my friends every April when they get all excited about their tax refunds. With that kind of mindset (acting like having your money returned to you is the same as getting a gift) could doom us all.

 

[selfAdjoint]

I get $1500 a month from social security, and that's what I live on. Oh, I should have saved while I was working? Yeah right! With what? One thing I did all through the years was plug in my FICA, check after check. And that, suitably deflated, is what's coming back to me. We'll seee what you guys think when you get old. Remember to do the calculation, 2.5% average inflation per year for 30 years.

 

[Zantra]

That's why it's important to establish a 401k, 401b or other independent retirement fund. Even a roth IRA. Once you get used to living without the little bit of extra money each check, you don't even miss it. That's assuming of course, that you're working already

 

[member 5645]

I get $1500 a month from social security, and that's what I live on. Oh, I should have saved while I was working? Yeah right! With what? One thing I did all through the years was plug in my FICA, check after check. And that, suitably deflated, is what's coming back to me. We'll seee what you guys think when you get old. Remember to do the calculation, 2.5% average inflation per year for 30 years.

You would have had PLENTY to save while working had you not been paying into the system.

 

[selfAdjoint]

By paying into the system I was saving. The idea that I could have had more if I had invested it is a counterfactual; I could also have lost it all. I was also buying a house (a couple of houses at different times). I lucked out; both times when I sold the market was high and I got an excellent price. That money went to buy the place I now live in (in a deal with my daughter), so at least that part of my outgo is nulled, and you could say from saving.

 

[member 5645]

By paying into the system I was saving. The idea that I could have had more if I had invested it is a counterfactual; I could also have lost it all. I was also buying a house (a couple of houses at different times). I lucked out; both times when I sold the market was high and I got an excellent price. That money went to buy the place I now live in (in a deal with my daughter), so at least that part of my outgo is nulled, and you could say from saving.

Have you ever calculated how much you paid into the system in yoru life?

 

[russ_watters]

I get $1500 a month from social security, and that's what I live on. Oh, I should have saved while I was working? Yeah right! With what?

If you hadn't paid that 7.8% of your income to Social Security, would you have saved it? How about a 401K? That's free money (in two ways - matched funds and tax-deferred investing).

The idea that I could have had more if I had invested it is a counterfactual; I could also have lost it all.

Only if you were really, really stupid (ie, greedy). The stock market is a far better investment than people realize.

 

[member 5645]

The stock market is a far better investment than people realize.

And even then, thereare plenty of other no risk investments that pay back higher than you will see from SS, and earlier if needed

 

[russ_watters]

Here is a quickie little spreadsheet showing what the stock market can do for you without thinking about it, ie. if you simply put all of your investment money into a stable index fund (S&P is preferable).

My assumptions are that you start with an income of $24,000, get a 2%+inflation raise per year (you're a mediocre employee), invest 7.8% (the amount you put into SS), and the stock market rises at a constant 8% yearly rate (its historical inflation adjusted average), and you invest for 40 years (start investing at 30, retire at 70). Feel free to tweak them to fit you. The results in today's dollars:

Your lifetime (40 years) earnings are $1,43,319
Your lifetime investment input is $114,918
Your investment portfolio's end value is $697,491
This will provide 26 years of income at half your salary at retirement of $53,376 (assuming it doesn't continue to grow).

Now that's not great, but that's a doable retirement. But my assumptions were very conservative. Try a 10% yearly market increase instead of 8% (the past 50 years have been better than the overall average). Try a 5%+inflation yearly salary increase (or if you're ambitious and a good worker, try 7%). Try investing 10% instead of 7.8%. Try making the investments tax deferred (add ~40% to each payment into it). Try 50% (or if you work for a good company, 100%) matched funds for your 401K. Try adding the post-retirement investment growth. Try starting to invest at age 25 instead of 30. Try getting that other half of your SS tax (the part your employer pays) to invest.

Put even half of these improvements in the assumptions into the equation and, on a modest income, virtually anyone could retire truly wealthy if SS wasn't standing in the way.

BTW, SA, assuming you will make that $1500/mo for 30 years, that comes out to $540,000 - about $150,000 less than if you had invested that 7.8%. But wait - its even worse - your employer matched that 7.8% with 7.8% of its own!

 

[selfAdjoint]

Index funds weren't available throughout most of my career, so it's moot. And your assumptions are wildly off. I started in 1964 at $8000 per year, got a raise to $11,000 in 1968 and $18,000 in 1973. These were excellent salaries for the time. I went to $30,000 in 1980, $40,000 in 1986, worked at a consultant for $35 an hour from 1990 to 1995, $55,000 from 1995, $65,000 from 1998, $72,000 in 2000, unemployed and drawing Social Security from 2001.

 

[Zantra]

I just wanted to also add that you have to take inflation into account. So 600K in today's dollars will only be worth a percentage of that in 30 or 40 years. 600K sounds great now, but in 30 years when it costs 20 bucks for a gallon of milk it won't buy nearly as much. If you're not staying ahead of inflaction and the value of the dollar, in addition to the 8-10 percent you're making on your investment, you won't be doing that great.

 

[Mercator]

Anybody thought about what would happen to the stockmarket if everybody would put his money on it?

 

[Aquamarine]

Anyone considering index funds should read this:
http://www.zealllc.com/2002/valu.htm

 

[selfAdjoint]

Anybody thought about what would happen to the stockmarket if everybody would put his money on it?

Especially if the GOVERNMENT put everybody's money in it!

 

[russ_watters]

Index funds weren't available throughout most of my career, so it's moot. And your assumptions are wildly off. I started in 1964 at $8000 per year, got a raise to $11,000 in 1968 and $18,000 in 1973. These were excellent salaries for the time. I went to $30,000 in 1980, $40,000 in 1986, worked at a consultant for $35 an hour from 1990 to 1995, $55,000 from 1995, $65,000 from 1998, $72,000 in 2000, unemployed and drawing Social Security from 2001.

Sorry, being 28, my assumptions are from today, looking forward - I didn't know there were no index funds in the 60s. Be that as it may, there were diversified, low volatility mutual funds, weren't there?

I just wanted to also add that you have to take inflation into account. So 600K in today's dollars will only be worth a percentage of that in 30 or 40 years. 600K sounds great now, but in 30 years when it costs 20 bucks for a gallon of milk it won't buy nearly as much. If you're not staying ahead of inflaction and the value of the dollar, in addition to the 8-10 percent you're making on your investment, you won't be doing that great.

I did take inflation into account. All my numbers are post-inflation. The stock market, for example, has averaged something like 12% over its lifetime or 8% after inflation - I used 8% in my spreadsheet. I consider it better to use today's dollars because while that $600,000 would be more like $1.5 million 40 years from now (guess), that number isn't one we can really comprehend - its tough to relate it to a real cost of living.

Anybody thought about what would happen to the stockmarket if everybody would put his money on it?

Phew - it'd be a wild ride initially, but it'd eventually settle down to a slightly higher growth rate than it has today. But the people who had their money in first would be filthy rich.

Aquamarine, that article has nothing at all to do with index funds and decade-term investing. They don't rely on boom-bust cycles for quick profit (or loss). In any case, the article doesn't say anything bad about index funds (I'm not sure what your point is). What it does say is perfectly consistent with super-long term investing in index funds.

Dear friends, the key to successful long-term strategic investing does not rest in attempting to interpret endless day-to-day market noise. It does not rest in buying high and attempting to sell even higher, the so-called “Greater Fool Theory” advocated almost universally on Wall Street today.

The key to long-term investment success is to Buy Low and Sell High, and general market valuations as measured by P/E ratios and dividend yields provide the ultimate long-term buy and sell signals.

The caveat is that buying based on the long-term "waves" as the author calls them still requires interpeting market signals (albeit fairly simple, clear signals). Someone who is investing for retirement shouldn't be trying to read the signals at all until they get within about 10 years of retirement.

 

[russ_watters]

FYI, the only investment guide I've ever read is . Its not a get-rich-quick guide, but rather a long-term prudent, frugal (sometimes insanely frugal) strategy.

I say "insanely frugal" because he recommends buying a used car because cars are a terrible investment (he's right, but my car is a toy...) and buying most of your groceries in massive bulk. The basis of that is his motto "a penny saved is two pennies earned." The logic behind that is that another $1 of income (from working overtime, for exmple) is taxed at about 40%, so you really only get $0.60 of it whereas a $1 saved is post-tax and really is $1 saved...plus growth.

Its short, easy to read, informative, and entertaining. I highly recommend it.

 

[selfAdjoint]

Sorry, being 28, my assumptions are from today, looking forward - I didn't know there were no index funds in the 60s. Be that as it may, there were diversified, low volatility mutual funds, weren't there?

None of the financial counselers in my earlier years ever talked about mutual funds at all. They were pretty crude at the time, heavily loaded, and not regarded as a significant investment. The people who talked about investing to me in the 60s talked about two things: investment clubs, and real estate. But investment clubs were not a way to make a significant amount of money, they were just a hobby, promoted by brokerage houses to get the fees. And real estate required a lot of up front risk. My best buddy maxed out his credits cards to buy a beat-up apartment building that he and his wife then sweat-equitied in fixing up, and he went on from there to bigger and better deals, leveraging equity on new purchases. For about five years he had a lot of tension, and then broke through into real prosperity. But I was never up for that.

(Added)
BTW, a lot of the people I knew who did go strongly into the market were essentially wiped out in 1987.

 

[Aquamarine]

Aquamarine, that article has nothing at all to do with index funds and decade-term investing. They don't rely on boom-bust cycles for quick profit (or loss). In any case, the article doesn't say anything bad about index funds (I'm not sure what your point is). What it does say is perfectly consistent with super-long term investing in index funds. The caveat is that buying based on the long-term "waves" as the author calls them still requires interpeting market signals (albeit fairly simple, clear signals). Someone who is investing for retirement shouldn't be trying to read the signals at all until they get within about 10 years of retirement.

I should have been more specific about my point. Index funds should be timed and not just before retirement. So some thinking must be done. Here is a chart of the Dow, inflation-adjusted. Those who bought in 1929 and 1965 had to wait a long, long time before break-even. If at all before dying.
http://www.dogsofthedow.com/dow1925cpilog.htm

 

[russ_watters]

None of the financial counselers in my earlier years ever talked about mutual funds at all. They were pretty crude at the time, heavily loaded, and not regarded as a significant investment. The people who talked about investing to me in the 60s talked about two things: investment clubs, and real estate. But investment clubs were not a way to make a significant amount of money, they were just a hobby, promoted by brokerage houses to get the fees. And real estate required a lot of up front risk. My best buddy maxed out his credits cards to buy a beat-up apartment building that he and his wife then sweat-equitied in fixing up, and he went on from there to bigger and better deals, leveraging equity on new purchases. For about five years he had a lot of tension, and then broke through into real prosperity. But I was never up for that.

Quite frankly, that sucks, and I didn't know investing was that closed-off to the mainstream back then. I'm glad I have so much easier access to the market ($5,000 is all it takes to start an investment account).

BTW, a lot of the people I knew who did go strongly into the market were essentially wiped out in 1987.

There is a forumla for how much of your money should be in stocks based on how far you are from retirement (something like 20%+ the number of years to go), so it shouldn't have killed anyone (that said, my parents are near retirement age and were hurt more by the '98 drop than they should have been - its tempting to stay in when its time to get out). As bad as it looked on Monday (depending on how you look at it, it was as bad as 1929), it wasn't that bad in the grand scheme of things:

http://www.lope.ca/markets/1987.html shows that the Dow went from about 2,200 to 2,700 to (in a matter of days) 1,600, then back to 2,000 in about six months overall. So anyone who was diversified and didn't panic, at the peak lost about 40% of their holdings, but over the course of the six months only lost about 9% of their holdings. Overall, 1998 was a far worse year. And today, the Dow is about 5x the value it was then - which, by the way, is about 15% per year, even when calculated from the peak. But certainly, people panic - like I said, that Monday, things looked pretty bleak. That's why one of the keys is to stay rational.

 

[russ_watters]

I should have been more specific about my point. Index funds should be timed and not just before retirement. So some thinking must be done. Here is a chart of the Dow, inflation-adjusted. Those who bought in 1929 and 1965 had to wait a long, long time before break-even. If at all before dying.
http://www.dogsofthedow.com/dow1925cpilog.htm

I need to look into that graph some more - it doesn't make sense to me. If today's value is 10,000 and the inflation-adjusted value is 1,000, that's 1,000% inflation over 100 years - or 10% a year. Inflation historically has averaged more like 3%.

 

[Locrian]

The fact that 40 years ago people were not properly educated on methods of savings is not an acceptable reason for continuing an absurd government program. Vast amounts of information is available on the subject and anyone who is interested can learn to invest their money in low or high risk instruments. I can understand the plight of those short sighted enough to have believed social security would enable them to retire, and therefore suggest a gradual phasing out over time.

There is no reason the government should be responsible for supporting people for decades (sometimes up to a third) of their life. I do believe there should be a safety net for elderly who end up poor. That is a very different thing from a gigantic welfare system everyone is entitled to from 65 to death.

By the way, those who lost their money in oct of 87 did so due to grievous personal error (and have probably been kicking themselves since). "Buy and hold" is not a joke. If they were to retire soon, they should have been invested in bonds. If they weren;t, they should have stuck with it (and would have earned healthy returns later on). This is basic information that was available and taught at the time.

 

[Locrian]

By paying into the system I was saving.

Sort of. The money you gave the government was immediately lent to an entity that hasn't shown a consistent positive balance on its books in almost 70 years and now carries a debt of over 7 trillion dollars. This is the definition of a bad investment and its no surprise it is turning sour. The government has loaned itself every penny you put in and then piddled it away. All that's left is your children's obligation to pay back a promise they never made.

This inforamtion was freely available to you since you began working. How can you defend such an absurd concept? Of course, your generation won't pay the price. Mine will.

 

[Locrian]

I need to look into that graph some more - it doesn't make sense to me.

One thing that fooled me for a moment is that it is on a logarithmic scale, so an exponential return produces a linear line (sorry if you already noted this). This makes some periods of return look much worse than they really were. One thing that chart does do a good job of showing is that inflation is really bad for stocks, despite them being sometimes treated as safe havens.

I wonder if there isn't also an iflation adjusted chart showing your dollar invested in government bonds? That would be much more pertinent to the discussion.

Edit: For instance, between 1950 and 2000 it doesen't look like you've gained much. However, going from $150 to $1000 in 50 years amounts to over 6% a year, after inflation. Compared to other investments over the same time that's good return.

As for the comment about it taking a long time to recoup if you bought the dow in '65... of course its bad. A decade of bad inflation is bad news for equity of many kinds. However, it could be worse.

You could have put your money in bonds or - worst case scenario - have it in cash or a savings banks. A heavy bought of inflation destroys assets, period. Your only hope is to either liquify and spend or wait a long time. Since few people can see these things coming in advance, you might as well go with stocks. Its not pretty, but the other choices are uglier.

 

[aeroegnr]

Of course, your generation won't pay the price. Mine will.

We can only hope that this country begins taking steps in the proper direction. Otherwise, there will be an interesting time to be had.

We just need a way to get peoples' attention so that they can act on it.

 

[russ_watters]

I need to look into that graph some more - it doesn't make sense to me. If today's value is 10,000 and the inflation-adjusted value is 1,000, that's 1,000% inflation over 100 years - or 10% a year. Inflation historically has averaged more like 3%.

Ok, I'm still not sure about the inflation part (I'm guessing compounding interest is biting me...), but the long-term investing part I did figure out.

Here's what it says in my book:

...a person who bought shares in all the companies on the exchange on any day in its history would have made a profit over any 15 year stretch and would have beaten bonds and savings account oer virtually any period exceeding 20 years. [emphasis added]

For that to jive with the Dow graph, Aquamarine, I guess it means the Dow (being that its only 20 stocks) isn't diversified enough to show the true value of the market. The S&P is both more stable and outperforms the DOW, but its newer, so you can't get much of that early history from it.

Another thing to remember is that this is worst-case and unrealistic. If you picked the worst possible day to invest, it would take 15 years to break even. But when investing for retirement, you invest a constant (or increasing) amount every month for decades, which smooths out both the peaks and valleys giving you something closer to the actual average performance over the time period in which you are investing.

Another nugget though (I'm going to reread this book and start a new thread about it...):

From 1926 to the beginning of 2001...the total compounded annual rate of return you would have had from buying risk-free US Treasury bills was 3.8%; the return from slightly riskier corporate bonds would have been 5.7%; the return from blue-chip stocks would have been 11%; and the return from the stocks of small companies would have been 12.4%...The compounded annual rate of inflation durin the same period was 3.1%

(both quotes, pp 125-127, 2002 edition "The Only Investment Guide You'll Ever Need").

And one last thing - I haven't said it before because I wanted to keep everything as worst-case as possible: though I accept that I may be naive (I haven't seen a bear market like in the 70s or 30s, but I do remember 1989), I do also think there is reason to believe those events won't be repeated. The conditions that allowed the market to gain so much un-deserved wealth (mostly margin trading) don't exist anymore. Every time something bad happens, the rules change to make it less likely that it'll happen again.

 

[russ_watters]

The fact that 40 years ago people were not properly educated on methods of savings is not an acceptable reason for continuing an absurd government program. Vast amounts of information is available on the subject and anyone who is interested can learn to invest their money in low or high risk instruments. I can understand the plight of those short sighted enough to have believed social security would enable them to retire, and therefore suggest a gradual phasing out over time.

I largely agree but I'm willing to be a little more generous - it wasn't so much that guys like SelfAdjoint didn't know how, but the opportunities weren't as broad as they are today.

That said, that's not a good reason to perpetuate a system that is an anchor on the economy. One way or another, Social Security is going to change. I just hope we fix it before it utterly implodes (I'm not optimistic). I said in the last post that I think the conditions that caused the stock market to implode in 1929 don't exist anymore - social security is the one major danger I see right now. If we don't do something soon, we could actually end up with another depression.

Best-case scenario for SS would be for the government to start investing part (most) of the money. Had the government done that from the begnning, SS would be generating profit today instead of being tens of trillions of dollars in debt. That's the way corporate pension funds are required (by law) to operate. The government should not be above the law.

There is no reason the government should be responsible for supporting people for decades (sometimes up to a third) of their life. I do believe there should be a safety net for elderly who end up poor. That is a very different thing from a gigantic welfare system everyone is entitled to from 65 to death.

Though I trust myself to invest, I don't trust the general population. Part of me says screw the rest of them if they are too irresponsible to save - but that's unrealistic since eventually I'll have to bail them out if they don't.

By the way, those who lost their money in oct of 87 did so due to grievous personal error (and have probably been kicking themselves since). "Buy and hold" is not a joke. If they were to retire soon, they should have been invested in bonds. If they weren;t, they should have stuck with it (and would have earned healthy returns later on). This is basic information that was available and taught at the time.

Another (funny) quote from the book (page 139):

[Rule #2] Buy low and sell high. You laugh. Yet most people, particularly small investors, shun the market when its getting drubbd and venture back only after it has recovered and appears, once again, to be "healthy." It is precisely when the market looks worst that the opportunities are best [which is why I'm glad the market has taken its time recovering - more time for me to put money in]...

[from an article in an investment magazine about an investment club] A Washington, D.C., investment club purchased 200 shares of stock at 18. "Club sold all holdings at 12.5...due to decline in price; intends to reinvest when price moves up."

How idiotic is that?