“The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

“Annuities generally guarantee income until the retiree’s death, and often that of a surviving spouse as well. They are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year, David Certner, legislative counsel for AARP, said in an interview.”

Now ostensibly, the plan to offer an annuity option for 401(k) plans will seem sensible. But don’t be fooled.

This is the beginning of a money grab by the Feds for the $3.6 trillion in assets held by U.S. 401(k)s. The Feds need that money to finance the deficit. This is where some of the money to fund the deficits may come from, answering a question we asked earlier in the week. What you can’t take, you’ll have to print.

But right now, the Feds can’t just take that 401(k) money. Well, they could. But it would crash stocks and infuriate the public, leading to some civic violence. What’s more, it would feel like theft as well as looking (and being) like it. So they have to dress the plan up as something that’s better for savers.

They’re trotting out the idea that a defined benefit pension plan is better than defined contribution plan (which is true, if it’s funded well). A defined benefit plan guarantees you income in your old age years. A defined contribution plan (what we have now) just guarantees money flows into the stock market (which is good for the financial services industry, but don’t guarantee you’ll have any money when you really need it later in life).

The U.S. Treasury Department and the Obama administration are exploring ways to encourage U.S. savers to buy more annuities or investment vehicles composed of “safe” assets. What constitutes safe? Why 30-year U.S. government bonds of course! Thus, the government can encourage people to buy what the Chinese and the Japanese and most other U.S. creditors don’t want to touch any longer.

The trouble with an annuity or 30-year bond is that you get crushed by inflation. In principle, it’s not different that a zero coupon bond. You get your nominal investment back upon redemption. But you are not compensated for inflation and your money is tied up, instead of working harder for you elsewhere.

It’s obvious what the Fed’s get out of this: a ready source of new funds to buy their bonds. This kicks the can of unsustainable deficit spending down the road a few months, or perhaps a few years. But it doesn’t change the fundamentally destructive path of U.S. fiscal policy.

What it does tell you is that mischief is afoot among the wealth stealers of the modern nation state? Faced with a failed funding model, they are beginning their cash grab. This takes the form of higher taxes. But the big bounty is the retirement savings of millions of Americans.

This solves the problem of having to sell the debt to foreign investors. And it solves the problem of having to make tough budget deficits. Just issue more debt and make the super funds buy it with your money.

If you think that’s balderdash or won’t happen, you’re being naïve. It won’t happen overnight. But it will happen gradually. It’s evolving towards that already. If they can’t get it through tax or royalty revenues, the tax posse will get it by any means necessary, which means your super assets are an obvious target.

Alarmist? Irresponsible? You decide. But we can see the evolution of this as clear as day, even if saying it in public is bad form or taboo. But now is the time to say the taboo things.

Regards,
Dan Denning
The Daily Reckoning Australia

January 18, 2010

Will the Feds Fund Deficits with 401(k)s? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I even did the usual due diligence and wandered around a bit at night to get a truer sense of how safe the neighborhood really was. Thing is, a cursory walk-through cannot substitute for actually living in a place. For example, I’m sure even downtown Baghdad has its moments; you’d have to stick around a bit to see exactly why the property values are so low in places. I’ve since come to know just how unsettling this otherwise lovely neighborhood can be in the dead of night. I’d heard endless stories of how rough Baltimore was (“Haven’t you seen The Wire?”) and I knew it looked bad on paper, but what I’d seen of historic Mount Vernon assuaged any doubts…until I actually moved in…

My last neighborhood in New York was historic as well—in fact, last year it became NYC’s newest designated historic district—but it felt safer by an order of magnitude. I would often venture out to the local 24-hour grocery stores or all-night food carts at 2 or 3 in the morning. There were many other times I couldn’t sleep in the hours past midnight and would walk the ten blocks to the 24-hour gym. I can’t remember once feeling the least bit afraid while doing so. New York has had the distinction of being the safest big city in America for a while, a phenomenon I’ll address in a bit. Baltimore’s not nearly as big…nor nearly as safe.
Ironically Baltimore does resemble the fictional New York in the movie adaptation of the classic Richard Matheson novel I Am Legend. For those of you who didn’t catch that Will Smith vehicle, the plot in the movie is as follows: a treatment that was supposed to cure mankind of an age-old plague becomes a virus that transforms over 99% of humanity into violent, blood-sucking, mindless monsters.

I hope you see where I’m going with this.

Federal Ghetto-ization

Baltimore—like a host of other old central cities in the U.S.—has for the past couple of generations been an ulcerating hole surrounded by affluent towns where the sane people with money would rather live. The ostensible reason is the flight of the pale, pale middle class while those with less access to capital—and who tan easily—remained stuck in the middle. Most folks take the decline of the American city as some sort of mysterious but certain given…like ageing and death…but I still point the finger of blame squarely at government.

Government at all levels—local, state and federal—is directly responsible for hobbling our cities, draining them of their human capital and mentally and economically crippling those that remain. And all the programs to “help” the cities after the initial wounding just wound up making things worse. Government created the problem and all its supposed balms turned out to be poison. Of course, this is government we speak of…so we really shouldn’t be surprised. Friend Jim Kunstler has made the point that the suburbanization of America was the manifestation of the will of the masses to escape the nightmare of the industrialized city…and that’s true…but it was the federal government that greased the wheels on that particular road to hell. They built the highways and subsidized the housing tracts miles from the daily necessities of work and commerce. They knocked down the neighborhoods in the old core cities and replaced them with housing projects where the poor devolved into listless and violent wards of the state.

I suspect that market forces would have worked to keep the cities and suburbs in balance, that they would have fostered the co-existence of multiple modes of transit between them, which in turn would have kept center cities and surrounding towns both distinct and compact, both internally walkable and efficiently linked by road and rail. Instead, the federal government catered to the fantasy that no one should ever have to walk again anywhere. In turn the built environment transformed into a place where no one can ever walk. A byproduct of all this is that the land between distinct urban zones that used to be devoted to local food production (“farms”) has been gleefully paved over to cater to the auto-dependence fetish.

Allow me to anticipate the criticism that I’m just a Luddite and an anachronist in love with some romantic notion of pre-automobile life…and that I’m nurturing an unreasoning but increasingly popular hatred of suburban icky-ness. What I am is a realist. Our living arrangement is an affront to human instinct…and it was never sustainable. We are returning—as things do—to the mean. We are going to be inhabiting our cities in a way more in line with how other humans have throughout history…and in the process we are going to be reversing the federally-funded ghetto-ization that has all but killed our core cities.

The Middle Class Comeback

The neighborhoods of Baltimore clinging to the Inner Harbor are actually quite wonderful…but I defy anyone reading this to venture for a stroll in the other two-thirds of the city. The resettlement of the city by people other than welfare-recipients, hustlers and muggers is well underway in those more pleasing precincts along the water, but the rest of the place remains marginal at best and downright seedy and dangerous at worst. The reason I felt so safe in my New York neighborhood and many others in that vast conurbation (with the notable exception of East New York and a lot of the South Bronx) was that New York has been experiencing massive re-colonization by middle and upper class people for years.

My own neighborhood in Baltimore is a curious case; it’s a nice collection of blocks just atop the so-so downtown and that inner ring around the water. It straddles North Charles Street which bisects the city into east and west; it’s surrounded on three of its sides by a ring o’ ghetto. The more disruptive inhabitants of that ring often wander on through. It’s especially bad after sundown. It’s best not to venture out too late at night, but if you do, travel in a group, stay on the main drag and avoid eye contact. In the movie referenced above the monsters come out in hordes at night and the hero has to board up his home and lie completely still till morning lest they find and devour him. Yet he could move about in the daylight in relative safety while the monsters hid from the sun. I know how he feels.

Reality has begun to trump the vagaries of energy excess, government interference and government misallocation. The middle class is choosing to move back to the cities, not because of D.C. diktat, but because of market forces. The lifestyle the feds sought to encourage with their highways, sins of railroad omission and their vigorous corralling of the poor within city lines…all of that is simply becoming unaffordable and therefore unsustainable. It’s all going away. Our cities will—must—become places where everyone can live again without having to get into a vehicle on a regular basis…or constantly worry about getting assaulted. The presence of honest citizens going about their business and doing honorable and necessary work will make the city streets much safer again. When the purposeful outnumber the idle, the tide will have turned. Lord, haste the day.

Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder

December 05, 2008

Thank the Government for the Ghetto was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.