Simon Black [firstname.lastname@example.org]
Sovereign Valley Farm, Chile
A few weeks ago the Board of Trustees of Social Security sent a formal letter to the United States Senate and House of Representatives to issue a dire warning: Social Security is running out of money.
Given that tens of millions of Americans depend on this public pension program as their sole source of retirement income, you’d think this would have been front page news…
… and that every newspaper in the country would have reprinted this ominous projection out of a basic journalistic duty to keep the public informed about an issue that will affect nearly everyone.
But that didn’t happen.
The story was hardly picked up.
It’s astonishing how little attention this issue receives considering it will end up being one of the biggest financial crises in US history.
That’s not hyperbole either– the numbers are very clear.
The US government itself calculates that the long-term Social Security shortfall exceeds $46 TRILLION.
In other words, in order to be able to pay the benefits they’ve promised, Social Security needs a $46 trillion bailout.
That amount is over TWICE the national debt, and nearly THREE times the size of the entire US economy.
Moreover, it’s nearly SIXTY times the size of the bailout that the banking system received back in 2008.
So this is a pretty big deal.
More importantly, even though the Social Security Trustees acknowledge that the fund is running out of money, their projections are still wildly optimistic.
In order to build their long-term financial models, Social Security’s administrators have to make certain assumptions about the future.
What will interest rates be in the future?
What will the population growth rate be?
How high (or low) will inflation be?
These variables can dramatically impact the outcome for Social Security.
For example, Social Security assumes that productivity growth in the US economy will average between 1.7% and 2% per year.
This is an important assumption: the faster US productivity grows, the faster the economy will grow. And this ultimately means more tax revenue (and more income) for the program.
But -actual- US productivity growth is WAY below their assumption.
Over the past ten years productivity growth has been about 25% below their expectations.
And in 2016 US productivity growth was actually NEGATIVE.
Here’s another one: Social Security is hoping for a fertility rate in the US of 2.2 children per woman.
This is important, because a higher population growth means more people entering the work force and paying in to the Social Security system.
But the actual fertility rate is nearly 20% lower than what they project.
And if course, the most important assumption for Social Security is interest rates.
100% of Social Security’s investment income is from their ownership of US government bonds.
So if interest rates are high, the program makes more money. If interest rates are low, the program doesn’t make money.
Where are interest rates now? Very low!
In fact, interest rates are still near the lowest levels they’ve been in US history.
Social Security hopes that ‘real’ interest rates, i.e. inflation-adjusted interest rates, will be at least 3.2%.
This means that they need interest rates to be 3.2% ABOVE the rate of inflation.
This is where their projections are WAY OFF… because real interest rates in the US are actually negative.
The 12-month US government bond currently yields 1.2%. Yet the official inflation rate in the Land of the Free is 1.7%.
In other words, the interest rate is LOWER than inflation, i.e. the ‘real’ interest rate is MINUS 0.5%.
Social Security is depending on +3.2%.
So their assumptions are totally wrong.
And it’s not just Social Security either.
According to the Center for Retirement Research at Boston Collage, US public pension funds at the state and local level are also underfunded by an average of 67.9%.
Additionally, most pension funds target an investment return of between 7.5% to 8% in order to stay solvent.
Yet in 2015 the average pension fund’s investment return was just 3.2%. And last year a pitiful 0.6%.
This is a nationwide problem. Social Security is running out of money. State and local pension funds are running out of money.
And even still their assumptions are wildly optimistic. So the problem is much worse than their already dismal forecasts.
Understandably everyone is preoccupied right now with whether or not World War III breaks out in Guam.
(I would respectfully admit that this is one of those times I am grateful to be living on a farm in the southern hemisphere.)
But long-term, these pension shortfalls are truly going to create an epic financial and social crisis.
It’s a ticking time bomb, and one with so much certainty that we can practically circle a date on a calendar for when it will hit.
There are solutions.
Waiting on politicians to fix the problem is not one of them.
The government does not have a spare $45 trillion lying around to re-fund Social Security.
So anyone who expects to retire with comfort and dignity is going to have to take matters into their own hands and start saving now.
Consider options like SEP IRAs and 401(k) plans that have MUCH higher contribution limits, as well as self-directed structures which give you greater influence over how your retirement savings are invested.
These flexible structures also allow investments in alternative asset classes like private equity, cashflowing royalties, secured lending, cryptocurrency, etc.
Education is also critical.
Learning how to be a better investor can increase your investment returns and (most importantly) reduce losses.
And increasing the long-term average investment return of your IRA or 401(k) by just 1% per year can have a PROFOUND (six figure) impact on your retirement.
These solutions make sense: there is ZERO downside in saving more money for retirement.
But it’s critical to start now. A little bit of effort and planning right now will pay enormous dividends in the future.
Neither this email nor content posted on the website SovereignMan.com is intended to provide personal tax or financial advice. Before undertaking any action described in this letter, financial or otherwise, you should discuss your options with a qualified advisor– tax accountant, financial planner, attorney, priest, IRS auditor, Bernie Madoff, etc.
Blacksmith Global Ltd.
Publisher of Sovereign Man
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Singapore, Singapore – No State 049712
by Egon von Greyerz
Fake money has created a totally uneven playing field for most ordinary people.
Money used to represent a medium of exchange that would facilitate bartering. Instead of exchanging goods or services, people would receive a piece of paper that was equal to the value of their goods or services. This was initially an honest system when for each service or goods offered there was only one bank note issued. Eventually the banker started to cheat and issued a lot more money/paper than the counter value produced in kind. And that was the beginning of money printing. It just became too tempting and convenient for governments and bankers to simply create more money since nobody would really know. So if the value of a day’s work or a pig were both say $100, the money or paper issued for this should be $100 for each. But gradually governments/banks would issue more and more paper with nothing produced in return. All banks today lend at least 10x the money deposited so for every $100 received $1,000 is leant. But the leverage can be much greater like Deutsche Bank which is leveraged nearer 50x.
The effect of this money creation is that the $100 pig will eventually cost 50x more or $5,000 for the same pig. The pig hasn’t gone up in price since there is no scarcity of pigs but the money has instead gone down in value to 1/50th. The same for a day of labour. The man who previously received $100 per day now gets $5,000 for his work. He is not working harder and the price of labour has not gone up in real terms. But the value of money has gone so he needs to work one day to buy a big which now costs $5,000. I do realise it is a very simplified explanation but in essence, it is the way the corrupt monetary system works.
And this is how governments destroy the value of money. As they mismanage the economy and can’t make ends meet, they just issue more paper which has zero real value since it just lowers the purchasing power of money.
The value of paper money has been totally decimated in the last 100 years since the creation of the Fed in 1913. The chart shows how paper money has declined in relation to “real money” which is gold. All major currencies have declined 97-99% against gold during this period. So there is only 1-3% to go until they reach ZERO. But from here to zero is another 100% fall which will be disastrous for the world and involve an economic collapse as well as hyperinflation.
In a final attempt to save the world governments will print unlimited amounts of money. This is what will make paper money totally worthless and reach zero. This is of course nothing new in history. Governments have always done it. The Roman did it and many governments since. I don’t know how many times I have quoted Voltaire in the last 17 years but it is worth repeating what he said in 1729:
“PAPER MONEY EVENTUALLY RETURNS TO ITS INTRINSIC VALUE – ZERO”
The problem with money printing is not just that it destroys the value of paper money, as creating money out of thin air also creates a totally uneven playing field. To produce goods or services requires a lot of hard labour for ordinary people. But governments and bankers have the upper hand because they just need some electricity which allows them to press a button to produce money. And this money that they produce has the same value that ordinary people struggle to earn.
We are now not far from the point when the bubbles in stocks, credit and property will collapse. This will lead to a final futile attempt by governments to save the world by printing unlimited amounts of money. At that point, normal people will finally realise that the money they are holding is totally worthless. This will lead to protests, attack on government and bankers as well as social unrest.
In spite of a small move in the last few days, many holders of precious metals are getting restless. This is totally normal since we have seen a 6 year range of $150 above or below the June $1,220 bottom.
I often get the question if the paper gold manipulation will go on forever as seems to be the case since 2013. My very firm belief is that we are likely to see the end of this consolidation period right now. During the autumn of 2017, gold is likely to resume its uptrend to eventually much higher levels. That next strong uptrend in gold will also eventually break the paper gold market.
The reasons for the coming move are manifold. The risk situation in the world are more critical than ever both economically and geopolitically as I have outlined many times in my articles. Also, the supply situation physical gold is very tight. All the mine production of 3,000 tonnes are easily absorbed and no more can be produced.
In my recent audio interview with King World News I explain this in detail and that we have never seen sellers of physical gold in quantity and that bigger wealth preservation buyers are now buying again. We are likely to see many surprises in the coming months.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG