The Continued Lies

Sitting here listening to the Presidential Inauguration Address, I take an outsider’s view of the coming four years and the continued propaganda of lies. Talk is cheap, and with a bankrupt budget, the only thing left to spend besides fiat currency backed by nothing are more words of “Hope and Change” that fill the minds of millions with the intellectual nutrition level of an old McDonald’s hamburger.

As most Americans are beginning to learn, now that their paychecks are being adjusted to reflect some of that free lunch mentality, that the buck stops somewhere and the buck always will stop with the average American’s paying more. Death by a thousand cuts has led to that treadmill lifestyle where the public feels they can never get ahead. A mom at home becomes a mom who must work, which morphs into both parents’ needing to take second and sometimes third jobs to make ends meet. A high school diploma’s occupational sufficiency was replaced by the need for a college diploma, and now some would argue that a comfortable standard of living requires even higher levels of education to where even doctors and lawyers are finding it hard to find good paying jobs and are now saddled with crippling education debts equal in size to a luxury home mortgage. And all without the luxury home. About 95% of the population is experiencing this and no amount of hope or change can fix this financial house of cards teetering on a bad foundation.

For the real healing to begin the first step is to realize that there is no easy way out and that the short term thinking of elected officials has painted the public into a corner we cannot get out of without getting really, really messy. These problems have been accumulating over a period of decades and cannot be solved in months, much less remedied by those with the same mentality as those who created the difficulties in the first place. For the outlook to trully improve we will be compelled to make seriously hard choices that will require real pain and upend the present delusional mindset. Please prepare yourself for these changes—it won’t be pretty.

bonds were the backbone of most retirees’ investment income

The US was a creditor nation up until 1981 and has been running greater and greater federal budget deficits ever since. The rub here is that back when 30-year fixed mortgage rates topped out at 18.45% in October of that year our cost of borrowing had fallen, which should have been a windfall allowing the government to pay down its principal with the lower interest rate savings. Unfortunately, instead of doing the right thing and paying down debt and building up a surplus for a rainy day, the federal government continued assuming more and more debt, so that today, after a 32-year bond bull market, it’s got the majority of its $16+ trillion debt in short term notes costing about $245 billion in interest service annually at a rate of around 2.25% per year.

This is now the end of the road for further refinancing miracles since the real rate of inflation is running higher than the current rates. And yes, I’m aware of the government’s “official” numbers, but what are your family’s numbers? From this point on, any 1% rise in interest rates will cost the government an additional $120 billion per year in debt service. Please read that number again—that’s $120 billion extra if rates increase a mere 1%! If rates returned to where they were back before the depression we are now experiencing (and it is a depression), the government’s recent $1.1 trillion annual budget deficits would balloon to $1.4 trillion. This amount of debt can never be paid back in sound currency, but can only be discharged for pennies on the dollar when inflation is factored in. This means that money lent today will be paid back at a fraction of its original value: lend $1.00 and receive back $0.50.

Now, to place this in perspective, most pension funds run off of a 60/40 split model in which 60% is invested in stocks and 40% in bonds. For the last 32 years, bonds, for the most part, have always made money and were the backbone of most retirees’ investment income. Stocks would fluctuate, but the bonds pretty much consistently made money. They were able to make money and stay ahead of inflation because long term interest rates were consistently falling (remember, mortgage rates have fallen from a high of 18.45% to the current 3.5% range). Now, if we reverse this long-term cycle, the bond life preserver becomes an anchor that will drown and kill almost every pension system in the US because the assumed rates of return will not be high enough to pay future retirees. This is the secret panic going on in the halls of power. All of their capital market assumptions, by which investment portfolios average 8% return per year, blow up when those returns drop to a more probable 5% overall rate of return. This shortfall can only be offset by higher savings or reductions in benefits. For taxpayers, this means more money from your pocket to cover existing commitments to government employees.

If you are retired now and trying to live off CD rates and bond interest you know what I am talking about here. The Federal Reserve’s zero interest rate policy is forcing those on fixed incomes to eat into their principle each year now to live. Costs for healthcare, college, food, rent, are all going up faster than your paychecks. Now, some prices have fallen, like the price of used luxury goods but actual day-to-day living expenses are escalating steadily.

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