If I have it right, government interest rates are around one half of one percent. The banks are paying the same. When you examine it, why in the world would anyone put money in a bank for retirement? The incentive is not there.
Then at the same time a homebuyer can purchase a home with little down and at an interest rate of 4 percent for 30 years. With core inflation at 2 percent (by government accounting calculations), the banks are netting about 2 percent on a home loan. Do you wonder where the banks get the money to loan? Individual deposits are considered by the bank as short term accounts, while home loans are long term commitments. As rates rise money goes the higher interest rate, like it did in the 1990 and brought about the Saving and Loan collapse.
My experience with age, shows the home I grew up in rising from $27,000K in 1964 to 125,000 in 2004. A brand-new car in 1969 was $3,000 and in the year 2000 about 20k. And I can bore you with cigarettes at 23 cents a pack in 1962 and $4.50 in 2000.
CalPERS the California Public Employees Retirement System has lowered their estimated return to the retirement fund this year from 7.5 percent to a projected 7 percent over the next 3 years. The Mercury News claimed that they are lucky if they are earning six tenths of one percent on their investments. The state of California has to make up the shortfalls for the pension fund which is around 100 million this year. The trouble is, the accountants misplaced a couple of zeros that could bankrupt California’s budget.
Then we have the Fed raising interest rates. With a national debt of 21 trillion dollars, a quarter point increase in the interest rate increase jacks up the governments annual interest payments by about 52 billion dollars. The yearly budget for California is a little more than three rate hikes. We are not talking nickels and dimes here.
What can we discern from all of the information presented? We can probably infer that in 40 years everything will have increase in value or cost by a factor of 10 and maybe higher to even 20 times its cost today. Calculated inflations rates will be hopelessly grossly understated because of Congress linking benefits to the rate of inflation. Our interest rates will be determined by the government’s ability to make the payments on the national debt. Rates higher than 8.5 percent make our government insolvent.
Our retirement income programs are in a horrible state with the very low interest rates that have been experienced over the last 12 years. Their failure was the inability to see the Fed’s pushing interest rates to zero. All sorts of insurance companies are at risk here also. The interest received on premiums held by them, helped them give you a better deal on car, health and life rates. And that’s gone away.
Here is where the conundrum lies. The rule of 72 says that if you divide the interest rate into it, you get the number of years for your dollars to double. Right now, that is 144 years. My rule of inflation, states that the cost of everything will increase by a factor of 10 in 40 years and you can bet your bottom dollar on the certainty of that happening.
It is pretty easy to guess that all sorts of taxes will increase. A majority of if will be in the increased cost of the item. Also, look for a decrease in welfare payments; nothing in, you get nothing out. In turn as wages increase, so does the amount the government collects in taxes.
We cannot wait 144 years for our money to double, so the bank and retirement options are toast. Can we wait 40 years for the cost of everything to rise out of sight? Yes, and we even might be around for another 20 years to really enjoy its effect over our wonderful golden retirement years. Tragically it’s about that time that you will realize that old people are invisible; either that or they have all died off and I wasn’t informed of the fact.
The big picture: our financial system was built and modified enough to fail miserably sometime in the near future. Telling anyone will not stop it from happening, but later on in life when they issue you a tube of Preparation H, a tube of Denture Grip and a rocking chair, you will know I was right. You will be “Rockin ’round the Clock.”
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