I really enjoy math; it has a precision and beauty that language oftentimes cannot match.

As an example, consider The Street.com’s Daily BlogWatch. This morning, they linked to this post at the Happy Capitalist (graphic in original):

"Can we retire on \$14.5 trillion? That’s the amount of money Americans have stashed away in retirement accounts according to research published today by the Investment Company Institute.

"Clearly, Americans are focused on saving for retirement as a top priority," said ICI senior economist Sarah Holden, who co-authored the study with ICI senior economist Peter Brady, in a statement.

"Our research continues to indicate that individuals are building retirement nest eggs by using employer-sponsored plans and IRAs."

Now, the data part of what the ICI is saying is technically true; Yes, the line "Clearly, Americans are focused on saving for retirement as a top priority" is crap — Its not clear, and we have no idea if its their top priority. The Street.com compounds the situation by adding "This demonstrates that things might not be so bad after all. \$14.5 trillion is not chicken scratch."

But the math is what I want to focus on:  It turns out that \$14.5 trillion dollars is (more or less)  chicken scratch. And courtesy of an idea dropped by a commenter at the aforementioned Happy Capitalist, along with some quick calculations, we know precisely how much scratch it is:

"Let’s do the math. \$14.5 trillion divided by 80 million retiring baby boomers over the next 20 years = \$181,250/American.

The Average retirement 65 and lifespan 15 years (80 at death)= \$12,083.33/year or \$1007/month.

Hmmmm… I don’t know anyone that can live on \$1007/month unless you are in some fourth world country.

Oh wait, I forgot to add all those free medicaid, medicare, prescription drug benefits everyone is going to get. Hmmm.. I wonder who’s going to pay for that."

Its actually even worse than it sounds:  As we have seen from many data sources this year, wealth distribution is somehwat lumpy. Its not remotely evenly allocated. This means that for at least half of the future retirees, their savings will generate less than \$1007 per month. And if the retirement dollar distribution curve is anywhere near the rest of the nation’s wealth distirbution, it means most retirees have considerably less than that.

Inflation is another concern, but let’s assume that returns between now and then keep pace. If not, its even worse.

~~~

And that’s why I love math. Some weasel at the Investment Company Institute throws a multi-trillion dollar number out there, and it sounds great — until you dissect what it actually means.

Less than a \$1007/month — in 2025. Sounds alot like chicken scratch to me . . .

Category: Data Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

### 60 Responses to “Do the Math”

1. Zephyr says:

It’s certainly not enough money – yet. And I doubt that most will accumulate enough for their retirement. However, while the oldest boomers are now turning 60, the median age is about 50. So they have 15 years on average to accumulate more. Historically, the average person digs out of debt and accumulates nearly all of their retirement wealth during the last decade before retirement – so it is not clear how this will end.

However, I believe it will end badly for most because most boomers do not seem to have the discipline to defer consumption. So far, contrary to the historical pattern, the oldest boomers (as a group) are failing to accumulate wealth during their post 55 years. This will be a political nightmare, and a massive example of the ant and the grasshopper tale.

2. minmex says:

But..assume the 181k throws off 7% a year, that’s around 12k/year right there, without pulling any principal.

Plus won’t that 14 trillion grow over the next 20 years as well?

Probably not enough, either way…unless you like living in a cardboard box..

I fully expect to be tax-raped by the majority baby boomer crowd over the next 20-30 years….why bother saving when you can use your majority population stake to make the government give you all the free stuff you want.

Oh…and that house you’re counting on to fund your retirement isn’t going to be worth much when every boomer is trying to sell at about the same time. Who do you think will be buying? I’ll be busy laboring under a 60+ percent income tax to support you by then, sorry…no house upgrade cash handy.

It’s a ticking atom bomb…I’d like to be more optimisitic but I love math too.

FYI-my theoretical boomer here is just a made up one, and not any member of the Big Picture family.

3. wcw says:

I can’t get exercised about aggregate problems with retiring boomers. One word: productivity. We as a society can and will continue to be able to support retirees. Individuals will have plenty of trouble, but that will be a symptom of other issues, not of an aggregate inability to pay for them to live.

That ICI quote is pretty rich, but they’re hardly a disinterested observer.

4. bgates says:

It’s quite a bit worse than that commenter makes it sound. For one, there’s an assumption that all of the \$14.5 trillion is held by boomers. Factor in the GenX IRA’s, and the boomers probably average 150k or less. And minmex’ observation on houses could apply to equities as well.

5. Jon H says:

“Who do you think will be buying?”

Well, on the plus side, this probably means lots of ugly, run-down mid-20th century homes on small lots will be bought up, combined, knocked down, and replaced by newer, larger homes with more green space.

Possibly not so much a factor in the booming areas of the country where most housing is newish, but something you see in the Northeast.

6. Mike M says:

The only real solution? Working longer. Most will do this. It’s a necessity. And I think Rob Arnott says a “normal” retirement age will be 73 (versus 65) based on current life expectancy.

7. kennycan says:

I would like to believe that working later will be an option that many will take. For some it will but it will be because they like they’re job. However, as one commenter notes, why not take advantage of the current govt set up whereby a majority can vote themselves free stuff and get the minority to pay for it. You really think the early half of the boomers are really going to work past 65. A lot of boomers were talking early retirement, not working till they drop. Once they retire and see it’s not working as they’re retirement funds are depleting faster than they thought, voting goodies will be a lot easier and a lot more enticing than going back to the labor force.

8. YZ says:

I’m not convinced about the maths here…

\$181,000 is available per person today. Assume this person is 50 years old, will retire at 65, and die at 80.

Also, let’s assume quite conservatively that this person will never put another penny into their retirement account, and that the real rate of interest they can achieve (ie: after inflation) is 4%.

By age 65, their nest egg will have grown to 181,000 * (1 + 4%) ^ 15 = \$268,000. They will then start withdrawing this money for 15 years until they die. This money earms the 4% interest rate, so they can withdraw \$29,318 per year during those 15 years, which is actually not an unreasonable income considering the conservative assumptions. If you want to recreate this, the spreadsheet function is PMT(4%,15,268000).

Things don’t look as good if you assume the person is 60 today. The yearly income drops to \$19,800. If they live another 25 years instead of 15, a 50 year old has \$20,800 a year and a 60 year old has \$14,000 a year.

9. WhoCares says:

These Baby Boomers should be called the Kaboomers. The Rapture is not a retirement plan!

Perhaps the Kaboomers are getting old, sensing the doom of their retirement years sneaking up on them, and they are subconsciously projecting that the Apocalypse is upon us.

Well it isn’t. It’s your own private apocalypse that you are kindly sharing with the rest of us. Literally the rest of us. As in the rest of the planet via the national debt and other adventures. Please don’t drag the us into World War III as part of your end of life conniption fit.

The Greatest Generation gave birth to you. And you inherited much and were carried aloft on the opportunities the Greatest Generation afforded you. Now you have spent it all, sold out, had a great ride, and are running up the charge cards on the way out. Classy.

The Kaboomers are the Worst Generation to come around in a long time.

Given the current rate of disintegration … you self-centered bastards have a few days or weeks to salvage the situation … but it will be a real feat.

Maybe when Gen X-ers and other youthful generations are of age they will start running for leadership positions and things will turn around.

So forget about YOU for a change.

10. Leisa says:

Any article that takes an aggregate lump of money and then proceeds to make any type of analytical or qualitative judgment about it isn’t worth the time to read. Even teasing out an average number doesn’t work due to the “lumpy” distribution as you point out.

I always find it interesting how words get into our vernacular. “Lumpy” is one of those words. I’ve never heard it used in a financial context (certainly I hadn’t used it!). Yet, I listened to three conference calls over so many days back in the Spring Every one of the CFO’s used “lumpy”. I see it here! I must admit that I have found myself using it.

11. alan says:

That 14.5 trillion is one lump sum for everyone. How is that distributed among the future retirees? I don’t think you will find that it is a bell shaped curve since we have a concentration of wealth in this country. We need to know the median amount stashed away per retiree, not the average amount.

12. GMF says:

What alan said.

Some of these folks will be retiring on a million dollars a month, many more will be retiring with zero dollars a month.

13. Jeff D says:

Many will also retire with their housing already bought and paid for, which will reduce their living expenses considerably.

14. Craig says:

Class warfare + generational warfare = The top 1% win their 12.5% increase in overall earnings (2004). The bottom 99%? They get 1.5%. (2004). What is inflation? Well above 1.5%.

Might I suggest that this is not an age phenomenon?
The average AMERICAN has a negative savings rate.
If we ALL saved money, this would be a non-issue, as would most of what the fed does.

It’s about capital. We are capitalists running out of capital. We are running on the rest of the world’s savings.

How long can this go on?

How can the bottom 99% SAVE when, on the average, they aren’t keeping up with inflation, spending more than they make and removing equity from their RE?

Instead of getting in a huff about BB’ers, why don’t we get after our beloved moron politicians and remove the taxes on savings, interest and dividends? Leave the cap gains as is to encourage long term investment.

The answer is simple, but it isn’t blaming the previous generation. If it is, you better be looking at the current retirees that collect fixed benefit retirements, SS, medicare, etc. NONE of us will see anything like that again unless we do it ourselves.

15. Ricardo says:

Let’s see, \$1,007/mo will fill up my SUV 6.7 times at an avg cost of \$150 per fill up. Ok, I don’t drive THAT much, but even 4 fill-ups a month will cost \$600, then I hv to also pay for insurance, let’s add \$100/mo for that. This would leave me with \$307/mo to buy groceries, pay my condo fee, go on vacation, help out my kids, a few golf games. Yup, Mozambique, here I come!

16. brendan says:

Barry, rather than giving us numbers, why don’t you give us a solution. It’s easy to say the other guy is wrong. Give us your facts about why Peter Brady at ICI is wrong in what he is saying, and then suggest a solution to the overall problem.

17. Craig says:

I know lots of boomers looking to move to a second world country so they can see the standard of living RISE while retired.

That won’t happen here in debt land.

18. T says:

“Also, let’s assume quite conservatively that this person will never put another penny into their retirement account, and that the real rate of interest they can achieve (ie: after inflation) is 4%.”

4% after inflation is about 6-7% pre inflation sounds like equity returns — not something that someone who is 50 years old should have the majority of their retirement funds invested in. A more realistic “real” rate of return for someone in the final decade or two before retirement is 1-3%, the kind of spread you could expect from moderate duration, fixed income securities.

“Instead of getting in a huff about BB’ers, why don’t we get after our beloved moron politicians and remove the taxes on savings, interest and dividends? Leave the cap gains as is to encourage long term investment.”

You’re presuming the reason people aren’t saving is because the returns aren’t high enough… but what if they’re not saving because they want to spend the money now (hmm?) In that case, driving up the expected return of saving money would actually decrease the amount they save, since they’d have higher return expectations and might transfer more to spending. I’m not saying that it’s clearly that way, just that there are two sides to that concept and it’s not as simple as decreasing taxes on savings. Most American’s hardly take care of the tax advantages savings plans offered right now.

Needless to say there’s a real problem building here. A generation that more often than not voted against social welfare on the idea people should take care of their own needs is about to become a huge burden on the younger half of this country.

Why should I have to pay for the irresponsible spending of the previous generation?

If you do bail them out, isn’t that just going to create a moral hazard where future generations know that they have a “boomer put” that relieves them of the responsibility to save for their retirement.

19. Alex Khenkin says:

A few quick notes:
- Assuming 4% average after-inflation return is borderline ridiculous, where is this return going to come from with nominal 5% bond yelds and stock market valuations in the stratosphere? Don’t get me started on the 7%…
- The income distribution in this country is the same as everywhere else – it’s a power law (google “Pareto”). Hence – most people have less then average.
- Working longer – agreed 100%
- Untill we open our eyes to the biggest problem facing this country – the idiotic way in which we (over)pay for our healthcare – the American Healthcare System wuill remain the single biggest threat to an average person’s retirement.
Small Investor Chronicles

20. M.Z. Forrest says:

Something that should probably be pointed out is that there is no such thing as stock market savings whether it is in a 401(k) or not. The folks who put out this are being intentionally irresponsible by claiming it. For the older ones, age 60, if we did a Monte Carlo on their “savings” there is nothing saying that there savings wouldn’t be flat over the next 5 years. Heaven forfend is we have a bear market over the next five years. Even the folks who have 15 years to go have some risk that their returns will be less than AAA bonds.

21. Jdamon says:

No one has mentioned the fact that since ’98 the S&P is basically flat. Thus, even if one is “saving” money, it is, at best, keeping up with inflation. Therefore, without a vibrant stock market to grow wealth, Americans are SOL. What we really need in this country is to have a decent vehicle to grow our savings. 99.9% of individuals don’t short stocks. That is the only way anyone can make money these days. I am a Gen X’er and I have saved my butt off. However, over the last 5 years, my savings have fallen by being in the market. What is a good saver to do? 4% returns won’t cut it folks. That is the real issue.

22. Patrick (G) says:

I’d hate to live in NYC on \$1K a month, but two (married?) living on \$2k/month and with 2 SS checks coming in with a paid-off mortgage and no other debt as well, living in a less expensive part of the country …does not strike me as a poverty retirement.

23. T says:

Patrick:

\$80 a day split between two people means you aren’t going to starve, but it’s sure not the retirement most folks envision. Out of pocket spending in retirement tends to run at 80-90% of what was being paid out just prior to stopping working, in large part because you now have a huge gap of free time that needs to be filled with activities like golf, travel, etc. Plus, they’ll need to pay real estate taxes, even if the mortgage is paid off.

If someone has lived to 65, they need to budget to have at least 25 years of retirement — if median life expectancy for their generation was 80, the remaining group that hits 65 will likely live to 85-90 on average (I think the exact figure is 88 if you’re 30 now and make it to 65.)

Jdamon: 4%-6% is going to have to do. We’re rolling into one of the biggest asset/savings liquidations in history. To expect we’ll match the returns of the last century over the next 25 years would ignore that.

24. ML says:

T,

I love the “boomer put.” Moral hazard is real and pervasive – so is a sense of entitlement.

I think education in simple finance/economics is the biggest problem. Too many people think we are living in France. I have seen surveys that indicate that the average Gen X and Y’er think their retirements will be covered by defined pensions and SS. What? The odds of being covered by a standard pension for someone less than 30 has to be less than 10% right now. The odds of the pension program lasting another 30 years for the average 30 old is probably less than 1%.

We need to start teaching kids about matching assets with liabilities and about the simple principals of economics in a capitalist world. How many of you that have kids see them bring home books that mention the time value of money?

Our politicians and educators need to get their acts together on this. Too bad the moral hazard might trump any real leadership or education on the issue.

25. TDL says:

Just to add another wrinkle, life expectancy is actually longer. 80 (or, 84) is the expectancy from birth, past a certain age the life expectancy begins to increase (not significantly, but enough to add several years.)

Also, if inflation were only 1.5% we would be lucky. I imagine that inflation is at least twice that (I imagine Mr. Ritholtz probably has calculated the actual rate.)

Isn’t the “national” savings rate negative because it only looks at cash savings? If we include investmets (or speculations as the case may be) doesn’t the “savings” rate rise?

As for a solution; stop taxing savings accounts. One of the reasons that East Asians save so much is that their savings accounts aren’t taxed. Also, abolish the Fed and you eliminate the major source of inflation allowing purchasing power to increase over time. I think the former is much more politically feasible than the later.

26. M.Z. Forrest says:

ML,

The problem is that a lot financial commentators don’t get it, let alone adults and kids. The worst part is a lot of people are leveraging their ignorance. Take a typical market appreciation of 8%. If a person has a debt to asset ration of 60% (say \$400K home, \$100K stocks, \$300,000K mortgage), they are getting a discounted rate return of around 3%. And that is hardly gaurenteed. Considering the market has been flat for 5 years, the best investment would have been to pay off the mortgage, but mortgage debt has exploded.

27. ML says:

Forrest,

Many financial commentators probably do get it. The problem is that most of those that comment are employed by the institutions that profit from investment/speculation in risky assets. Hell, even CNBC could not exist if they routinely commented on paying down debt in favor of equity investing despite poor expected returns on equity. Commentators are struck by the same moral hazard as Joe Blow citizen in the “boomer put” option scenario. As a result, you’ll continue to hear more about MS’s \$20B buy back instead of fundamentally lower equity risk premiums and the impending boomer asset liquidation.

28. JoshK says:

Predicting so far out is a risky game. Many things can happen:

1. Our increasingly service and tech economy can keep people working a lot longer. \$10/hr at WMT 25 hrs a week is another 15K.

2. Having to give up the SUV may not be so bad.

3. Assets will continue to accumulate.

4. Will people retire at the same time? Sell off from 14t of assets at the same time may get less than 14t.

5. We have huge entitlement liabilities – discussed many times over. Will these be sustained? Will we find more taxpayers (immigrants maybe) to take them over and increase them?

6. Will increases in productivity reduce costs of core living significantly?

7. Will new medical technology further drive up retirement costs?

8. Will more people live longer and sicker? Nursing homes are very expensive? Or will they live longer and healthier, staying in the workforce.

If we can learn one thing from Malthus, is that we may have more hay that people think. ;)

29. Bob A says:

That \$1007 per month will be just about enough to pay for gas to your job as a greeter at Wall Mart.

30. JoshK says:

Or option 9: Will WMT come out with WMT-Retirement, where for \$1k a month, you get to live inside one of their big box stores and eat anything from their snack section?

31. jkw says:

The economy is not driven by savings, it is driven by spending. Lowering taxes on savings and investments is a bad idea because it rewards people for doing something that is good for them but bad for the economy. Any distortion in the tax code from a flat, equal tax on all income should have some well-defined benefit to the economy. The best thing for the economy is to have people spend money. Savings are taken out of the economy and reduce growth. Recessions are caused by a cutback in spending, not a cutback in savings and investment.

The retirement of the baby boomers will not cause any major problems for the US economy. It will reduce the labor supply, which will drive up wages enough to compensate for any required tax increases. This will squeeze corporate profits, but that will only affect people who are already well-off. The real danger would be if the baby boomers don’t retire, because then there will be an excess supply of labor and unemployment will grow. This will lead to a dangerous drop in consumption.

The major risk in the world economy right now is the imbalances between the emerging markets and the consumption countries (mostly US). If America cuts back on its spending, we will get a depression. There is no risk to the world economy from America reducing its savings, other than that the imbalances might be worse when they are corrected. We will eventually get a world-wide depression unless the emerging markets can create a large consumer class and start importing before Americans are forced to start saving. Sadly, the emerging markets do not seem to be interested in creating a large middle class. Having the baby boomers retire will allow Americans to continue spending even if we don’t produce more, which will allow the emerging markets more time to fix their problems.

jkw, are you sure you’re initials aren’t actually jmk?

It is also an economic identity that savings equals investment. So your proposal is, roughly, “screw investment.” When there is no investment in the future, pray tell, what happens to the future. Nothing good.

A doubly bad idea when a lot of the spending you advocate leaves the country… and winds up as someone else’s savings, and someone else’s investment.

There is no risk to the world economy from America reducing its savings, other than that the imbalances might be worse when they are corrected.

Classic…

34. DavidB says:

Saving is deferred spending. Every saved dollar has ultimately been spent or will be spent by either the saver, the beneficiary of the saver or the government that taxed the estate of the saver.

But that is not my original intention for posting.

I have had a prophecy about the boomers for years and I believe it will come to fruition.

The boomers are the most immoral generation to come along in centuries. It was their free sex ways that caused them to institutionalize the act of abortion in America.

I believe that their immoral ways will not subside in retirement. I believe that they will be on the vanguard of the institutionalization of euthanasia and assisted suicide.

What is ironic is that the 30+ million kids that were aborted would now be in the workforce and providing tax dollars to mitigate some of the cost of retirees benefits right now.

If you have ever seen the movie Logan’s Run I think that is somewhat how the future will look except without the happy ending and euthanasia probably committed along income lines as opposed to age lines

35. JWC says:

Every time I read someone talk about how in the future people are going to work until their 70′s, I figure they must be pretty young yet.

Let’s have lessons on the reality of getting older. How many jobs in this country fall into the category of blue collar? How many jobs are there in the health care industry? How many jobs are desk jobs that involve computers?

OK now. Does anybody reading this have a clue how physically difficult it is to be a nurse? (Good, well paying jobs, nursing, but hard on you physically as well as emotionally.) Blue collar jobs, I’m sure you agree there is some physical requirements in most of them. Computer desk jobs? Hey folks, ever heard of vision problems? (My husband just developed macular degeneration and he is 62, I would be very surprised if he can drive in five years, let alone work a computer screen.)

I’m at the end of the thread so noone will probably read this… so much for my rant.

36. jkw says:

I’m not sure who jmk is.

Investments in the future come from spending, not saving. Big bank accounts are not nearly as useful as better schools, factories, and infrastructure.

Which of the following would most help GM? Buying \$20k of their stock, buying \$20k of their bonds, or spending \$20k on one of their new cars? Unless it is newly issued, buying their stocks or bonds has no affect at all on GM. Newly issued stocks or bonds take away from future profits. Buying a car gives them some more profit and pays for some of their expenses. This extends through the entire economy. Saving money does nothing useful for the economy, it merely passes the responsibility of spending the money onto someone else. Saving money is beneficial to the individual, but bad for the economy.

Spending money on foreign goods isn’t really a problem either. The trade deficit has to balance out over time. It will balance out through currency corrections eventually. For every car that Japan sells us now, we will only have to sell them a tire 20 years from now. Their paper accounts won’t be worth nearly what we are getting from them. The money we send them is practically worthless. But until they create a consumer class of their own, it is the best they can get.

Too little spending is always a more serious problem than too little savings. Japan’s long bout of deflation and recession was caused by their failure to spend sufficiently. If the baby boomers stop spending, we will have the same problem here. But since we are the world’s consumers, it will spread through the entire world.

The savings rate will be fixed by wage inflation once the currency manipulation stops, and possibly even before that. The government will raise taxes to pay for the baby boomers to retire. As they retire, the labor market will tighten and wages will go up by at least enough to compensate for the higher taxes. This will only hurt corporate profits and the incomes of the uppermost class of society. And they are well-off enough to deal with it. They also engineered most of the policies that created the mess, so I have no problem with making them pay for it.

The alternative would be to have the baby boomers either cut back on spending or keep working. If they keep working, it will drive down wages for everyone, which will lead to reduced spending anyway. Reduced spending will lead to a world-wide recession. The only soft-landing scenario is for the boomers to retire and keep spending until the emerging markets create a consumer class and we gradually shift to balanced trade. Anything else will produce a serious economic depression.

My proposal is not “screw investment.” It is roughly to fund the boomers retirement from corporate profits through tax/wage inflation. Because if the boomers stop spending, we get a deflationary death-spiral depression.

37. Zephyr says:

I agree that the boomer retirement will cause a labor shortage and wage inflation. However, it will also cause general price inflation as their spending continues while their production declines.

Whether people save money for retirement or not, when they do retire they consume without producing. It is a tranfer of real goods at that time. This will be inflationary if the proportion of the population that is retired increases.

When you save money for the future you are really just lending your right to consume now to someone else who is borrowing to consume now. When you later spend your savings you are reclaiming your share of consumption previously borrowed by others.

38. Zephyr says:

In essence the saver is saying “you can drink my beer today if I can drink your beer tomorrow.” Of course, in a complex economy there is no direct link between the two parties, and the beer you drink tomorrow will likely be that of another saver.

39. BDG123 says:

As odd as it all sounds, jkw is basically right on this one. NATIONAL wealth is created by having an economy of spenders. Not that we should be spending everything we make. I’m not sure we actually are. But, if we are, it’s likely because we have wage stagnation, are barely getting by, have overreached from the euphoria of the late 1990s or some other similar reason.

Only three things can truly put a death spike in the consumer in America IMO. Housing deflation, stock deflation and energy input costs. Well, maybe a fourth in a personal foul of piling on. A 5%+ Fed Funds rate. Ala, the Paradox of Thrift. These things never came to pass over the last seventeen years hence betting against the consumer has been a bad deal. Now? I just don’t see a way out of a housing mess and that will likely cause a serious rash.

The emerging markets and feeder markets which rely on American exports are likely going to take a dirt nap and maybe for a long time depending on the country.

I’m not sure who jmk is.

John Maynard Keynes.

Investment does not come from spending, it comes from savings. You are confusing consumer savings with business savings.

If the consumer spends his money with a business, that business will have savings to invest if it chooses. If the consumer chooses to leave his money in the bank, that money will be available for the bank to lend out. If the business in question is domiciled overseas, or the business chooses to invest its savings in an overseas capacity, or the business chooses to sit on that cash as economic conditions deteriorate, then the US economy has lost out. Spending is no panacea.

Your attitude seems to be that there can’t be enough consumer spending. But when consumers consistently spend more than they can afford, they eat their future seed corn. Max out the credit card now and the bill comes due tomorrow. Borrowed money can be a helfpul hand or a hangman’s rope; in America’s case her creditors have offered up plenty of rope.

When you say “spending money on foreign goods isn’t really a problem,” what you are really saying is that we can merrily rip off our trading partners by deliberately devaluing their dollar-denominated holdings, and thus get something for nothing in perpetuity. As the old saying goes, you can shear a sheep many times but you can only skin him once. When the dollar collapses, America’s trading partners will be skinned. And that will be a real problem.

The most equitable solution to global imbalances would be allowing foreign entities with large dollar holdings to purchase US assets–let them get worth out of their greenbacks by purchasing American businesses and properties. But as we saw with Unocal and the Dubai Ports deal, that probably isn’t going to fly politically. We want to have our cake and eat it too, and somehow convince ourselves we deserve it.

Your solution isn’t really a solution at all. An ongoing buildup of imbalances and debt-fueled spending is only going to lead to that which you most fear: massive liquidity withdrawal when the music stops and an inevitable tailoff in consumer spending, probably with deflationary consequences, followed up with an emergency rollout of the printing press. Deflation is what you fear if everyone stops spending, but spending is the wrong solution to the wrong problem. The problem all along, you see, has been our willy-nilly borrowing to fuel a pipe dream; the housing bubble was basically a ponzi-scheme that masked the true source of our borrowing binge (foreign creditors). We got here by way of our lack of prudent saving and investing in the first place.

If China’s economy implodes in the next six to twelve months, as may well happen also, it will be in no small part due to the gross overinvestment and economic distortion facilitated by the mercantilist Bretton Woods II arrangement that you paint as so benign. The economic models are always nice and neat, but in the real world things can get pretty ugly.

BWII is essentially a massive greed triangle between the debtor US and the vendor-financiers of Asia and the Middle East. Ultimately the blame will fall at the feet of the US for ringing up the charge card and assuming, wrongly as always, that it’s possible to get something for nothing.

Only three things can truly put a death spike in the consumer in America IMO. Housing deflation, stock deflation and energy input costs. Well, maybe a fourth in a personal foul of piling on. A 5%+ Fed Funds rate. Ala, the Paradox of Thrift. These things never came to pass over the last seventeen years hence betting against the consumer has been a bad deal. Now? I just don’t see a way out of a housing mess and that will likely cause a serious rash.

I agree.

Too bad it looks like all those things are in the cards… if businesses decide to sit on their cash hordes as tapped out consumers retrench, those pretty balance sheets won’t help much. Nor will they look as pretty when corporate profits head into decline.

Ironically, \$75 crude is in some ways a beast of our own making. If we hadn’t kick-started this whole mercantilist lending routine and jet-fueled it with housing bubble optimism, China wouldn’t have ramped up nearly as fast by selling us stuff on credit. From this perspective, Easy Al and the BoJ at least partially created the commodity boom alongside the liquidity bubble.

The Austrians may have been out in the cold these past few decades, but they’ve got one helluva big “I told you so” coming due.

42. BDG123 says:

Now quit your tantrum Trader75!! Or I’ll make you go live in China.

Oh, and it is not true we want our cake and want to eat it to. 6 million Americans work for foreign companies and many international deals have gone through post Dubai Ports.

Our wealth is growing faster than our current account deficit so that isn’t exactly a fact written in stone either. So, if your spending increases but your wealth increases at a faster pace as has been happening, does that mean you are going broke?

It all comes back to housing and equities potentially collapsing at the same time. That will possibly create a snowball.

And, what does China have to do with BW? They were never part of Bw or BWII. They don’t even have a convertible currency. China has created their own “China Woods” GREEDY manipulation.

As for Asia, if you are f*cking stupid enough as a country to continue to rely on the American consumer shoving more and more garbage down their gullet without getting your own house in order, you deserve the mess Japan went through and China will likely go through. We’ve given these countries a century to get their shit together. How much longer do we need to continue to consume and consume and consume before we hurl? It’s goddamn tiring to have to buy everything everyone ever made. Their glorious economic mirages based on our miraculous ability to woof more and more down. BW? Talk to the BOJ about their constant manipulations of currency to continue to have a favorable exchange rate to keep mercilessly jamming more and more shit down our throat. No. Asia will end up right where they belong. They never opened their economies to our goods and services because they never dealt with the painful transformations they needed to make in their domestic policy. Instead, they wanted to jam garbage down our throat ad infinitum. An unhealthy Nash Equilibrium?

Why did Japan suffer so much for twenty years? THEY DIDN’T HAVE THE WILL TO REFORM THEIR OWN HOUSE. INSTEAD, THEY TRIED TO KEEP DOING THE SAME THING OVER AND OVER AND OVER. RELY ON EXPORTS TO AMERICA RATHER THAN CLEAN OUR OWN STINKING MESS UP. China is no different and ultimately they will pay a similar price for repeating history unless they have some kind of miracle up their sleeve.

43. Lord says:

why not take advantage of the current govt set up whereby a majority can vote themselves free stuff and get the minority to pay for it

Well, that would be great improvement over the current situation where a minority control the government and use it reward themselves at the cost of the majority.

Average retirement savings for people in their 50s is \$150k while median is \$50k, meager indeed. The bottom half of the income distribution don’t even have accounts.

I doubt there will be any labor shortage as it is in the interest of the minority to import workers and keep down wage rates. A \$1000 a month may not be much but may be enough to provide a couple household servants.

44. T says:

You can make fun of Japan, but in term of outstanding liabilities we’re the deepest in the hole out of anyone — failing to save now for retirement is simply taking money out of the next generation’s pockets. Those of us under 40 are almost certainly going to see significant tax increases in our lives to pay for the unbalanced liabilities associated with the boomer generation in terms of retirement savings, health care reserves and social security.

It’s not like that money is being spent on productive investments like education or infrastructure. Buying a plasma TV does not create future GDP. Let’s not mistake consumption for investment.

Now quit your tantrum Trader75!! Or I’ll make you go live in China.

Have mercy now Br’er B, don’t throw me in dat ole Briar Patch! Anything but that! :-)

I pretty much agree with ya. Nothing is written in stone, we could still pull off a hail mary and keep things duct taped together for a while, but the odds of a housing / equity snowball are alarmingly high, considering they’re both tied to loss of confidence and liquidity withdrawal.

I also agree that Asia’s done gone and got themselves into some deep shit hitchin’ their wagon to John Q. Public’s star. But since they’re our creditors, maybe we be in some deep shit too.

46. Ralph says:

Don’t forget that we all have to contribute to pay off trillions of govt debt as well!

47. BDG123 says:

That is simply not true regarding Japan. While they have made progress in reform, they are still quite a messy situation. And, they have a boatload of debt and still a basically insolvent banking system that they keep promising to clean up. You need to recheck your facts.

48. jkw says:

When you say “spending money on foreign goods isn’t really a problem,” what you are really saying is that we can merrily rip off our trading partners by deliberately devaluing their dollar-denominated holdings, and thus get something for nothing in perpetuity. As the old saying goes, you can shear a sheep many times but you can only skin him once. When the dollar collapses, America’s trading partners will be skinned. And that will be a real problem.

Basically, yes, that’s how it works. Except we aren’t deliberitely devaluing their dollar assets, they are if they ever decide to sell them for something useful. Anyone stupid enough to manipulate currencies for a short-term benefit will lose out in the long run. The only problem this will cause for America will be inflation as foreign products become expensive enough that American workers are competitive again. Then we will rebuild our manufacturing and continue rolling along with higher prices. As long as we don’t cut our spending between now and then, we will manage to pull through until wage inflation catches up.

What are you proposing America’s trading partners are going to do if they get upset? They are already mostly refusing to buy products from us, so they can’t really threaten us with that. Will they refuse to sell products to us? That will be the inevitable consequence of currencies adjusting properly anyway. It will just drive American wage inflation, which will allow American workers to continue spending. It will also allow wages to catch up to housing so that the asset bubbles don’t have to pop.

I’m not claiming I like my proposal. I’m merely saying that it seems like the least painful way for things to go. Given a choice between inflation and deflation, I would rather have inflation. Retirement is inflationary because you spend without producing. Continuing to work is deflationary because you increase the supply of labor. Outsourcing and productivity growth are already more deflationary then we can handle, we don’t want baby boomers putting off retirement to make things worse.

The options are:

a) baby boomers work until they die, diluting labor’s power and causing a deflationary death-spiral depression

b) baby boomers retire at about 65 and cut back on consumption drastically, increasing the probability of a deflationary death-spiral depression

c) baby boomers retire at 65 and vote for benefit increases with tax increases to pay for them. Workers demand higher pay to cover inflation and tax growth. Corporate profits drop as they are squeezed by workers ability to buy things dependant on how much they are paid. Tax/wage inflation increases the chances of stagflation.

So the question is, with equities, houses, and most other assets overvalued, would you rather have inflation or deflation? The assets are pre-inflated, so they will just stagnate for a while if we get inflation. But if we get deflation, housing and other assets will plummet in a positive feedback loop making the deflation harsher. A deflationary soft landing is infeasible. An inflationary soft-landing is merely unlikey.

49. BDG123 says:

I totally agree. I just don’t buy this premise that China holds the cards because they a trillion dollars of our debt when our economy will generate 150-180 trillion dollars over the next ten years………….if the global economy doesn’t fall off of a cliff are just bearish for the wrong reasons. They only hold our debt because they are selling us so much sh*t. Gladly quit selling it to us and let us save for a while. The likely outcome is they will regardless of whether they want to or not.

I still like Trader75. :) I just tend to think we disagree on one point. Who holds the winning hand at the end of the day. Other than that, we are buddies of blathering and tend to agree on most things. I really don’t want you to move to China. How would we ever marry and have kids?

50. BDG123 says:

Except, you are too negative! Death spiral depression? Not out of the cards but you need to get a woman in your life. Only a guy who lives by himself would draw that gloomy picture.

So the question is, with equities, houses, and most other assets overvalued, would you rather have inflation or deflation?

I don’t think we really have much of a choice in the matter.

If inflationary expectations are allowed to lock in, i.e. if the fed voluntarily gives up its inflation fighting credibility, and everyone takes persistent wage inflation as a given, then you wind up with the threat of hyperinflation. The more momentum that ball gets, the harder it is to stop.

Alternatively, if the fed works to maintain its credibility by continuing to tighten, there is greater risk of the housing / equity deflation snowball that B spoke of… which, if it gets bad enough, could result in the ‘pushing on a string’ scenario in which emergency stimulus does nothing but further debase the currency as everyone hunkers down.

The problem with major imbalances is that their compressed timeframe for correction tends to be distinctly uncomfortable. Walking down the stairs and being forcibly hurled down the stairs are two very different things.

Again, the problem goes back to debt. We no longer have the ability to sustain a healthy correction–too leveraged for that–and so we worsen the problem by putting off the inevitable and making the situation worse.

The ‘keep spending’ solution is akin to a martingale roulette strategy. Eventually the bankroll runs out or the house cuts you off. What isn’t feasible is the notion that US wages could adjust fast enough without causing a major economic dislocation or inviting fears of hyperinflation. Not to mention the potential geopolitical consequences if China endures a deflationary bust.

The monster has already been created by past actions; from a probable outcome perspective the hope of avoiding a crisis, let alone a hard landing, should already be gone. What we have to do now is figure out how to best deal with the consequences of what has been wrought.

I still like Trader75. :) I just tend to think we disagree on one point. Who holds the winning hand at the end of the day. Other than that, we are buddies of blathering and tend to agree on most things. I really don’t want you to move to China. How would we ever marry and have kids?

Well I hate to disappoint you B but I’m already married; my 25 year old wife is hotter than Katie Couric, I thought we already established that :-)

Except, you are too negative! Death spiral depression? Not out of the cards but you need to get a woman in your life. Only a guy who lives by himself would draw that gloomy picture.

Believe it or not, I’m actually a happy go lucky kind of dude. From a personal perspective I don’t take things all that seriously. Just happy to be alive and kicking you know? Working barefoot and spending most of my time thinking and reading helps too.

p.s. as for who holds the winning hand at the end of the day, I’m not sure anymore. I think you’re right that isn’t China. But I’m not sure if it’s the USA either. Maybe Estonia has the nuts…

53. jkw says:

There has been non-wage inflation for a while now. We need some wage inflation to get things back in balance. Otherwise we will lose our middle class and our economy will fall apart. The trick would be allowing wage inflation while withdrawing liquidity at just the right speed to not allow any asset inflation. If we can somehow pull off that trick, we win. Otherwise, we get a hard landing. I’m expecting a hard landing, but wishing for a soft one.

54. Blissex says:

«The options are:»

Those are some of the options. But you have forgotten the one that is happening and will continue to happen:

d) Unlimited illegal immigration of young, hard working, poor, benefit-less, easily exploitable workers will rebalance demographics and sustain house prices, and keep citizen retired asset holders happy. Woe to those citizens whose profile looks like that of an immigrant though, unless they stand to inherit assets from their parents.

Of all people Greg Mankiw famously wrote a paper several years ago predicting a collapse in house prices in the 90s due to the end of the baby boom. Of course precisely the opposite happened, so another paper was done to figure out what happened, and that was illegal immigration. The government has all but stopped enforcing immigration law to reduce the bargaining power of low end wage earners and to prop up house prices, all to the benefits of middle class americans, who would otherwise be very upset by their stagnating wages.

55. Blissex says:

«4% after inflation is about 6-7% pre inflation sounds like equity returns — not something that someone who is 50 years old should have the majority of their retirement funds invested in.»

The 7% nominal returns is the figure used by the Republicans to promote individual social security accounts…

BTW, I would think it extraordinarily lucky to get 7% nominal over a 10-20 year period even from the stock market, *after costs*.

«A more realistic “real” rate of return for someone in the final decade or two before retirement is 1-3%,»

That is indeed more reasonable, because in the long term and over a very large number of people it is practically impossible to beat the expected real GDP growth rate, or the productivity growth rate. The top 1% of incomes have been growing much faster than GDP or productivity, but only by redistributing from the bottom 99%, and even that will eventually stop.

So those \$14,500 billion will grow at best at the GDP growth rate, or as you say something like 1-3%, if they are lucky, and ignoring costs (which can pretty huge). If you look at it like that, Social Security as it is now is a pretty good deal overall.

Given that 80% of workers have an income of less than \$70,000 and 40% of less than \$30,000 it would be very generous to assume that median retirement funds at 50 are around \$100,000; assume that median income is around \$50,000 for a 50 year old, that means around \$750,000 of income over 10 years, and assume that 10% of that is added to retirement funds. At 65, fudging things a bit, we can expect perhaps the retirement fund will have reached \$200,000 and then over twenty years one gets between \$11,000 and \$14,000 a year depending on real rate (2-3%) and duration (20-25 years). This probably nicely doubles the Social Security money, for around \$25,000-\$30,000 total per person income.

Expect to see many old folks spending 20 years eating pasta in crumbling houses, if they are lucky and own a house.

Actually the really lucky old folks will be retired government and local government workers with 80-90% final salary pensions, probably around 15-20% of all retirees.

56. alan says:

Without a strong manufacturing base, there is no middle class. The financial engineers can use smoke and mirrors to hide this fact for only so long.

57. Geneva says:

who holds the cards ?

The Swiss …… they always do

58. Lord says:

Here is a nice analysis of expected stock returns going forward, http://www.sscommonsense.org/page04.html
A real 4% is probably somewhat pessimistic as the population abroad entering into global exchange is growing rapidly and international returns will maintain higher returns than this, but they may well be lower than historic returns. Still, someone in their 50s, even in their 60s, should still have the majority of their financial investments in stocks. Their time horizon is too long and inflation too devastating to live entirely off the depreciating 1-2% real returns from bonds.

59. Craig says:

Okay Kids, where does capital come from?

As noted by BB, the U.S. has been running it’s spending spree on the SAVINGS of the rest of the world. We BORROW capital from THEM to fuel spending. (Mainly for their crappy products at Walmart). Capital follows the law of supply and demand. If we save, we lessen the cost of capital and we EXPAND. If we spend, as some here suggest, without sufficient savings, we turn capital into physical stuff like Walmart junk that is worthless when you walk out of Walmart, and capital costs us more.

Remember, less of something demanded drives prices up (interest rates go higher when there is less capital). MORE of something demanded drives prices lower (interest rates go down with increased supply of capital).

Folks, no matter how old you are there is no such thing as perpetual motion or something for nothing.

Money doesn’t just lie there “on the sidelines” in savings, it is the source of investment capital.
See here: http://www.hussman.net/wmc/wmc060710.htm

WHAT is it BB is raising the rates on? Capital.

If we SAVE, then we can supply our OWN capital that is not raliant on consuming Chinese (or Japanese) junk or on borrowing capital from foreign central banks of people that DO save.

A certain amount of spending is necessary of course, but does anyone here really believe we aren’t spending MORE than we make or produce? PULEESE.

As to the silly notion that spending drives the economy……sounds like some excuse my daughter would try to justify buying something really stupid to impress people that don’t know or care one bit about her. Are you guys like that too?

Spending is good when you spend less than you make.
It cannot drive an economy if it is fueled by DEBT.

Anyone here saying spending MORE than you make is good or sustainable?

THAT would be perpetual motion and THAT is impossible. Period.

Just shrink the spending idiocy to a personal level and see how it works. It CAN’T be any different for the collective whole than it is for individuals. That is, if it can’t work for you on a small scale, it is an even bigger disaster when applied to the entire country.

Saving and hence cheap capital, is the ONLY answer.

Well, there is one other……default.
Better known as bankruptcy.

That may well come to pass if we keep spending and don’t SAVE.

If we want to encourage a desired behavior, we have to make the reward as compelling as running up the credit cards on borrowed equity from our overvalued homes. That’s why savings should be tax free.

I also know most of you are too young to remember savings stamps and savings plans at school. We once had those, and cheap capital. Real capital from savings.

BTW, I’m a boomer. My home is paid for, I save everything I can, I carry no personal debt, and I don’t plan on scavanging off my daughter, grandchildren or any one else to take care of myself. So I save and invest. You better too or you are going to live in something like the post WWII British economy in the not to distant future.

60. Rich Slick says:

Well my math calculations weren’t wrong, the assumptions were skewed. So perhaps the article shouldn’t have been called DO THE MATH but rather DON’T MAKE ASSUMPTIONS.

My assumptions were based on the fact that we frequently hear that 80% of the wealth is controlled by 10% of the population. I’m not sure how it breaks the 14.5 trillion down but let’s apply that formula. 80% of 14.5 trillion = 11.6 trillion (the rich controlled portion) or ~2.9 trillion for average Joe. Now DO THE MATH. I was a little more conservative and used 3.4 trillion to be a little generous.

Also, I keep reading that the retirement numbers don’t factor in the Real Estate boomers have. I have a simple question: If there are 80 million boomers living in large expensive homes, who is going to buy them all at the high end price?

If 1/3 of the population is retiring and they want to downsize from a 400k home to a 100k home, does that mean that the other 2/3 will automatically have the money to buy a bigger more expensive home?

I would imagine that if everyone starts selling the prices will drop fast. Add to it that most boomers will likely retire from “cold” places like New York, Pennsylvania, etc to “warmer” states like Florida, Arizona, Texas then you can see how a huge real estate disaster is also looming in the future.

Let me sum it up for you the right way:

Person retires and creates a cascading effect of trouble
1. They don’t earn a salary (i.e. pay no taxes, no ss)
2. They don’t contribute to 401k (i.e. stock market)
3. Because they are retired, they start WITHDRAWING money from 401k (i.e. lowers stock market)
4. Because they are retired, they start TAKING Social Security benefits.
5. Because they are older, they start TAXING Medicare, Medicaid etc for medicine, heart surgery, cancers, etc.
6. Boomers realize that they don’t have enough money to live on, so this huge voting block (80 million) puts into office a bunch of high taxing socialist. Your taxes go from 20% to 40-60% (welcome to the new America).

Now as bad as all of this is, it gets worse because you need to factor in:

1. The US has HUGE trade deficits with world.
2. The US has HUGE government deficits (currently borrows four billion/month from foreigners to stay aflot).
3. We are now entering a period of high inflation and whatever savings you have are being eroded away right before those boomers retire.
4. At a time when more immigrants are needed to come in and fill the void, there is a great deal of immigrant bashing. The irony of course is that all the boomers will rely heavily on fresh young immigrants paying high taxes to help survive.

Now for the solutions:
1. Get rid of the Federal Reserve. These people have caused more problems to destroy the American economic system than have helped. What will kill seniors is fabricated inflation which doesn’t need to exist anymore.
2. I hate to say it but raise taxes now not later.
3. Cut benefits. I’d love to be able to cure everyone of all of their ailments but let’s get realistic and a little harsh. If you smoked all your life and now you have lung cancer then you don’t deserve healthcare for that particular disease. Sorry if it’s harsh but you have to draw the line somewhere.
4. Vote for politicians that make this disaster a priority that don’t spend all of their time on trivial issues (i.e. the pledge, darwin vs. creationism, flag burning – don’t these people have more pressing issues at hand?)
5. Have a backup plan to move out of the US (i.e. Costa Rica, Australia, South America, etc) in case of the worse case scenario.