Social Security: The 6% Solution *

March 27, 2011

* Or, How to Transform SSA into an Individual Retirement Plan

Late in 2010 President Obama’s Deficit Commission disgorged their budget recommendations. The complex and difficult work under the combined wisdom of these earnest, well regarded, leaders has resulted in a series of entitlement proposals that are significant for their disregard for physical laborers, all young people and every responsible individual. Not to have seized this opportunity to revamp a failed program is a feckless and cowardly insult to hard working, responsible individuals and is most egregious to young people. Choosing to raise the taxation level, institute means testing and bump out the full retirement age could not be a bigger insult to America’s responsible citizens. No, this is just another instance of kicking the entitlement can down the road just as did the 1983 Greenspan Commission on Social Security. It too failed to correct the long term entitlement program and so will these proposals.

Raising the taxation level will, under the current SSA benefit scheme merely result in larger benefits to the upper income retirees down the road. It only temporarily solves the current benefit issue and does so by creating a worse predicament in future years. Means testing seems viable but it ignores the current SSA rules that link tax payments to benefits. Further, to change the program after the fact, when upper income individuals have already paid in their full tax payments only to find their benefits arbitrarily reduced upon retirement is dishonest at best. It will achieve full disrepute not by means testing directly but by instead instituting an increased tax rate on upper income SSA benefits. The left hand will take what the right hand gives. And the always favorite scheme of bureaucratic desk warmers to bump out the retirement age, is so rife with discriminatory application one wonders how it can pass the ADA (American’s with Disability Act). Anyone who physically labors will pay a steep price in lost benefits and lost jobs as they approach their later years. Who will hire a 60 year old laborer?

I propose a “6% Solution” to the current Social Security Ponzi scheme. My proposal gives individuals control over their retirement funds and retirement age. It also provides a wealth creation scheme that protects their families in the event of early death or disability. It specifically avoids giving monies to Wall Street or to the government. It utilizes existing government guarantees to protect the individual accounts along with a new scheme to provide a minimum return on their retirement funds. At the same time it provides a secondary revenue stream to government to provide funds for current retirees, those who are disabled and to provide for the minimum return on the retirement accounts. That secondary revenue stream is simply the employer’s portion of the current social security tax.

My proposal will result in the “Individualization of Social Security”. This is not privatization with its Wall Street connotations. Individualization uses the existing banking system with its FDIC guarantees and is premised on typical bank Certificates of Deposit. In essence an individual’s monthly social security tax payments would be deposited in a Retirement Certificate of Deposit (RCD) in a bank of their choosing. This RCD would, to the bank, be the same as any other CD. The bank would use those funds to make loans to individuals and businesses. The RCD would receive the current FDIC protection ($250,000 at present). However, the RCD may not be cashed or used as collateral. It is strictly intended to provide retirement benefits.

The new minimum return scheme is to ensure that every individual is able to earn a minimum 6% return on their RCD. This is necessary because of the Federal Reserve’s repeated and ongoing action to maintain interest rates at levels that provide little or no interest income. The basic idea is that the bank will pay the RCD interest at the higher of 6% or the current 10 year treasury note rate. The government will guarantee the bank the difference between 6% and the current 10 year treasury note. This difference is currently about 3.35% owing to the Federal Reserve’s monetary policies. The money to provide this subsidy is obtained from the secondary revenue stream. Of course if the Federal Reserve would raise interest rates to more normal levels the subsidy would all but disappear.

There would need to be a transition of course for those who have been in the workforce for some time but who are still distant from retirement age. Such a transition could be accomplished by a transfer of the existing Treasury notes or notes in the social security trust fund to each individual according to their own individual work history. Each bank can redeem those treasury notes/notes for capital from the Federal Reserve. In this way the individual retirement CD accounts, the RCD’s, can be funded.

This not a perfect scheme and likely has serious flaws. However, it is an attempt to put each working individual in charge of their retirement. At the same time it removes government from direct responsibility while leaving government (e.g., taxpayers) liable to protect and guarantee the retirement accounts. By limiting the accounts to an RCD as opposed to stocks or bonds the taxpayer guarantee is likely to have limited exposure. There are three principal benefits to this scheme.

  1. charge each individual worker with responsibility for their own retirement by giving them direct ownership of their retirement account.
  2. remove the workers retirement funds from government control thus eliminating the resulting spending of those funds by the government and limiting government control over individuals retirement choices.
  3. ensure workers retirement funds are isolated from Wall Street and in exchange provide guaranteed minimum returns and security of the accounts.

Do Ask, Do Tell

March 24, 2011

Repeal of “Don’t Ask, Don’t Tell” (DADT) on the premise of Gay Rights is a false step on a left footed march to utopia. Advocates for the repeal of DADT are only considering homosexual or Gay Rights. The rights of heterosexuals or Straights are simply ignored in a conspiracy of silence. Such silence needs to be challenged. The intent of the DADT repeal is not simply to end one policy, it is to create a wholly new policy of: “Do Ask, Do Tell” (DoADoT). Repeal of DADT now means homosexuals have a constitutional right to openly and freely participate in the military. It also means that they are now free to openly and actively seek and engage sex partners within the minimal limits conditioned by military policy. Even so, they can now “ask” and “tell” with constitutional protections.

The political expectation is that military training and discipline should be sufficient to cure all social ills. Yet most often those who demand that military discipline restrain the hormonal instincts of young people are anti-military forces in pursuit of a political agenda. Pregnancies of military women by military men while both are on duty testify to the limits of such discipline. Not to mention the volume of sexually transmitted diseases (STD’s) by military men and women. The greatest military discipline at issue under DoADoT it will be how to keep homosexuals from widespread sexual activity and the concomitant spread of HIV and other STD’s throughout a unit. Good luck with that. But the discipline issue is a mere distraction, not the key issue at hand. Individual rights – for straights and gays – are the key issue. Straight Rights deserve and must have equal constitutional protections as any presumed Gay Rights.

The issue, indeed even the very concept of Straight Rights has been willfully ignored out of political cowardice. As DoADoT becomes policy male and female homosexuals will be granted superior constitutional rights to male and female heterosexuals. For Straights to have the same constitutional value as Gay Rights, heterosexual men and women must not and cannot be segregated simply because of gender. This new DoADoT policy should require that males and females not only work together but live together in an unrestricted environment. After all, if such physical differences as skin color, height, weight, hair color, and sexual orientation are immaterial then why are mere physical differences in genitalia of any importance?

Clearly there are obvious differences in genitalia within gender as well as between genders. What ought to be equally obvious is that such differences pale in comparison with sexual attraction as a valid rationale for gender segregation. Males and females have not been segregated merely because of physical differences. They have historically been segregated due to presumed sexual attraction. Yet the DoADoT policy explicitly eliminates sexual attraction as a valid basis for gender segregation.

Under DoADoT homosexuals are entitled to openly and actively live with and among that gender to which they are sexually attracted. By what constitutional doctrine or legal logic are heterosexuals to be denied those same rights? Yet, what member of Congress or military policy maker will require male and female military personnel to live together in a wholly unrestricted environment? Will the military chiefs fulfill the constitutional requirement that men and women now must use the same showers together, toilet together, use the same sinks side by side and of course dress and sleep in the same room or barracks? Will Congress stipulate that there cannot be any segregation based on gender? Will the President, Congress or the military chiefs acknowledge that under DoADoT all gender segregation will in fact be constitutionally prohibited?

Presuming that gays are somehow immune to sexual attraction towards straights is utterly laughable. Are straight males immune to sexual attraction towards females, homosexual or not? And since a DoADoT policy enables gays to openly ask and tell if any sexual attraction is mutual it follows that sexual solicitation and activity will follow. And because gays will be living with and among that gender to which they are sexually attracted they will be able to ask gays and straights alike. Homosexual “Gaydar” is no more effective than anyone else’s. But straights will not be able to “ask” and “tell” until living arrangements within the military are modified to remove all gender segregation. Under DoADoT there will no longer be any constitutional doctrine or legal logic to preclude such modifications. Indeed, one can presume that removing gender segregation is not merely permitted, it is mandated as equal protection.

Ultimately DoADoT  means females (homosexual and heterosexual) will be subject to sexual solicitations from heterosexual males while both are showering, toileting or dressing. Males will be equally subject to such solicitations. Under the DoADoT policy there cannot be any gender segregation, everyone is free to “ask and tell” and everyone will be subject to sexual solicitation. Will females freely submit to such a policy? What about homosexual males? It can only be imagined what impact such a constitutional right may have on the military enlistment rates of females (heterosexual or homosexual). It is unlikely to raise them. Nor is any of this likely to improve military readiness or morale.

But the DoADoT  policy rises well beyond the military. If the military must follow a constitutionally mandated social policy of DoADoT, then by what constitutional doctrine or legal logic will civilians be excluded from such a policy? And under a DoADoT constitutionally mandated social policy all gender segregation will henceforth be prohibited. That means bathrooms, locker rooms, and dorm rooms, for elementary, middle and high schools as well as all colleges and universities will be gender neutral. No gender segregation period. This policy will apply to adults as well whether in business or government although one can assume Congress will (as usual) exempt itself. Repeal of DADT is not a trivial exercise to provide one thin segment of society with a presumed “right”. It will result in a massive cynical overthrow of the most intimate human social policy for mere political gain.

When Experts Disagree –

March 21, 2011

For some time now I have been pondering the conumdrum of what to do When Experts Disagree. Naturally the next line would have to be, ” And, When Don’t They?”

My interests (as with many people) lie in the political, economic, financial and investment worlds but like most folks I dip into other worlds such as medicine, environment, education and social policy as I meander down life’s paths. And as I peek into those side worlds and stare at my intrinsic worlds I am confident that this issue of When Experts Disagree flows into nearly (if not every) facet of our modern life. The great question is what, exactly, do we – the decided non-experts do when those experts upon whom we supposedly depend disagree?

As an example,Professor Don Boudreaux wrote a letter to the Wall Street Journal, noting one such disagreement among economics experts:

Justin Lahart accurately reports that, as recently as last year, the late Paul Samuelson dismissed F.A. Hayek’s book The Road to Serfdom as alarmist and wrong: “Sweden and its Scandinavian neighbors are among the most socialistic countries in the world, as Mr. Hayek defined them, Mr. Samuelson pointed out.  ‘Where are their horror camps?’ he [Samuelson] wrote” (“The Glenn Beck Effect: Hayek Has a Hit,” June 17).

Indeed, do physicists even agree on the speed of light? The short answer is, at best, maybe, maybe not. From another area, Curious About Astronomy, comes another type of disagreement among experts.

However, other astronomers disagree that the experiment is able to measure the speed of gravity, arguing that the effect is much smaller than the scientists claim and that (in effect) they got their arithmatic wrong when they decided that the speed of gravity did come into the equations. They are not claiming that the speed of gravity is different to that of light, just that it could not be measured in the experiment.

Clearly this disagreement is at an intellectual level far beyond my capability. But, then, I’m not an expert in anything so almost every disagreement by experts is beyond my intellectual capability. The question though remains: what do I (we), as  non-experts do when experts disagree – as they almost always do?

Take another set of disagreements at the stratospheric intellectual level. This is the abstract for a translation of a disagreement between Albert Einstein and Walter Ritz.

During 1908 and 1909 Ritz and Einstein battled over what we now call the time arrows of electrodynamics and entropy. Ritz argued that electrodynamic irreversibility was one of the roots of the second law of thermodynamics, while Einstein defended Maxwell-Lorentz electromagnetic time symmetry. Microscopic reversibility remains a cornerstone of our current paradigm, yet we are finding more and more evidence that experimentally discerned time arrows are asymmetrical and that they all point from past to future. This paper furnishes some comments about events leading up to the Ritz-Einstein confrontation, some subsequent developments, and an English translation of their agreement to disagree. A side by side comparison of two recent summaries of their battle communiques is included to provide an overview of what they had to say about this current issue.

In matters of scientific fact we may – and most assuredly I emphasize MAY – allow scientists to conduct their experiments to discover the facts of a situation. But what happens when the science community cannot experiment but can only create models they think mirror reality? This is precisely the circumstance in the arguments regarding global warming. Or, more specifically, anthropogenic global warming (AGW), warming caused exclusively by the acts of man. The facts cannot be determined by experiment. The various scientific camps create computer models and argue about the models and the input data and it all has taken on the slimy sheen of a political argument, not a scientific one.

What would we do if our lives were dependent on deciding which of these experts, these intellectual giants was correct? Or even which was more correct? How would we decide? What would be the basis of our decision? Ultimately, might one even be so arrogant as to ask why even consult the experts? For if they ultimately disagree and we are not expert yet we must make a decision then why consult them at all? How would we, on what basis would we, differentiate between the various expert camps?

What do we do when our experts disagree?

When Ears Don’t Hear, Truth is Futile

March 21, 2011

Comment in response to this article by Leonard Pitts, writer for the Miami Herald           03/19/2011

Mr. Pitts,

You claim to be presenting “objective fact” and rue the idea that no one gets it. That your article will be futile, I agree. But it will be futile because you have not and will not present “objective fact”.

“For instance, in her book, The New Jim Crow, Michelle Alexander reports that white kids are a third more likely to have sold drugs than black kids. But in some states, blacks account for up to 90 percent of all drug offenders in prison.” Thus your column infers drug arrests must be racially motivated.

Michelle Alexander claims, “white kids are a third more likely” to deal drugs. This is clever word usage designed more to hide information than provide it. Let’s assume any randomly selected drug dealer has a 33% probability of being black. But if that drug dealer is 1/3 more likely to be white then a randomly selected drug dealer has a 44% probability of being white. We can assume a 23% probability of the drug dealer being Hispanic or Asian or of mixed race.

Out of every 100 drug dealers then about 33 are black and 44 are white. Thus “white kids are a third more likely to have sold drugs”. But black’s only constitute about 13% of our population while whites are about 80%. If we look at any random sample of 100,000 Americans and of those we assume 100 are drug dealers then of those drug dealers 33 are likely to be black and 44 likely to be white. But in that same 100,000 population sample only 13,000 are black and 80,000 are white. The rest being of other races. (See U.S. Census Bureau Quick Facts)

That suggests a 0.254% probability of a black being a drug dealer and a 0.055% probability of a white being a drug dealer [33/13,000=0.254% and 44/80,000=0.055%]. This means blacks are 4.6 times more likely to be a drug dealer than whites [0.0254/0.055=4.62]. Is that racist Mr. Pitts? If random members of the black race are nearly 5 times more likely to be drug dealers than random members of the white race then isn’t it “objective fact” that they are far more likely to end up in jail?

Other questions regard the nature of the drug offense. Is the drug dealer who only sells marijuana more likely to be white or black? Is the drug dealer who sells powder cocaine more likely to be white or black? Is the drug dealer who sells crack cocaine more likely to be white or black? Is the drug dealer who sells methamphetamine more likely to be white or black? Is the drug dealer who sells heroin more likely to be white or black? Mr. Pitts you claim “objective fact” but all I read is subjective bias. You and Michelle Alexander conflate various types of drug offenses together as if selling heroin on a street corner is no more offensive than selling a nickel bag of marijuana to a college buddy. You obscure “facts” with sophistry.

And that sir, is why your column is so futile. You continuously harp on the racial makeup of statistical outcomes  and rarely harp on the choices being made by individuals. In so doing you drive a wedge between those of us who expect individuals to make responsible choices and to enjoy (or not) the obligations thereof and those who seek to have the state provide an outcome. It is not racist to ask why so many black children are born out of wedlock yet few black leaders complain publicly. It is not racist to ask why so many black children grow up without a father yet few black leaders complain publicly. It is not racist to ask why so many black males have criminal records while black leaders only complain about the racist police instead of stupid choices made by individuals. Instead of challenging the choices members of your racial community make you charge the white population with racism and then demand that the state force an alternative outcome regardless of choices individuals make. If expecting individuals to make responsible choices about their lives means that I am racist then so be it.

And for the record, it is objective fact that most murders are committed within racial categories. That is most blacks are killed by other blacks and most whites are killed by other whites. Indeed, in all cases most often by someone they know.


March 21, 2011

Wilmington, NC
StarNews      03/03/2011
Letter to Editor:

[Note: NC has a film industry incentive to give filmmakers a 25% rebate on their expenses. The editors of the local paper find this just peachy.]

The editors congratulate themselves on the erstwhile success of the film industry in, “Wilmington’s film business on a roll; let’s hope it continues”. Yes, the local film industry is on a roll all right, they’re rolling away with our tax dollars. Golly, who would have thought that bribing a favored industry with a tax credit equaling 25% of its expenses would actually bring that industry to town. Amazing, simply amazing. As Claude Rains famously remarked, “I’m shocked, shocked …”! And as the film industry responds to these tax credit bribes the surprised editors shout with “Glee” or is it just glee? But economically this is “The Night of the Living Dead”.

As a small business owner I’m tired of the endless pleadings for “more porridge tax credits please sir!” as if film is the only industry that needs to remain competitive. What pray tell (is prayer permitted in Willmingwood?) would the editors expect to happen if other industries received the same bribe? Would pharmaceutical companies (PPD) show up in force? What about nuclear (GE) facilities? Might some more build plants nearby? How about a 25% tax credit for specialty glass (Corning)? Would Corning manufacture their Gorilla Glass locally? Or, forsooth, would a 25% tax credit lure more cement plants (Titan)? The list is endless really. In fact, the State of North Carolina could bankrupt itself by bribing industry to locate here. We know that the film industry responds to “The Bribe” (1949). So will others.

Bond Portfolio Frustrations

March 21, 2011

Below is an excerpt from a Morningstar article by Christine Benz published on 2/28/2011

 The Error-Proof Portfolio: Nervous Bond Investors–Don’t Make These Mistakes

“The second potential risk for individual-bond investors right now is one of lost opportunity more than anything else: If available bond yields pop up from today’s ultralow rates, buy-and-hold individual-bond investors won’t be able to take advantage of them until their securities mature. And when they do, they’ll be forced to reinvest their bonds at whatever interest rates may be on offer, even though interest rates could go even higher in the future.”

This attitude is so frustrating. I’ve seen it from Morningstar and individual investment advisors alike. In a discussion of bond allocation in a portfolio to infer that individuals should remain in cash or only buy a capital losing bond mutual fund because otherwise we’ll miss other investment opportunities is downright insulting. What the heck are the alternatives? Bond funds? The implication is that individuals should only invest in bond mutual funds so that we don’t miss investment opportunities! Phooey.

If I invest in a bond mutual fund I will lose a lot more than opportunity compared to buying individual bonds. I will lose capital and with it the opportunity to invest in anything. So what if I have to re-invest my matured bonds at “… whatever interest rates may be on offer, …”. Doesn’t that give me the chance to re-invest at much higher yields? And this is as compared to a bond mutual fund throwing my capital away in order to maintain a fixed duration in their fund. And rarely does the resulting yield rise recoup my capital loss. This comment poisons the rest of the article.

U.S. Experience With Deflation

March 21, 2011

Letter to St. Louis Federal Reserve employee                                   10/03/2010

 Dear Mr. ——,

 I just read your cover article regarding the “U.S. Historical Experience with Deflation” (National Economic Trends, October 2010). As you will readily ascertain I am not a credentialed economist just a street level economic person. As I read your article I was struck by several points. First, the Mark Twain story about the cat that slept on the stove came to mind. You may recall that story. A cat routinely slept on top of what was normally an unlit pot bellied stove. One day the cat jumped up on the stove and found it had been lit and was very hot. The cat learned not to sleep on the stove. The cat should have instead learned to check if the stove was lit.

Is the U.S. experience with deflation analogous? Have we simply learned to avoid deflation at all costs rather than to manage an economy to avoid both excessive inflation and deflation? Is it not possible that our economy would be better overall if we accepted limited deflation as well as limited inflation? If not, why not? Has it been any easier to rein in excessive inflation than to correct excessive deflation?

It is not clear to me why the rationale of reduced economic growth as a result of deflation is accurate. If deflation is a symptom of reduced growth rather than a cause the linkage is even more tenuous is it not? As a street level economic person I would not hold cash per se during deflation but would invest it so as to earn a return. Clearly a 2% deflation makes cash more “valuable” in real terms but cash invested at 3% (or 2% or 1%) provides even more value. Nor would I hold off buying items just because they might be cheaper in a year. This is of course the common argument against deflation.

Indeed, if I need a car why would I wait a year? If I needed (or wanted) a new house why would I wait? Yes, it might be cheaper but 2% or 5% even? Is the “cost” of waiting a year worth some modest percentage of the value? Presumably I would receive at least that much value from the new asset else why buy it? The short answer is yes, I would buy it even if it would be cheaper a year from now.

Consider please every single electronic device created over the past 30 years or more. Every single one has gone down in price year after year but people continue to buy today rather than wait a year or two or three. Where is the practice of sitting on ones cash evident? Would a business not invest today if they believed it would be profitable? As a small business owner I can assure you I would even if I knew that a new building, new equipment, new vehicles – new computers? – would be cheaper in a year. I might lose 5% or 10% of additional profits by waiting for 2% cheaper prices. That would be stupid and while I might not succeed I try real hard not to be stupid.

But there’s the rub isn’t it? Business would invest if they thought it would be profitable but because they don’t think it will be profitable they don’t invest. From my perspective way down at street level the issue isn’t deflation but demand that has been pulled (yanked, jerked, dragged) forward through every imaginable type of macro-economic policy government can conceive. Now that the U.S. has reached the end of that economic gaming the worry is deflation. Yet just as I lag behind the inflation curve so too I would lag (my income that is) behind the deflation curve. Allowing prices to decline may incur some pain (possibly severe) but it would certainly clear the surplus assets faster and permit a more measured and sustainable growth to resume. The big losers will be those who benefitted from the unsustainable, inflationary economic policies. And I care about them as much as they care about me. Seriously though I understand such a policy would present a severe economic disruption but I also believe our nation and economic system is strong enough to survive. Most forests benefit, in the long term, from a forest fire. We need the economic version of a forest fire which is deflation.

Second, why is a 2% inflation rate considered “price stability”? I certainly don’t consider the annual loss of 2% of my dollar value as stable. It means that every 25 years my dollar buys half what it used to buy and that assumes (wrongly I believe) that the published inflation rates are in fact accurate. It also means I must run twice as fast just to keep up with those “stable prices”. Worse, inflation rises ahead of and typically faster than my income. Consequently I am always behind that inflation curve. Government is not of course and the suspicion is that that is the actual intent. Is this the best that our Federal Reserve can do?

Why wouldn’t a true zero inflation/deflation rate be better for the average worker? Would we not gain economic value through productivity gains and technological advances? Why is it necessary to devalue our currency to achieve economic growth? Mind I am not suggesting stable money supply. I recognize that as population grows the money supply must grow to accommodate that increased population. What I don’t recognize is why it must grow faster than the population.

 Thanks for your article. Clearly I found it quite interesting if also frustrating. I’ve not read a review of the economic history presented in this way and I appreciate the perspective.

The Right To Judge

March 21, 2011

Wilmington, NC

 StarNews                                                      08/13/2010

Letter to Editor:

In the article, “Who has the right to Judge”, by Leonard Pitts he makes the point that a judges personal circumstance does not invalidate their ability to pass judgment on issues – even when those issues may impact the judge personally. He challenges those who claim that a supposed homosexual judge (who overturned California’s Prop 8) is biased in favor of homosexual rights. Mr. Pitts writes, “… that reasoning would require women judges to recuse themselves from cases with women plaintiffs, Jewish judges to abandon cases with Jewish defendants, white judges to leave cases tried by white lawyers.” 

I am curious then how Mr. Pitts views the NC Racial Justice Act that requires investigations of bias in sentencing? From the “Sentencing Law and Policy” blog:

“Under the terms of the Racial Justice Act in 2009, convicts can use statistical evidence to argue bias in their sentencing. The law allows judges to consider evidence that one racial group is being punished more harshly than members of other racial groups.”

Which is it Mr. Pitts? Can a white jury judge a black defendant or a black jury judge a white defendant? Can a male jury judge a female defendant or heterosexual jury judge a homosexual defendant. Or, based on your past writings, is it only bias when a black defendant is on trial? Consider what Supreme Court Justice Sonia Sotomayor said in 2001. “Hence, one must accept the proposition that a difference there will be by the presence of women and people of color on the bench. Personal experiences affect the facts that judges choose to see. … I simply do not know exactly what that difference will be in my judging. But I accept there will be some based on my gender and my Latina heritage.”

I love that line: “Personal experiences affect the facts that judges choose to see.” Facts that judges choose to see. Never mind the whole truth, here’s what I want to see.

 So, Mr. Pitts, is it truly unreasonable to expect a homosexual judge will in fact be biased when ruling on a case involving presumed homosexual rights? And, if not, then justify the NC Racial Justice Act. Either we are all capable of bias or none of us are, right?

An Economic Parable

May 28, 2010

A group of individuals arrive at the shores of an assumed to be deserted land. Well, there may have been some a-priori occupants but they only have knives and the new group has guns. The earlier occupants are quickly dispatched. The new group settles onto the new land to begin an new economy. 

Some in the group are hunters, some are farmers. Some have a skill at turning clay into pots that store food stuffs for the long winters. Some have a skill at turning hides and furs into clothing to stay warm during those long cold winters. Others have a skill at turning trees into lumber and thence into shelter, yada yada yada, long cold winter. Some actually have little or no skill and lack the intellect to develop same, but they are able to provide value by their labors and assist the skilled individuals in their respective tasks. 

Early on the economy was a simple barter system. Furs for lumber, grain for leather, shelter for clay pots. Within the small group it was perfectly reasonable to maintain a book of ledgers to ensure the barter was fair (that is, bilaterally agreeable) and completed or fulfilled. Clearly the farmer may need some assistance while the crop was growing but before it was harvested. The laborer desired some record of their labors to trade for the future harvest. A record was needed to ensure such trade occurred. 

That barter exchange was recorded in the great ledger and the laborer was given the right to obtain some agreed upon amount of grain whence the harvest occurred. In like manner the hunter provided a fur credit to the timber person in exchange for future shelter. As the shelter was completed that barter credit was reduced. Should the shelter credit exceed the fur debit the hunter would be obliged to provide additional furs during the following hunting season. Ditto the farmer and potter and so on. 

Cleary one of, if not the first issue the group needed to settle was the barter level of exchange. How many furs, and of what type would be required for a shelter of some defined size. How much grain and fruit, what type, what condition, is equivalent to the farm laborer assistant for their labors. Only through much discussion, and some argument was the great barter book of ledgers (GBBL) developed. And it was never really a settled matter. As conditions and requirements varied so too did the individual barter levels between the various skill groups. It was a dynamic system, flexing with the winds of change. 

As the group procreates and their population grows new issues arise. New skill sets develop such as doctoring for the sick or injured. Caring for the children so others can be productive. Caring for the elderly. Maintaining the ever changing GBBL. Each of these new skills needed to be correlated with the original skills in the GBBL and again, as circumstances varied so too did the new skills values need to be adjusted. Too many individuals desiring to trade child care labor for grains and fruits reduced the value of that labor. Too many farmers and not enough hunters ensured full belly’s and cold backs. Again, the value of those individual labors and skills required constant adjustment in the GBBL. 

Enough the people cried. The GBBL is beyond recognition. The scribes cannot keep up with the population growth and the constant, daily variations of the barter exchange rates. We need a better system. One that permits rapid, individual adjustments on demand. So, computers were born? No, I’m kidding. Actually money was created. And so, in a massive group project the people spent one long cold winter converting the GBBL to a money system. Creating their money in one ducat denominations they laboriously converted their GBBL exchange rate to a ducat exchange rate. One that all agreed fairly represented the values of the different skills, labors and goods the community produced. 

But the people also understood, intuitively and literally, that the money being created must relate to the skills people possess, labors they provide and goods they create. Further, that new money can only be created in response to a new amount of goods being provided. Else the value of that money would decline and all would suffer. That is, assume the group creates 1000 ducats for the entire community economy. And that those ducats are distributed according to the skills, labors and goods based on the new money exchange rate system (MERS) which in turn was originally derived from the GBBL. 

Yet suppose one member (a thief working as a scribe) secretly forges another 20 ducats for their own purposes. The thief has reduced the value of everyone’s skills, labors and goods by 2%. Why? Because the thief – who provides no skills, no labors and no goods – quietly spends their 20 ducats to purchase a variety of goods and services that they would not otherwise possess. And that spending is in addition to the spending of the ducats legitimately acquired. Others in the community, desiring some of those same goods and services find a shortage and they begin to bid amongst themselves for the now scarce items raising the cost of such to equal the demand. The thief, amazed at the success of this nefarious deed, plots their next turn of fraudulent money creation. 

The difficulty for the group is that new money must be constantly created in response to new goods and services that are created. As a child matures to a productive adult they provide a service or create a good that did not and would not otherwise exist. To facilitate the integration of that item into the economy requires additional money creation but only in proportion to the goods and services being provided. As the new money is created the thief recognizes a marvelous, if opprobrious, opportunity. As the community creates new money in response to population growth the thief will forge a new batch as well. Indeed the thief rightly recognizes that as the money supply – along with population – grows the opportunity to quietly insert the forged ducats improves until it is hardly an issue for the thief at all. 

If the productive population grows at 5% per year (long cold winters, yada yada yada) it will double in some 14 years. [That assumes a population compounding; without compounding it will take about 20 years.] The economy would then have some 2000 legitimate ducats circulating due to the doubling of the productive members.  The thief meanwhile continues to forge 2% each year and adjusts for the growing money supply. Over the 14 years the thief actually creates some 392 ducats or some 20% of the total money supply (392 forged/1980 legitimate)! So a simple plan to steal just 2% per year results in a 20% theft over 14 years. Indeed, if one accurately counts the money in circulation and if the thief adroitly forges new ducats right alongside the valid ducats the actual money supply becomes not 2000 (1980 mathematically) ducats but 2400 ducats (or 2372 mathematically). The purchasing power of the legitimate and productive members of the community has been methodically reduced by some 20% in just one generation. 

The problem for the community is that some of the other scribes have observed that one of their brethren has been curiously non-productive yet continues to acquire a marvelous supply of community goods and services. On inspection they discover the ruse and confront the thief about the forgery. The scribes being largely unhappy at the lowly position they occupy in the MERS and recognizing their critical linkage in the maintenance of that MERS decide not to expose the thief but to emulate them. At least most of the scribes, uh, subscribe to that philosophy. The few remaining are either blissfully unaware or threatened into submission. 

Now the forgery begins apace. Each of the scribes committed to undermining the money system (SCUM) demands a share of the forgery. Indeed their demands are so great that the modest 2% theft rate is wholly insufficient. The SCUM decide to bump up their forgery rate to an obscene, but lucrative 10% each year. Awesome. But the scheme takes a coolly cynical and sinister turn. For the SCUM recognize that their new theft rate may be a bit obvious. As a group the SCUM decide to shower some their new found largesse to the benefit of a select few members of the community. The very members whose support is vitally necessary to the SCUM remaining in their positions as scribes. After all, the community may, if it so desires, change the individuals working as scribes. But by enlisting the support of key members of the community the SCUM ensure their positions and hence, their theft. 

What happens now is painfully obvious. The community is so large and diverse it is difficult for any one member or even a small group to understand what is happening in their midst. For while they seem to be prospering, they each have more ducats this year than last, they also seem to be trapped in an economic paradox. With each step of growing prosperity, more ducats, they seem less able to obtain the goods and services required. Indeed, it is only by committing their future service and goods that they are even able to maintain their current standard of living. It is a curious paradox indeed. 

At the new, higher, theft rate of 10% per year the SCUM reap vast rewards – as do their key supporters. Indeed, in just 10 short years even as the community economy grows apace at a compounded 5% annually the SCUM ravage enough of the new growth to effectively steal half of the community wealth. In just those 10 years the SCUM rise from having stolen 20% of the economy (as measured by the forged/legitimate money supply ratio) to having stolen an additional 83% of the economy. Combining both the original theft and the new theft the SCUM have stolen an amazing 95% of the community economy as measured by the forged/legitimate money supply ratio. 

And the people of the community are left with a conundrum. How can they continue to improve their economy with growing population and growing production of goods and services yet lose individual economic ground each year? True they each have vastly more ducats than just a few years prior but strangely those ducats just don’t purchase as many goods or services as they used to. Are the productive members really better off? Can they finally gather enough disenchantment with the SCUM to remove them from their high offices? Will they revolt against the key SCUM supporters? Or will they succumb to the temptation to join them?

100 Population Base   1000 Money Supply
5% Population/Money Rate   2% Old Thief’s Rate
        10% SCUM Rate  
  Population Money Thief      
1 105 1050 20      
2 110 1103 21      
3 116 1158 22      
4 122 1216 23      
5 128 1276 24      
6 134 1340 26      
7 141 1407 27      
8 148 1477 28      
9 155 1551 30      
10 163 1629 31      
11 171 1710 33      
12 180 1796 34      
13 189 1886 36 Total Thief Amount  
14 198 1980 38 392 20%  
15 208 2079 198      
16 218 2183 208      
17 229 2292 218      
18 241 2407 229      
19 253 2527 241      
20 265 2653 253      
21 279 2786 265      
22 293 2925 279      
23 307 3072 293      
24 323 3225 307 SCUM Thief Amount  
25 339 3386 323 2813 83%  
    Total Thief+SCUM 3205 95%  

State Pension Abuse

March 13, 2010

The article in today’s (March 10, 2010) Star News, “N.C. among states raising pension-investing risks” will sadly receive far less attention than it should. [Note: the original article is, “Public Pension Funds Are Adding Risk to Raise Returns” and was published in the NY Times on March 9, 2010.] In the same vein a subsequent article, “A richer retirement for ex-ABS boss” (March 13, 2010) adds fuel to the pension abuse fire. In fact, the NC pension system is a state level version of the federal Fannie Mae / Freddie Mac debacle. That is, Fannie Mae and Freddie Mac were deemed independent of the federal government by such luminaries as Rep. Barney Frank and Sen. Chris Dodd. That is, they were independent right up to the day that the federal taxpayer became fully liable for all their debts and fraudulent activities (see accounting frauds – Fannie Mae and Treasury, debts, Fannie Mae and Freddie Mac).

The NC pension system is undoubtedly deemed independent of the state’s taxpayers. And so it will remain right up to the day that the system is broke and the state taxpayers will become obligated to cover all the pension obligations incurred by a profligate state government that is owned and operated for the benefit of the state employees not the state taxpayers.

A recent article regarding a local state employee exemplifies this future debacle. The retiring Supreme Court Clerk when asked about her future plans noted that she will have to do something since she is only 48 and can’t draw her pension until she’s 50! What private sector employee gets a full pension at 50? And I mean full private sector not some quasi-governmental organization like Cape Fear PUA or the ABC folks. When state (and quasi-state) employees are able to take full pensions at age 50 and receive their benefits for 30, 40 years or more who will pay them? Given the failure of the pension board to meet its projected 7.25% return assumption for over a decade who will pay the promised benefits? It certainly won’t be the state employees.

The one answer, the only answer, the answer every time is the state taxpayer will pay. Indeed, no sentient being expects the state NOT to bail out the pension plan when it fails. And clearly it will fail when the investment assumptions are based on the benefits to be paid not the returns that can conservatively be earned. This is a prime example of government not by the people, of the people, for the people but government by the government, of the government, for the government. Government looks to the taxpayer every time. Government is not longer the servant of the people, it is our master. It is a classic case of heads, the taxpayer loses and tails, government wins. Here’s how it works.

The state employees pay the least possible amount that is politically acceptable into the pension plan. The pension board makes absurd assumptions about investment returns. The board then promises extravagant benefits based on those faulty assumptions. When the investment returns do not in fact occur the pension board then seeks authority for “flexibility and the tools to increase portfolio return and better manage risk.” to quote Janet Cowell, ex-state treasurer. In other words the pension board wants to speculate with the pension money in order to earn the higher returns needed in order to pay the extravagant benefits promised. And why not? If the pension boards speculative investments fail – and fail they eventually will (see Harvard, Endowment Fund, Losses) – then the pension board will simply ask the taxpayer to take over the obligations.

As an example of these extravagant pension benefits, consider our local ABC administrator Billy Williams. To calculate his pension the state treasurer uses the average of his four highest paid years, plus other factors such as  date of birth, estimated social security benefits, unused sick leave, the number of beneficiaries and the length of his employment. There are few, very few, if any private sector employees who can ever hope to obtain such extravagant benefits. Yet it is these very same private sector taxpayers who will ultimately be responsible for Billy Williams’ pension benefits. In short, state employees, through the state pension board and state treasurer get to speculate with their pension money so as to receive these extravagant benefits knowing full well that the state taxpayer will bail them out if the pension system fails. It is a win-win for the state employees and a lose-lose for the state taxpayers.

Where should the pension board invest the money? First, they should buy all the state and local bonds. Only when all state and local bonds have been purchased should the pension system be permitted to invest in federal bonds. That’s it. By investing in the state and local bonds the pension system and by extension, the state employees will have their fates tied to that of the state taxpayer instead of to some Wall Street hedge fund.