Reaching the Point of Insanity

Reaching the Point of Insanity by Rory, The Daily Coin

As we have been reporting, pensions, of all types, are beginning to show signs of stress and strain combined with out-right failure. You can call it what you wish but when a fund either stops paying out as it was originally designed or cuts benefits by 40+% that is a failure/default. The mainstream/presstitute media can paint the picture however they wish, it doesn’t change what the people are experiencing on the ground.

As QE, ZIRP and NIRP have now worked their way through the global system the impact on pension funds, most of which are heavily vested in the bond markets, are feeling the pinch. How can a pension fund create more wealth for it’s clients in a zero interest rate world? How can it create wealth when some of the clients funds are actually being stolen from the fund? There is no such thing as “Negative Interest Rate Policy”, this is merely the long way of saying “theft”. If you purchase an investment instrument and you are told “invest $10,000 and when the instrument matures, in 5 years time, you will have only lost $500. We’ll pay you back $9,500” This is the simple description of “Negative Interest Rate Policy”. Does that sound like theft or does that sound like a wise investment strategy?

We have documented, as recently as March 15, the disaster that is now coming into full view. With more and more people retiring everyday, with a major upswing coming over the next decade, these funds and their underperforming assets, will begin imploding in earnest. Math does not lie, unless it is being calculated by the government. Real math never lies, just like gold.

Daniel Amerman, points out the coming crash in the Social Security and Medicare system. The Social Security ponzi scheme was raided by the Clinton regime in the late 1990’s and early 2000’s. The system has been busted, and is an off-balance sheet liability for the federal government, for, at least, the past two decades. Just like our national debt it can not be fixed, re-funded or otherwise do anything other than implode. Once again, math doesn’t lie unless the government is doing the calculating.

US NATIONAL DEBT AND THE FUTURE OF INTEREST RATES

The easiest way to talk about financial repression is to look back at the classic financial repression period of roughly 1945-1970, when all the developed economies in the west were engaged in financial repression. In this case, financial repression means forcing negative real interest rates, which is how they escaped from very high government debt levels relative to the economy the last time we were in this situation. Many things today are different from that time, and the difference is that when financial repression was occurring the first time, what was happening was that the baby boomers gave us a tremendous number of workers producing real goods and services, which gave the the economy a boost and helped get government debts under control.

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The difference this time is that the boomers are retiring, and the expenses of paying for them are about to get far more expensive. You can see that we have a tremendous increase in projected benefit payouts. You take the entire US government expenditures right now, and just paying out anticipated social security and medicare that so many boomers are going to be collecting, we’re expecting to be adding another trillion dollars per year by 2024. We have this tremendous increase in cost at the same time that we’re starting with a $20T national debt.

There are a number of different ways that social security and medicare costs can be effectively reduced by nicking it in small little ways that reduce overall payments for everybody substantially over the years to come. In the US, social security payments are not tied to the CPI, but a different index that tracks wages that increases at a slower rate than overall consumer prices.

HIGH DEBT, SOCIAL SECURITY & MEDICARE COSTS

The key point is that we can’t really look at financial repression in the post-WW2 example because it’s fundamentally very different. They used financial repression to hold the debt level in inflation-adjusted terms for a 25 year period. We went from the national debt exceeding the total size of the economy to being under 30% of the size of the economy, but they weren’t facing this tremendous challenge we are with benefits costs. Because of that, the impact on investors and anyone who is expecting social security or medicare benefits means things have to work differently this time around.

We know for a fact that in the coming years we’re going to have this force that’s getting more powerful every year that we’re just not used to dealing with. We have twinned unprecedented situations: a $20T debt and much higher social security and medicare costs on the way quickly, and those two are happening at the same time.

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When you look at these, the key column is net interest which is exploding upwards. It doesn’t happen instantly because the weighted average life of the debt outstanding is 5.8 years, so it takes a number of years for it to actually reflect in the interest payments going out. What would happen is that we’d still have this surge in the deficit that’s going up almost dollar for dollar with the net interest payments. If you look at the overall impact on the economy and total governmental debt, what economists usually do is compare the size of the government debt to the economy, and you can see that the debt crosses the size of the economy by the mid 2030s and accelerates from there.

BENCHMARK OF “INSANITY”

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We define insanity as if benefits and interest payments consumes all government taxes and every other dollar of government spending has to be borrowed. By the 2020s, we’re more than halfway there, and in that dangerous yellow zone that could shift at any time.

From AC3, with benefits being paid in full, the net interest column has been negated. But now the problem is in the net benefits column, where the deficit is shooting up out of control again. You can see how the red line is pulling the yellow line up step by step, and by the time it reaches 2039 the annual deficit exceeds all normal governmental spending.

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We have two entirely independent compelling major financially problems out there. There’s the $20T debt being held in check by some the lowest interest rates in history, and we also have the tremendous increase in social security and medicare payments that’s going to hit soon. The problem is that in reality, we have both of these hitting us at the same time.

AD3 shows what would happen if we return to historically accurate interest rates. It takes some time for it to be reflected, but we still go from $400B in net interest payments to almost $2T at the same time that we have net benefits almost doubling. When those two hit together, it’s like we have two exponential series hitting each other simultaneously and reinforcing it. If you look at AD15, you see that we’re in the insanity range in under ten years. The future national debt, the future social security and medicare, and the future interest rates are all intertwined.

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GOVERNMENT REACTION

The point is not to say these scenarios will happen, the point is that this will happen if we had normality in the same way most people are building their assumptions when it comes to long term retirement planning. People are expecting to get their benefits in full because that’s what the government has assured them. They’re looking for long term historical returns in terms of investment allocations, and the point is that if everyone’s expectations were met simultaneously, then the country’s very quickly in the insanity range.

Even with 2% economic growth rate, you can stay in the green the entire time. You can do that with interest rates, you can do that with benefits, you can do that prioritizing interest rates over benefits, you can do it prioritizing benefit changes over interest rates, you can do it with tax changes, and you can do it with inflation. All of these are valid ways of staying within the range.

If you look at paying everything with taxes, the degree taxes would have to rise is shocking. This would be very difficult politically to do. Part of the appeal of financial repression to the government is that there is virtually no political cost to this. People pay personal cost in their lives, but this is generally not understood by the voters. Some of the methodologies of staying in the green are far more politically palatable than others, so we’re more likely to see those used and those are the ones where individuals need to have their defenses in place for. Every single one of these possibilities for staying in the zone has  very broad effects on all investment categories.

Much depends on the specific methods being used and the exact approach the government takes. Bonds in general are not a good idea during financial repression, though there are some time periods where they could be a good investment for a period of time. Real estate, gold, silver, and things like that are good investments.

There is very much a direct personal cost for savers, and working in a different way but related, a direct personal cost for beneficiaries. Source

With the economic meltdown in 2008 everything changed. The global economy imploded, went completely bankrupt and the only thing that has been keeping it propped up is a mirage created by the Federal Reserve, European Central Bank and the Bank of Japan. This criminal banking cabal has been creating currency, giving it to the zombie, bankrupt, too big to jail banks since 2008. If that stops, the truth would be revealed.

Real wages have been flat to falling since the 1970’s. Real jobs since the passing of NAFTA, another financial weapon unleashed by the Clinton regime combined with the passing of Obombacare, have been completely eviscerated from the landscape. We are left with a part-time, retail, service job market that doesn’t produce any new widgets nor any good paying jobs. If there are no good paying jobs how does Social Security collect the funding necessary to pay benefits to those that have already paid into the system? A ponzi scheme only works so long as their are new suckers, I mean citizens, that can have their wealth transferred to the people that came before them. The numbers no longer work as the good paying jobs are gone and real wages have been flat for 40+ years.

People really need to reconsider their future and consider taking charge of their wealth as these criminal enterprises are going to awaken to reality in the not to distant future. Some of the pension funds have already experienced their “come to Jesus” moment. How much longer should we sit idly by and watch our future be stolen?

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The Daily Coin

Rory Hall, The Daily Coin. Beginning in 1987 Rory has written over 1,000 articles and produced more than 300 videos on topics ranging from the precious metals market, economic and monetary policies, preparedness as well as geopolitical events. His articles have been published by Zerohedge, SHTFPlan, Sprott Money, GoldSilver, Silver Doctors, SGTReport, and a great many more. Rory was a producer and daily contributor at SGTReport between 2012 and 2014. He has interviewed experts such as Dr. Paul Craig Roberts, Dr. Marc Faber, Eric Sprott, Gerald Celente and Peter Schiff, to name but a few. Don't forget to visit The Daily Coin and Shadow of Truth YouTube channels to enjoy original videos and some of the best economic, precious metals, geopolitical and preparedness news from around the world.