|
|
The crux of any economic theory starts
off with the magic words “first assume that” and then using
dazzling logic follows an irrefutable happy conclusion. The real key to using
economic theory and logic is in the assumptions. Assume the correct
things about the world, and you have a chance of getting the outlook
right. Assume the wrong things, and any model will generate totally unreliable
garbage.
My experience in the business and
investment world over the last thirty five years has taught me a few things
about assumptions, so if you are interested in surviving the slings and
arrows of outrageous fortune, putting some good business policies in place is
crucial. Always assume nothing, verify everything, assume the worst
could happen and, if things can go wrong, they do and will. Even my
motto around the house “if it isn’t broke, I can fix that”
is based on experience. I have learned wisdom can be as simple as
substituting facts for assumptions.
As a baby boomer facing retirement down
the road, I can’t help but wonder whether there will be anything left
in the Social Security Fund and my personal investments by the time I need
them. I rely on assumptions when making my own investment decisions and
if they are not right, I could outlive my money and starve. Now, many
corporations and government pensions, insurance company annuities, and
retirement advisors rely on investment, economic, and corporate projections
that are all based on critical assumptions. The assumptions used by big
business and big government are all generated and reinforced by legions of
economists, accountants, actuaries and pundits, who, by the way, are all
bought and paid for by the government and powerful corporations. The experts
are paid very, very well. Why? Because, it seems, the experts are paid
twice. The first time is to figure out what an assumption needs to be to get
the result the corporation or government wants to hear. The second time
is to justify the assumption by creating up a bunch of bull to hand out to
the public. The bull in turn is fed to the public by reporters and TV
hosts who are also paid very, very well not to question the experts or
their assumptions.
It’s these bull assumptions I keep
hearing that hit me over the head and between the eyes like a two by
four. The biggest bull is that both corporations and state and local
governments assume their investment portfolios will grow an average of 8.5
percent a year. This assumption continues today, despite the fact that
10 year treasury securities have on average yielded less than three percent
over the last three years, and currently yield two percent. So, an 8.5
percent investment assumption on a safe asset is laughable and only one of
many assumptions about the present and future that might as well be from
Mars. Another such assumption is that banks can hold assets on their
balance sheet at cost and not what they are worth today, or that real
economic growth will be three to four percent a year for the next 10
years. One of the craziest assumptions, however, is that inflation is
contained and the money available for retirement will cover the future cost
of living. These are just a few on the list of unrealistic and hopeful
assumptions that stretches on and on. If you’re a Baby Boomer
like me, and fearful of the future, instead of looking at happy business and
government assumptions, perhaps we should all be looking at hard cold facts
and make decisions based on them, not fiction or hope.
For instance, even if the reinvestment
rate of investment in pension and retirement accounts was 8.5 percent,
pensions and retirement accounts are still under-funded by trillions of
dollars. Governments don’t want to tap taxpayers, and corporations
don’t want to contribute to those funds from earnings. Why?
Because it’s a mathematical fact that when you start with underfunded
pensions, and have core government interest rates as low as three percent,
virtually all of the defined pension plans (regardless of whether companies
and governments will be asked to actually step up to the plate and
contribute) are close to being bankrupt.
It’s also a fact that the Federal
Reserve has guaranteed to keep short-term interest rates near zero well into
2013 and beyond. Indeed, the Federal Reserve is running an overt and
knowing policy of keeping the rate of inflation well above the rate of
interest. For a saver or senior depending on a pension, this is not reassuring.
In other words, basing a retirement model on 8.5 percent investment returns
is about as realistic as assuming that pigs can fly. The government
also wants to change the nature and composition of the Consumer Price Index
to keep reported inflation down. Under-reporting inflation will give
Social Security and Medicare less money and save the US Treasury hundreds of
billions of dollars. But retirees are already short-changed by the
government price indexes because most of what retirees pay for is rent, food,
fuel, and other utilities that go up rapidly in price. Meanwhile, the
Consumer Price Index includes a lot of high-tech gadgets and games which show
price decreases because computers run faster and store more data. Much
of what is consumed is videos, games, and social networking. As I get
older, my problem is that I want to eat and drive somewhere, and not play
computer games or socialize with silly twits on Facebook. Over time,
Social Security will be forced to change its name to “Social
Insecurity” because cuts in retirement benefits are coming, and the
value of the dollars paid to retirees will drop because of inflation.
At my age, I’ve given up dreaming
of winning a Nobel Prize based on dazzling logic applied to delightful
assumptions. Instead, I have settled for simply trying to understand the
interplay of political reality smashing against the rock of hard economics
caused by older workers retiring faster than younger workers are entering the
labor force. In short, I just want to sniff out the bull that is being handed
out as laughable assumptions and twisted by economic logic into total
crap. I’m only looking for a “No Bull” prize in
economics, in a world where in print and on TV the bull never stops.
Richard Benson
|
|
