patrick.net

@Troy
I'm betting that much of the wealth is being generated by people who are interested in generating that wealth. The average American isn't interested in sticking their neck out and opening up a business or doing what it takes to run a business. They're happier being a worker bee, with dreams of becoming rich and dreams of using a get rich quick scheme to do it. They spend everything they have, instead of being prudent and saving. The rich can't spend everything they've got, so it goes back into savings, and thus they accumulate more wealth. This is just how the system works. As companies have grown in size over the last 50 years, so has this wealth because fewer and fewer people were needed to run, own and operate these massive organizations.

I dont know why you would need to "double up health premiums" there is only something like 10% of the country without insurance. Obviously doubling up wouldn't be necessary.

Likewise, I saw something on social security needing 1-2 extra % over the coming years to offset the dooms day that everyone is predicting. 1-2% isn't much, which makes me believe this is more hype than a problem.

Pkennedy,

You asked what I do.

I study the macro economy and bet on what will happen.
This has been my focus for about 35 years.
The economy has been my favorite topic for more than 35 years.

More specifically, I am an investor/speculator.
I make my living by betting on what the economy and markets will do.
When I am right I make money.
When I am wrong I lose money.

I have over 30 years of experience in the financial services industry (risking other peoples’ money), including more than a decade of CEO experience running large ($1+ billion in assets) financial enterprises within the Fortune 500 environment. I have retired and do some consulting/advisory work for private equity/hedge funds and an investment bank.

pkennedy,

I agree with all of your observations above except one. You stated that the cheap labor combined with higher productivity will far outpace us. The more likely scenario is that their real wages will eventually climb until the wage gap is closed. So they will at least lose their wage advantage.

As for how far we can inflate our currency, we can go forever as long as the other currencies inflate at a somewhat similar pace. If the dollar loses value relative to other currencies at a fast pace it will cause problems. But if the dollar loses real value, but at a similar pace to other currencies it will not stir shifts in global currency uses.

Troy,

There is no contradiction to my assertion that we must compete with a global labor pool, and the likely expansion of money supply leading to inflation. In fact, the tough global competition will make it more difficult for government to raise enough revenue by taxes. So the incentive to inflate is increased.

10% owning 90% of the wealth is not ideal. But, that does not mean it cannot continue. For one thing you are looking at only one country in the world. During the last two decades (since the fall of the communist system) most of the world has experienced significant improvement in their wealth and well being. The richest elites of the world have also become richer. But, the average American worker has been in competition with the starving poor of the world. Their wage needs are lower, so the world labor demand has shifted away from the average US worker. It will continue to do so until the wage disparity between the US workers and the poor foreign workers becomes much smaller than it is today. Not a pleasant path for the average US worker.

It is certainly possible that average home values might not increase in real terms over the next few decades. But they will go up in nominal price. It might be entirely due to inflation, just keeping pace with the cost of everything else (ie no real gain). Along the way home prices will rise and fall in a cyclical pattern around the long term trend. And there will be regular future bubbles and busts, as there have been in the past.

High end homes in the preferred neighborhoods will rise in real value as a growing population competes for the best spots. This will be most visible along metropolitan coastlines. It is the affluence of the top few percent who determine the price for those homes. So we could have stagnant real values at the low end along with rising real values at the high end.

The likely cyclical pattern from here is that home prices will be stagnant for 2-3 years before starting a noticeable cyclical climb.

Zephyr says

I have over 30 years of experience in the financial services industry (risking other peoples’ money), including more than a decade of CEO experience running large ($1+ billion in assets) financial enterprises within the Fortune 500 environment.

I doubt a Fortune 500 CEO will come and read a "house price is too high forum".

Most people here are the people who got priced out by the house market and wonder what to do.

Xeno, I look for interesting information in a broad range of places. Mostly I read economics blogs and business news sites. But, with a third of my money invested in CA rental properties, I am interested in the sentiment of renters. As a real estate speculator, I am interested in the sentiment of people who will want to eventually buy. So, occasionally I come to this website to see what people are thinking.

You are entitled to your doubts, but my description of myself is accurate.

pkennedy says

I dont know why you would need to “double up health premiums” there is only something like 10% of the country without insurance. Obviously doubling up wouldn’t be necessary.

There's having insurance, and actually being covered.

"An estimated total of 61 million adults, or 35 percent of individuals, ages 19 to 64, had either no insurance, sporadic coverage, or insurance coverage that exposed them to high health care costs during 2003."

http://www.commonwealthfund.org/Content/Publications/In-the-Literature/2005/Jun/Insured-But-Not-Protected--How-Many-Adults-Are-Underinsured.aspx

61 million is a bit different than 10%. We lower our insurance burden by simply not covering the most expensive cases (speaking in general, obviously people have expensive procedures done thanks to their insurance every day).

The recent reform bill stops recission (dropping people once they become expensive) and also stops the preexisting condition exclusion -- children this year, and everyone in 2014. THIS IS NOT GOING TO LOWER OUR MONTHLY INSURANCE BILLS, LOL.

Whether it doubles them is up for debate, but whatever the cost of the health insurance reform. it's not going to be putting more money in your pockets. Unless you're associated with the medical industry directly or indirectly.

I agree that the reversal of the FICA surplus that is starting now and will continue until the OASDI-held treasuries are sold off (around 25 years from now) is not that big of a deal. But for the past 25 years the FICA overpayments of the toiling classes have helped prop up the overall tax picture. SS is scheduled to rise from $700B/yr now to $1.1T in 2020. That's $400B more in taxation that is going to need to come from somewhere, a burden we have not had to face in quite a while, and one we were supposed to have been preparing for since the 90s.

Zephyr says

There is no contradiction to my assertion that we must compete with a global labor pool, and the likely expansion of money supply leading to inflation. In fact, the tough global competition will make it more difficult for government to raise enough revenue by taxes. So the incentive to inflate is increased.

This is pretty vague. Throwing words like "inflation" and "difficult" around without really digging down into what you're saying doesn't help me much.

Inflation can be a complex monetary phenomenon. The 30 year at 5% right now is telling us something. What, I don't know, either the PTB have their fingers on the scale right now, the market knows something you don't, or space aliens have a mind control satellite helping the Fed out.

Since 2005, assets of the private sector have risen from $37T to $42T, against liabilities of $16.4T and 19.4T. So our net worth has increased $2T in 4 years, I think Uncle Sam should be able to take half of that back. Times are tough and all.

With the S&P almost back to pre-crash levels, looks like the market likes corporate earnings power going forward. The big guys seem to be making money again, as the thread title says, so I fail to see why raising additional tax revenue from our corporate masters is necessarily "difficult".

I, personally, think J6P is due for liquidation this decade so I agree with your general thesis that land values for the middle tier and lower are going to be stable. If the rich are going to be bidding up the price of land in the enclaves, seems to me that it would be better for everyone that they carry a bit more of the tax burden instead.

Kinda stupid to have undertaxed people just bidding up the price of housing all the time, but I guess we'll never learn.

Troy, I am not describing what I would like to see happen. I am describing what I think is most likely to happen. Politicians almost always run deficits. And when spending surges, taxes will likely not keep up. So the deficits will surge as well. It will be very difficult to pay for the recent surge with tax increases. Therefore the printing press is likely to ramp up.

But I am curious how you could have a problem understanding the possibility of inflation and labor competition happening at the same time. There is always labor competition. And nearly always inflation. A little more of both is not at all contradictory.

Zephyr says

Troy, I am not describing what I would like to see happen. I am describing what I think is most likely to happen. Politicians almost always run deficits. And when spending surges, taxes will likely not keep up. So the deficits will surge as well. It will be very difficult to pay for the recent surge with tax increases. Therefore the printing press is likely to ramp up.

Well, I think Obama's approach at drawing the class warfare line at $250K/year/earner has merit. Separates the wolves from the sheep. (I'll leave the reader to apply their biases to determine who is who.) I don't see any inherent "difficulties" here either politically or economically. Hell, the Bush tax cuts are scheduled to sunset without any action required at all.

But I am curious how you could have a problem understanding the possibility of inflation and labor competition happening at the same time. There is always labor competition. And nearly always inflation. A little more of both is not at all contradictory.

"Nearly always" is a useless assertion IMO since we are in terra incognita compared to past situations. We can apply our understanding and arguments of how the present power structure will generate policy going forward, but other than that I don't think anyone can state with any certainty how events are going to unfold this decade.

In the 1970s the Gang of Four was still running China's economy, what was left of it, back to the state it was in the 19th century. India was not connected to the US labor market via 24/7 satellite and cable communication. Mexican labor was for lettuce picking not VWs and NAFTA industries. In 1975 the baby boom was turning 20 and not turning 55 like this year. The national debt held by the public was $1.5T in real terms not the $8.3T of last Friday. The North Sea oil supply boom was still a decade off. Foreigners didn't hold almost half our gov't debt, either.

http://www.ustreas.gov/tic/mfh.txt

When I think inflation, I think the minimum wage and the COLAs social security recipients get, ie wage inflation. THAT'S inflation.

Price inflation without wage inflation doesn't concern me in the slightest, even tho it does mainstream economists for some reason. This is because I look at real estate valuation as an immense buffer -- it is 20% of our GDP -- that sucks money from us schmucks when times are loose and disgorges said money when times are tight. Mainstream economics IMO simply fails to acknowledge that the present production cost of the existing stock of land and improvements approaches $0, ie real estate is simply not a good like a commodity or a normal product of labor.

My general thesis, which I consider applicable for this decade, is that Income -- less gov't taxes, less mandatory insurance, less energy costs to get to work, less basics like food, less quality-of-life -- ends up in (ie determines) Land Values.

Hold Income constant and raise anything else in that intermediating list of life expenses, and Land Values will go down, eventually.

Government outgo has seen an immense expansion over the past 10 years. Up to $6.5T this year will flow through government -- that is 65 MILLION jobs at $100,000 each (stupendous!). There are three options going forward: cut government spending, raise taxes, and/or raise borrowing. The first two are deflationary and the other IMO doesn't automatically result in wage inflation (see Japan), and the price inflation it can engender isn't necessarily a good story for rising land values, like I said, show me $10 gas and I'll show you hundreds of housing markets utterly slaughtered.

edit: Well, there is a fourth option I neglected: sheer printing. It has a lot of benefits but also some costs; the China conduit from which we get so much of our consumer goods will be constricted, and OPEC will want their customary adjustment. Printing money will certainly result in higher consumer prices but I fail to see how it will result in higher home values.

In 2014 the health insurance reform is going to really start taking more money from our paychecks. This guy:

http://brucekrasting.blogspot.com/2009/11/oct-sstf-report.html and http://brucekrasting.blogspot.com/2010/04/size-buyer-now-size-seller.html

has a handle on the SSTF surplus or lack thereof. Social Security and the baby boomers are now officially a net suck on the general fund. Raising the cost of money for the Treasury and a lot of bad things can happen.

Again, I don't dismiss the inflation hypothesis. For all I know Walmart will be paying $20/hr in 2020. That's not what happened in Japan, 1990-now, but we are not necessarily Japan, no matter how much we try to repeat the mistakes they made.

The ultimate symptom of deflation is local government taking payroll/overall compensation reductions. We are beginning to see the change of course like Mayor Reed (or Newsom) following the example of Michael Bloomberg saying "back atcha" to the unions: let the unions decide, paycuts or layoffs.

Now it is about the union leadership saving face.

@E-man
Arnold. Granted he didn't get anywhere, he tried. I give him credit for going from 0 political experience to one of the most important positions in the country and trying his best.

@Zephyr
I think productivity + cheap wages will ultimately out pace us, but wages will be the factor that puts the break on their progress. Once they've tapped out all the easy productivity gains, wages will be the factor that slows everything down. I agree with you here for sure, I just think that low wages + productivity boosts for the next 5-10 years will really hurt us. After that, I think their own wages will balance everything out.

I figured your experience had to be fairly significant, your ideas are fairly all encompassing, which many people miss out on. It's easy to point a finger at one issue and another finger at a "solution" and say that is how it must come to be to fix everything! vs an understanding that with every action there is a reaction somewhere else. That many things have multiple counter balances and not just one input which can be turned to straighten it out.

Media is the worst for bringing these people out. They come out with solutions that essentially ignore half the market and say to fix this problem we just need to do X, ignoring that it would bankrupt half the country, or send interest rates way up or down, or the employment might be massively effected.

I'm always on the lookout for new information sources, do you have any that you regularly use that you would recommend? Or books that you've read and found balanced and informative? Without a major in economics, it's often easy to fall prey to these one sided arguments, so balanced information for me is most important aspect when I'm looking for new sources..

@troy
There was a piece I read last night on cnnmoney I believe on the insurance issue. They actually stated that many of the uninsured are in their 20's and 30's when they believe they are invincible. I know I'm invincible, but I keep insurance anyways :) They said that the insurance premiums might even drop at the higher ends because there will be a larger pool of people paying in, but fewer medical payouts in the lower end. They also had a figure on the emergency room visits for the 20's and 30's, and it was fairly significant, meaning they just wait until it's emergency room time and then go there.

To: Patrick, I tried to find the correct forum and don't want to hijack this one, but it is important. Please read this.

I recently saw your Google interview and thought you did wel! However, I think that there may be more variables to assess with the" Rent costs vs Buy with mortgage costs vs the pay cash for a house theory?

I have always accepted your hypothesis until recently. Here is what I have experienced. When you only look at the amount of rent vs cost of monthly PITI you may be missing two variables that might keep house prices high (above structural value).

1) This is the cost to replace the structure. yes a plot of dirt has value but look what happens if you ever have a disaster like a house fire. Even if you are FULLY insured lets say for a fire, and have zero deductibles with stated value on contents, insurace companies will NEVER pay the cost it takes to replace the structural damage. If you look carefully at THEIR objective evaluation of the value of the house it is MUCH less. Everyone knows that BUT there is an elephant in the room. Who owns personal lines insurance companies? It could be an investment bank which might even own the mortgage on the house. So the SAME people are willing to loan you MORE MONEY than the house is worth to them to fis it under the insurance part of the business. There must be a nexus between the two values. A TRANSPARENT VALUE. The house can NOT be worth two values to the SAME FIRM (not including land value---which does not burn--in my example) The banks want it both ways---put you in debt to them as a debt slave AND NOT PAY what THEY think the house is worth on the insurance claims side of the business.

2) I live in an exurban area with population of about 70,000. I noticed that local rents are still very high even though house prices are dropping. I started checking and here is what I have so far.
Single family dwellings, duplexes, triplexes and small apartment buildings under 20 units have different rents based on WHO OWNS THEM. The small operator including wannabe rentiers, mom and pop type investors are forced into lowering rents and many are hurting for one basic reason: THEY OWE A MORTGAGE that is less than 15 years old on the property.

But I noticed that about 12 families own over 70% of the rental units including single family residences. A simple records check with the county recorder shows liens and mortgages on these properties and the small investors are losing these properties. However the "GOB" or what we call locally the "Good Old Boys" property mafia happen to be in 3-4 of these businesses: Real estate sales, small building contractors, developers and property management. Many are all four of these. They also own their own small mortgage shops and cross fertilize with each other with 3-4 small banks that they may have in the "family".

This is not a big deal until I noticed something unusual. I know one of these people who is "all of the above" and aI looked at one of his websites and actually checked out some of his rental inventory.
He has many vacant houses that look less than ten years old, they all have "curb appeal" and look okay from the outside (I know all of these are junk on the inside---another story---this group includes city officials and the building and planning departments---If you are an "outsider" good luck with getting a building permit).

These houses if they were for sale today would get under $225K (MAX) . Okay thats not a big deal until you look at rents for those same houses. If the houses were owned by othersm the investor-owner would quickly take no more than $1100 month AND would look the other way about sublets. These "little people" are in PAIN. House prices down ---rents are dropping EXCEPT.

These SAME type and SIZE cheesebox tract houses have rent signs for 1350- 1500/momth ! If they are owned by the GOOD OLD BOYS. The GOB will never sell low as REALTORS unless they get the property for next to nothing. But they will NOT RENT IT OUT for anything but the maximum they can get. This means there is a LARGE inventory of RENTALS AT ABOVE MARKET RENT RATES.

How can this be? They own the property management firms as well. They get a cut out of ANYONE who thinks they will go into the RE business in this town.

They would rather have the houses sit in the sun EMPTY rather than rent them! One reason is that the RENT TO BUY simulation that the average local person sees make sit appear that they can not afford to rent SO THEY MUST BUY---FROM THESE SAME PEOPLE. So these are either faux rentals or unlisted properties for sale, and this keeps house prices high and the buy/sale machine running. All of these "rentals" have a price BUT ARE NEVER LISTED. I live in one of them. They houss are like marbles trading back and forth BETWEEN THE SAME PEOPLE.

Two blocks from here is a small development---mostly empty lots. I checked the recorders office and found that I see person A sell the lot to person B who sells the lot to person c who sells the lot back to person A LIKE A MERRY GO ROUND. They never seem to do anything materially to the lot or house but sell it to another friend for MORE MONEY. I can see a lot of criminal reasons for this such as building comps so the mortgage companies take a hit. A buyer overpays---can't sell it---off to foreclosusre and they buy it back again.

One thing they ALL have in common- EVERY ONE of them is a REAL ESTATE BROKER.

In this scenario, house rent vs sales price are artifically manipulated to keep house prices high!

I first guessed this was going on during the bubble but could not prove it...who can read minds? I can not be these same people are NEVER hurt buy the bubble collapse.

In 2004, I was right on the edge of buying----but I don't like listed properties since the REALTORS always get first dibs on the good ones. I called up the "landlord" for the place I rented and asked him if he wanted to sell the property. He told me he would think about it. Within one week one of his property managers was hanging around and gave me a notice to look inside. He bought the house that day. BTW my landlord was a REALTOR, BUILDER, PROPERTY MANAGEMENT FIRM, DEVELOPER, a former city councilman, former mayor, his two brothers were both city councilman or mayors and they are ALL IN THE SAME OR similar business. The planning department, city manager , building department directors all work for one or the other GOB. they take turns proteting their turf.

I know this happens all over the USA, and so fore the purposes of you rent/buy decision matrix you should think of including this in at least small areas cities or counties. One of these small town GOB's is actually on the FORBES 500 list of most wealthy US persons. It is may be a small town , but they are running a small kingdom for THEMSELVES ONLY.

Oh ths house I wanted to buy? The idiot property manager whou bought it---got a HELOC and bought a new VIPER and a car for his wife, raised my rent to cover bhis PITI and sold in 13 months and barely broke even.

The new owner is upside down by 300k and has turned the place into a pig sty. There must be AT LEAST four families living in the place---according to neighbors. The GOB are trying to bust the neighborhood and use a Redevelopment AGENCY to fix the BLIGHT they made---by hiring them to fix their OWN rental properties. The only non-realtor on the city council is a real estate appraiser who works for them .

bottom line ---The Rent vs Buy ratios can not be the ONLY determinant for a decision. My experience tells me that INTRINSIC replacement value AS WELL AS acknowledgement that in some geographic areas you will find this GOB type ownership - control system.

You may ask what about mortgage for construction loans to build this junk? Its easy SHODDY construction, low paid or unpaid laborers and construction workers keep HIGH equity positions in these properties. They pay CASH for the dumps and flip or rent. Its that easy.

Linda

Why homes aren't good investments.

1) A home is a place to live. If you gamble with your shelter you are gambling with one of the basics required to have a stable life.

2) A house is a tangible asset that is only worth what someone else is willing to pay for it at any given time, and this amount varies widely over time given socio-economic factors that are beyond most people's control.

3) As a tangible asset whose primary purpose is a basic necessity like, shelter, houses won't appreciate faster than inflation or wages over the long haul, as shown by hundreds of years of tracking house prices shows. This is true because the very basic purpose of this asset is shelter. It's utilitarian. It's not a blue chip stock that can be allowed to fluctuate wildly independent of a customer's willingness or ability to pay. The basics are always priced so that most people who work and earn income can afford them over the long haul. When prices get too high for that, we have a bubble. Eventually bubbles pop (if left alone in a capitalist system). Prices historically return to the pace of wages and inflation after bubbles and valleys.

4) Investments like stocks have consistently out-performed real estate over time. If you're counting on your house as a store of value to sell when you're ready to retire, you could be earning higher returns in the stock market. (Of course, this is based on past performance and doesn't necessarily dictate future performance.)

5) When you retire, you have to live somewhere. If you sell your house, you have to find somewhere else to live. It costs money to find shelter. It costs money to sell a house. It costs money to move your possessions from one shelter to another. You may not be able to find shelter that costs less than holding onto your house unless you are willing to majorly "downsize."

Continue...

tatupu70 says

P2D2 says

That could be true for your area. But people near big metropolitan areas do rent homes

I think it’s more of a West Coast thing. I’ve lived in Midwest and East Coast cities and people don’t rent houses very often. But it does seem to be common in CA.

When I was living in Davenport, Iowa, many of my co-workers and friends were renting houses. I think it's more common than you think.

Great post, Linda. Prop 13 for non-owner-occupied property was one of the stupider things California has done. The fallout effects from this are truly immense. RE is one scum-suck sector of the economy and Ho Chi Minh in the mid-50s had the right idea if wrong implementation.

Therefore, to expect home prices to come down to 3x income in the fortress areas is highly unlikely IMHO.

Oh, I agree. Prop 13 (and 58) has locked away tons of inventory that will cash flow in any foreseeable future economy (even one without Google and Apple pumping billions into the local economy).

The 3X rule might hold, but it won't be over area median income but the median income of the new people who can afford to bid themselves into the fortress's tight supply.

simchaland says

When I was living in Davenport, Iowa, many of my co-workers and friends were renting houses. I think it’s more common than you think.

Maybe-but I've lived in several different areas and never seen rental housing like I did when I was in CA. I think it is at least partially due to prop 13...

The fact is someone is paying for the uninsured to have medical care. Either in taxes or higher premiums.

I can't decide which 3/2 rental in Concord offers the best value; perhaps this one (1550 sq.ft.) at 1069 Kaski Lane which is going for $1800/month. Hmmmm... owner's tax basis is less than $100k. How low can you go....

The people paying for the uninsured to have medical, are the uninsured.

agreed

pkennedy,

You asked about info sources regarding economics. One of the best places to start is www.rtable.net. This site has links to many econ websites, and features daily articles selected from some of those websites. Lots to read, and endless links to follow. Very informative.

Calculatedriskblog.com provides a good general market discussion (though its author is not an economist). Interesting links as well.

For more general economic and market news I like Bloomberg.com, cnnmoney.com, wsj.com, businessweek.com, cnbc.com, economist.com, and so many more...

I have literally hundreds of links that I refer to for data or for various specific areas within economic theory or market focus. But the ones listed above cover the main issues pretty well.

Grecian formula? http://ur.lc/j2a

theoakman says

Has there ever been a time in history where countries didn’t cheat on their paper currencies with international trade?

Why restrict your thinking to paper currency? There hasn't been a time in history when countries didn't cheat on their currencies of any type.

The cat is out of the bag on Greece. The IMF will be picking up over 30% of the bill as junior debt. Why does this matter? Because the IMF is 40% funded by US taxpayers. So our tax dollars will be subordinate to the money owed to European banks. IMF has been almost always senior debt in the past. The US taxpayer will be on the hook subsidizing Greek style wages and benefits, including almost unbelievable retirement benefits for Greeks who can retire at age 53. Of course the possibility exists that the Greeks will put their fiscal house in order for the first time since Plato, repay all the debt, and everything will be fine.

What's going to happen if Spain and others have a similar issue? Or are they not in as much trouble?

Anyone notice how the rugged individualist anti government states like Alaska and Wyoming get a lot more money back from the federal government than they put in, yet they never complain about it? Why didn't Sara Palin just sent the money back?

No, it's because every state has two senators, and the senate has a disproportionately large influence compared to the house. This is a fairly well established issue. Idaho gets the same say in the senate as California.

California pays more money to the federal government than it receives.

That may have been true in the past, but not true over the past couple of years http://ur.lc/j56 , and probably will not be true for many years. From a study commissioned by Barbara Boxer:

Boxer's staff economist determined that California received approximately $1.02 back in federal spending for every $1 in tax revenue it sent to Washington in 2008. The economist further estimated California received $1.45 back in federal spending for every $1 in tax revenue the state sent in 2009.

With an economy in a downward spiral and state & local pensions and other spending out of control, I see no end in sight to CA becoming a massive leech off of taxpayers in other states in the foreseeable future.

I agree that spending reform needs to be broad based, and that welfare and illegal immigrants are a huge drain, but I disagree with your trying to minimize the pension problems. CA's largest 3 pension funds are facing a $500 billion shortfall. The problem is that public employees were bestowed lavish pension programs which enable them to retire at age 50 or 55. The number of govt employees retiring at a relatively young age with $100k/year pension packages has got to end. When you speak of "taking it from the working people", that's exactly what the govt pension programs are doing - if not slashed, they will end up forcing average workers to bust their @ss to age 67 or 70 in order to subsidize Carribean vacations for 52 yr old government retirees. Overly lavish govt. pensions are probably the largest financial timebomb that we face. Govt employees should pay for their own retirements by saving for themselves using IRA's and 401k's just like the rest of us.

What I’m saying is that people who worked under a contract that offered something and then gets changed - is one of those things that causes riots.

The alternative to these dreaded riots is to sock it to average workers to subsidize lavish pension and benefits programs for govt. employees. Government offered too-lavish pension programs that never should have been offered in the first place. We can't afford them. It's either make other non-govt workers pay to subsidize these extraordinary cushy benefits, or cut the pension benefits for the govt workers, which never ever should have been so generous to begin with.

Yes, govt. workers had a contract. But those govt. entitities which offered those contracts are, or will be, bankrupted as a result. Let the pensions fight it out in bankruptcy court like any other creditor who also has contracts. The alternative is to raise taxes and retirement ages on average workers to pay for government pensioners retiring at age 50. It's not "rubbing their faces" in anything to ask govt workers to save for their own retirements just like everyone else. I don't have any pension. I won't get paid for accumlutated sick days at retirement. Neither do most workers in private industry. Let the govt. employees save for their own retirements like everyone else and get their hands out of my pockets.

Out of control welfare, fraud under govt. programs and illegal immigration are also very costly problems. But the cost of the inflated number of govt. employees, who have inflated wages (federal workers now earn substantially more than their private industry counterparts, not including benefits which widen that gap further) and their lush pension system is a large, perhaps the largest financial time bomb that we face. It must be dealt with

Here is a classic example of the problem http://ur.lc/j59

A school superintendent in Rhode Island is trying to fix an abysmally bad school system.
Her plan calls for teachers at a local high school to work 25 minutes longer per day, each lunch with students once in a while, and help with tutoring. The teachers’ union has refused to accept these apparently onerous demands.

The teachers at the high school make $70,000-$78,000, as compared to a median income in the town of $22,000. This exemplifies a nationwide trend in which public sector workers make far more than their private-sector counterparts (with better benefits).

This is exactly what needs to happen with these public sector unions. Those govt. salaries and benefit packages never should have been inflated to that extreme to begin with. Bring them back down to earth to live like the rest of us. More firings and cutbacks like this need to happen across the country.

Well, converting a pension to a defined contribution plan means more drain on the tax payer dollar for the short-term, as the new hires would no longer be required to pay in and the tax payer has to fully foot the bill for the current and future retirees who already have a pension contract. We wouldn't see any savings, if there are any, for at least another 10 or 15 or perhaps more years. Defined contribution plans don't perform as well as pensions anyway, but that's a whole 'nother topic (have we forgotten already what happened to our 401ks in 2008?).

For every dollar that tax payers put in to a public pension plan, some multiple of that is paid out to retirees. Not funding it just means more poor retirees, and now we're back to tax payers footing the bill. There's really no way around it. Pay less now or pay more later. Those seem to be the choices.

Pensions are always underfunded. It's the nature of the instrument. That's not really a sky-is-falling issue though, because we will never have a day when all government employees in a pension decide to all retire on one particular day and start taking benefits.

I don't think we have to have a riot about it. Besides, U.S. citizens are panzies compared to the Greeks and the French. We don't scare our government nearly as well as they do.

Well, converting a pension to a defined contribution plan means more drain on the tax payer dollar for the short-term, as the new hires would no longer be required to pay in and the tax payer has to fully foot the bill for the current and future retirees who already have a pension contract.

Your suggestion is based on the premise that we must pay for the pension contracts. Let the states and local govts go bankrupt and have the Cadillac gold plated pension funds fight it out for the leftovers in court with other creditors who also have contracts. In other words, fight like hell not pay for those lavishly inflated pension benefits which never should have been offered in the first place.. there was not enough money to make good on those contractual offers and they never should have been made. Let the bankruptcies begin so that we can create a more realistic, and more stable foundation for future economic growth in this country.

It is not "written in stone" that we make good on those pensions.. because if we do, we're forcing average workers to work until 67 or 70 to subsidize govt. pensioners retiring at 50. Screw that.

Your suggestion is based on state and local governments (i.e. employees of the state and local government) filing for bankruptcy so as to avoid paying pensions to state and local government employees (i.e. themselves).

It seems unlikely.

There are just too many people with a vested interest in keeping their own contributions that they made into the system. Same holds for Social Security. As broken as it might be, we want ours, because we paid in too.

I don't know if the Fox News gold advertisements are enough to generate the bubble. I know about a dozen older couples who religiously watch Fox News yet they have ignored me for years about gold. They still insist on buying General Electric & Bank of America and have been despite the fact that their retirement accounts nearly got wiped out buying those stocks. Furthermore, the angry left seems to hate gold with a passion and most liberals I know refuse to acknowledge that gold can even act as a store of value let a lone go up in value. They insist it's worthless. Between the right's refusal to buy into gold and the left's hatred of gold, I really can't see it bubbling.

theoakman says

Furthermore, the angry left seems to hate gold with a passion and most liberals I know refuse to acknowledge that gold can even act as a store of value let a lone go up in value. They insist it’s worthless. Between the right’s refusal to buy into gold and the left’s hatred of gold, I really can’t see it bubbling.

I don't think I'm really part of the "angry left", but I don't see gold as a store of value. That doesn't mean I hate it though. I think it's very pretty, and also very shiny.

Value is determined by supply and demand. Gold supply is limited, no doubt, but what exactly is the demand? Besides jewelry and some niche electronic applications? It just seems to me that gold is valuable only because people think it is valuable...

tatupu70 says

theoakman says

Furthermore, the angry left seems to hate gold with a passion and most liberals I know refuse to acknowledge that gold can even act as a store of value let a lone go up in value. They insist it’s worthless. Between the right’s refusal to buy into gold and the left’s hatred of gold, I really can’t see it bubbling.

I don’t think I’m really part of the “angry left”, but I don’t see gold as a store of value. That doesn’t mean I hate it though. I think it’s very pretty, and also very shiny.
Value is determined by supply and demand. Gold supply is limited, no doubt, but what exactly is the demand? Besides jewelry and some niche electronic applications? It just seems to me that gold is valuable only because people think it is valuable…

Thank you for proving my point. You refuse to even understand why it's valuable. You can be told time and time again why but you still think it's only valuable because people "think it is valuable". Fact of the matter is, Gold's value is in the fact that it is the only form of honest money to ever function properly.