Yet more proof that inflation is taken for granted

http://online.wsj.com/article/SB10001424052748703315404575250822189252384.html?mod=WSJ_Opinion_LEFTSecond

In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state’s history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. […] What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers’s own employees would benefit from the pension increases and (5) members of Calpers’s board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.

Just to be clear. Flagrant non-disclosure has happened in the private sector and the sleepy SEC and US Attorney though aware have done nothing about it (Fanni Mae and GM as just two examples off the top of my head.)

But what this article highlights is how deeply ingrained in the psyche of people inflation is. Few people alive today can countenance the possibility that inflation may stall or, Ye Gods!, turn negative. During the inflationary boom years, projections only took into account yet more inflation ad infinitum without ever so much as pausing to contemplated anything remotely resembling a pause in the inflationary dynamic.

So it is that today in an environment of imploding asset prices, declining individual wealth, increasing tax burdens but declining tax revenue things like pension plans are being blown out of the water. The same goes for endowment funds, insurance funds and sundry funds whose projected returns were all calculated basis a blind sided, one way interpretation of inflation.

The piper is now at the door and he refuses to play till he gets paid… thus the rats (debt) are now festering in our communities.

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One Response to “Yet more proof that inflation is taken for granted”

  1. David W. Lincoln Says:

    As long as banks, hedge funds, pension plans, insurers, and whatnot can take their sweet time in revising their balance sheets, the hurricane will continue to swirl over water gaining strength.

    It’s like investing $100 in something, and then you want the money back, and the people who took the money said, “You owe us $100, because of things beyond our control”.

    That explanation is as bereft of truth as the current situation regarding the updating of balance sheets.

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