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What everyone who pays attention
already knows hit the front page the other day: Social Security will exhaust
its reserves by 2033. That's 3 years sooner than previously projected, and,
most importantly, a scant 21 years away for those hoping to retrieve some of
what they put in over the years.
The Social Security Administration
is kind enough to send out fliers occasionally letting us know how much of a
monthly check we can expect from the program we pay into all of our working
lives, depending on what age we decide to hang it up. Of course the folks at
Social Security make no promises about how far a dollar will go when the time
comes. And the present news would seem to cast some doubt as to whether any
checks will be coming at all.
The Wall Street Journal's
Damian Paletta writes,
The trustees who oversee Social
Security's two trust funds — one for disability benefits, the other for
retirees — said reserves for the fund that pays disability benefits
would be exhausted by 2016, two years earlier than projected last year. And
if the disability fund were combined with the larger fund that pays retiree
benefits, all reserves would be exhausted by 2033, three years sooner than
projected last year.
This makes it sound like there are
actual funds sitting there waiting to be deployed. Funds invested in, well,
anything. But of course that's not the case. Back in 1960, more than five
workers were paying into social security for every retiree. Now that ratio is
down to 2.8. People are living longer, and wages are not increasing at the
expected clip. So, the program is paying out more and collecting less than
planned.
What this all means is that people
had better be stuffing their 401k retirement plans and IRAs with as much
savings as possible. And not only that, individuals must make good investment
decisions. Mechanics, gardeners, carpenters, and computer jocks must not only
be good at their professions, but be money managers as well. However, since
the median 401k balance holds all of $13,000, future retirees better be spectacular
money managers and flawless speculators.
Not likely. In the words of Terry
Burnham, "markets are mean," and people are forced to navigate this
foreign world with "lizard brains." Speaking at the Socionomics Summit 2012
in Atlanta, the Harvard economics professor and money manager warned Social
Mood conferees that herding is normal in life and especially in financial
markets. And while our lives are made better by learning and perfecting
tasks, this learning does not work well for investing in financial markets.
As Burnham explained, Pavlov's
dogs, Skinner's pigeons, human investors, and monkeys are all the same:
reinforcement creates more persistent behavior.
The lizard part of our brains
pushes aside the cognitive areas when we make investment decisions.
Lizard-brain functioning was great when we had to track game or escape
physical danger to stay alive. But this part of the brain works against
success in the modern world, which as Burnham explained, "requires
effort toward abstract goals."
The implication is that
"Markets are irrational because of quirks in human nature," Burnham
explains in his 2005 book Mean Markets
and Lizard Brains.
In this very interesting book
Burnham explains that our lizard brains are pattern seeking and backward
looking, which again was handy when we lived in caves, but not so great for
managing our 401ks.
The fact is, without the constant
inflation of fiat money, people would (or have to) spend very little time
thinking about their money or savings. Squirreling a little money out of
every paycheck would suffice for retirement preparation.
But the modern world of
central-bank hyperplanning, hyperbailing,
and hyperprinting makes that impossible. In his
book The Ethics of
Money Production, Guido Hülsmann
says it is possible to protect one's savings from the government's inflation,
but not entirely, even if a person devotes lots of time to studying the
markets. To do so, "requires thorough financial knowledge, the time to
constantly supervise one's investments, and a good dose of luck. People who
lack one of these ingredients are likely to lose a substantial part of their
assets."
Hülsmann goes on to
point out that even those who can accomplish all of the above will not evade
inflation's impact of stealing time from them that would best be spent doing
things other than worrying about money and investments. This diligence to
personal financial matters
entails many hours
spent on comparing and selecting appropriate issues. And it compels them to
be ever watchful and concerned about their money for the rest of their lives.
They need to follow the financial news and monitor the price quotations on
the financial markets.
For the average Joe, the mere idea
of making money fires the dopamine neurons in his brain, and because (crazy)
people tend to herd, this leads investors to pile into the same investments
at the same time, which happen to be investments that have done well in the past.
Or in other words, investors gravitate en masse to investments that are
overpriced. Merely watching the green arrows on CNBC stimulates dopamine.
So when the Fed hit the monetary
gas in 2001, interest rates plunged and the lumpen investoriate collectively plunged into housing only to be
massacred by the end of the decade. Before that, Greenspan's Fed lubricated
the financial system thinking all kinds of things would go wrong at Y2K. The
money sloshed into Internet stocks and investors piled in just in time to
lose their shirts.
Dopamine neurons are stimulated
only if the rewards exceed the expectation. If investments work as planned,
even if the result is good, there will be no rush at reward. And when results
are less than expected, dopamine neurons are depressed — creating
immense regret.
As a real-estate developer told me
in the early 2000s, "interest rates are so low, I have to do
something." His brain was already feeling the dopamine tingle of
anticipated profits by hearing of the lower rates. As Pavlov's dogs salivate
at a bell that reliably signals food, low interest rates transformed
investors into Greenspan's and now Bernanke's dogs.
Bernanke's zero-interest-rate
policy has investors lunging for yield, buying junk bonds and junk houses.
"The rally in junk bonds extends an advance that began in early 2009 and
can be traced largely to the Federal Reserve's policy of keeping benchmark
interest rates near zero," writes the Wall Street Journal's Matt Wirz. "A pretty robust cottage industry has
developed and is absorbing [single family homes] at an incredibly fast
pace," Richard Smith, chief executive of Realogy
Corp., tells the WSJ.
To add insult to injury, Burnham
points out that people are "systematically overconfident. We are bad at
doing the calculations required to analyze investments, and simultaneously we
are unaware of our shortcomings." And if this isn't bad enough, Burnham
points out that numerous studies show that people "reveal themselves to
be proud. They are willing to lose money to retain their self-esteem."
Of course this all flies in the
face of the efficient-market hypothesis, which claims all market participants
are rational, and therefore all news is priced into particular investments at
any one time, and there is no such thing as a speculative bubble.
As he wound up his Atlanta speech,
Burnham had some sobering thoughts. "Financial markets are the watering
hole of society," he quipped. Like thirsty animals on the African
Savannah, humans are attracted to the speculative gains that financial
markets promise. But, stopping for a drink is likely hazardous to our
financial health.
Natural-resource-investing guru
Rick Rule is fond of saying what stands in the way of investing success lies
to the right of an investor's left ear and to the left of their right ear. Or
as Pogo
puts it, "We have met the enemy, and he is us."
Professor Burnham says flatly,
"Investors can have dopamine or money, but not both."
The government's control of the
printing press and its perpetuation, until recently, of the hoax that social
security is their actuarially sound retirement plan, has created a generation
of Americans that will be entirely dependent on the federal government in
their old age. As mean as markets are, the citizenry will find out the
government is much meaner.
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