Oh boy!… here we go (401Ks and your retirement)

What a mess!



The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.”

In case you are unable to see what is happening, this is an attempt at propping up the treasury market. Remember when I wondered who might be able to absorb $1.8Trillion in new US debt in this comment? It looks very much like it is going to be you.

Very succinctly: in a fiat monetary system, government MUST manipulate interest rates lower so that it may borrow progressively more in order to satisfy it’s spending requirements and boost nominal GDP. But interest rates cannot go below zero (ok, the real interest rate may be below zero as it has been in the recent past but that’s something for another time). Once at zero, government total outstanding debt is horrendous so that, at that point, it becomes vital for government to keep interest rates low; and I mean VITAL.

FRED Graph

BUT!!  As other sovereigns are at once leery of the financial health of other sovereigns AND have to content with many of the same problems that their peers have to contend with, they may no longer be willing or able to purchase each other’s sovereign debt as contemplated by a floating exchange rates mechanism.

If nobody is buying sovereign debt, then, perforce, interest rates would rise naturally.

But in a situation where the state is overburdened by debt, a rise in interest rates spells bankruptcy.

So! What are you going to do?

The only way to keep interest rates low is to induce someone to keep buying your debt.

But if inducement is not working, then you force them.

And who can government force to do that short of going to war with other nations?

Why! It’s the person reading this note.

Interest rates at historic lows have only one way to go… and that is up….
Of course, if interest rates should rise as surely they will because the market will ensure they will, all the money invested in treasuries and bonds at this particular stage of the interest rate cycle, will evaporate.
Government “encouraging” you to opt for annuities is a boondoggle. It is a two pronged boondoggle come to that. Your savings go to the insurers (and by the way the government is already the largest insurer in the land as they own AIG) and the insurers must plow this money in Treasuries and Bonds in order to satisfy the annuities stream.

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One Response to “Oh boy!… here we go (401Ks and your retirement)”

  1. …aaand here we go again… (401K and your retirement funds) « Guido's temple of the absurd Says:

    […] From the January 2010 post titled – “Oh boy!… Here we go (401Ks and your retirement)“ […]

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