no third solution

Blogging about liberty, anarchy, economics and politics

401(k) – The Next Bubble?

February 9th, 2009

There’s a really large proportion of people who are more-or-less passively “investing” in 401(k) type funds — a large enough proportion that if, in addition to the speculative bubble in mortgages that destroyed all sorts of paper “wealth” over the last 12-24 months, a macro-bubble exists, a lot of people are going to be all sorts of financially FUBAR.

The unintended consequences of government intervention in individual retirement planning is terrifying: it’s so massive and affects so many people. I suggest that, as the working population grew over the last several decades, this process created its own macro bubble, for which there are a few contributing factors:

  1. Even if prospects are poor, it seems foolish to turn down “free” and tax-deferred money.
  2. The individual has relatively little control over the allocation of his funds, especially he can not “cash & hold”.
  3. The individual can’t liquidate his holdings unless he’s unemployed, deqlinquent on your mortgage, or otherwise altogether financially f**ked.
  4. There is no opt-out mechanism: even if fund managers think there is nothing worth buying, they have to buy.

For most people making small/minimum contributions, even abstaining from contributing to these plans would only make a barely noticeable difference in their take-home pay. Individuals, faced with the prospect of “free money” via employer-matched funds, as well as tax deferral, have a huge economic incentive to invest in these vehicles. People, faced with severe economic incentives to invest in these vehicles (“matching funds” and tax deferral) will more often than not, put 3% or 6% or 10% into a 401(k) type plan. Corporations get to include matched funds as part of total compensation, which is tax deductible, it’s like health insurance: “We offer this awesome Health Plan/401(k) plan as part of our total compensation package. You don’t have to sign up, but you don’t get any substitutions if you don’t, though.”

So, why wouldn’t someonesign up? Keep in mind that they’re not actually making a trade-off between A and B, they’re making trade-offs between A and nil. Now, the individual has essentially delegated her retirement savings to the fund. And the fund takes care of her retirement, so she doesn’t have to &mash; indeed 60% of working Americans think of their 401(k) as their primary retirement fund! But here’s the rub: The level of control which any individual can exercise over his account is relatively limited, for instance, Vin Suprynowicz tried to convert his holdings to physical gold, gold ETFs, mining shares, and finally to cash — he couldn’t do any of these! There are also strict limits on how and under what circumstances an individual may withdraw from her account, but typically one must be unemployed, delinquent on her mortgage, or have suffered the death of an immediate family member.

The bottom line is that people are contributing to these funds because they really don’t have another meaningful option. This is interesting, and terribly frightening, because I don’t think we’ve seen the tip of the iceberg yet.

The “value” of these funds have previously been buoyed by (essentially) forced contributions burgeoned by a growing workforce. Funds were being bought because money was coming in, and managers had no other option but to buy.

As the growth of the workforce slows or potentially declines, what happens to the values of all these funds? Or, to make mattes even worse, when the baby-boomers begin drawing down these funds (i.e., selling them) in order to draw a retirement income, what happens to their value when there’s nobody buying them on the other end?

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(H/T: Vin Suprynowicz’s recent editorial.)

Comments on Comments #25

October 14th, 2008

About a month’s worth of comments!

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Kip Esquire responds to my 401(k) conundrum:

I would hope that your 401(k) has a money-market option.

There is a money-market option. I should have allocated more to that, several months ago. I didn’t. In any event, my 401(k) is rebalanced as of this evening.
http://1955design.com/journal/
1955Design follows up with,

Your fund family that your 401k is in probably has a gold or precious metals fund.

Although I am not sure that now is the time for that investment, either

I looked for this before, admittedly, I did not look very hard. I did not see anything that appeared to be a gold or precious metals fund. Some of these are ETFs or other things, and from what I understand are also highly leveraged. Many of these funds also are insolvent in a technical sense, meaning that they operate on a fractional reserve basis, too.

But, the market is up some 1,200 points since I wrote that. Go figure.

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Responding to my comments on anarchism and authority, Damaged Justice says

When a person possesses greater than average knowledge and/or experience regarding a given subject matter, we refer to them as “an authority on the subject.”

This accepted definition is a far cry from the “authority” who presumes to command others solely by the supposed virtue of superior muscle and firepower.

Agreed. This is why I find these discussions to be particularly difficult. Semantic confusion runs rampant when ideology is at stake. Franc has a new post at his blog addressing the immorality of hierarchies, but I haven’t had a chance to read it yet.

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Kip responds to my post, Gold is NOT a fiat currency:

You’re still tap-dancing around the core issue: gold only has value because people say it has value (or expect other people to say it has value).

The debate is instead whether it is better, in an advanced global economy to argue for a government that cannot debase gold or one that will not debase its currency. I continue to support the latter because I believe the former is simply unworkable.

I will respond to this comment in a stand-alone post, shortly. In the meantime, frequent commenter, Jeff Molby steals my thunder:

No, he’s specifically stating that that isn’t the core issue. Fiat currency has value solely due to government coercion. If the government disappeared tomorrow, so would the value of its currency. Gold would retain a strong value sans government.

You forgot the third possibility: a government that will debase its currency as often and as much as it thinks it can get away with.

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Tony, 1955Design, and Kip congratulated me on my marriage. Thanks everyone. Someday I’ll post some pictures maybe to my Flickr account.

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Shayou Wang left a comment on Gresham’s Law is Wrong.

In addition, it also works in the presence of Bimetalism fixed exchange rate or face values (also enforced by governments).

Exactly. The proper application of Gresham’s Law is not really an economic law of its own, it’s simply a case-specific formulation of general economic theory with regards to price floors or price ceilings. When a commodity is artificially over- (or under-) valued with regards to other commodities, bad things happen.

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Kip and I have a long-running dispute over the subject of jury nullification. In the most recent installment, Kip says,

I just find it utterly preposterous to suggest that it’s the “libertarian” thing to do.

Circumstances dictate the appropriateness of jury nullification. View individuals as moral agents, they are qualified to determine the justness (or injustice) of laws, and should render verdicts in accordance with proper morals. To use the fact that some people have a lousy moral compass as an objection to nullification on libertarian principles is a red herring.

Clay S Conrad comments:

You wrote that “An unjust law is a necessary condition for any appeal to nullification. ” I’d disagree.

Even the best laws can be misapplied, or unjustly applied. …

Clay’s point is that most laws, at one point in time or another, will eventually be used in such a manner that renders their application unjust. Point conceded.

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Thanks to No Treason for plugging my post, How Much Will The Bailout Cost You?.

In response to the same post, Azrael comments,

I am at the point where I expect this insanity and just do not see the point in getting angry anymore. As far as I am concerned our whole debt and monetary system is illigitimate because it is forced on us.

I’m not apathetic, yet. I try not to get upset over such things, but they do chap my ass, so-to-speak. There’s nothing I can do, per se, to stop these things from happening. The goal of libertarians, anarchists, agorists, etc., is to find a way to minimize the external costs imposed by this illegitimate system.

Jeff Molby comments:

Assuming that at least some of the assets are performing, some of the $700b will be recouped at some point.

Perhaps. But we, as taxpayers, who are ostensibly funding the TRILLION DOLLAR BAILOUT will never recoup a dime.

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Self-described “former AIG customer,” Louis left a comment on On Being Too Big To Fail:

there goes the proverbial credibility of the free market, the big fish falling in the safety net,saved from bankcrupcy by the the little guy…then ill’be dammed if i hear them talk about economy resilience again; help from the little guy, they will call it solidarity, expression he never heard in the mouth of those big fish when HE was in turbulent waters.

Louis! THE USA IS NOT A FREE MARKET, despite loads of rhetoric and propaganda to the contrary. What we see happening in the market right now is a textbook example of government interference gone wrong. But you’re right on the money with the second half of your comment: when the big fish goes bankrupt, we have to bail them out. When we go bankrupt, they take our houses.

The entire financial system is broken, beyond salvation.

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Ryan left a comment on If You Don’t Like it, Get the Fuck Out!

I agree but I feel that, especially following this coming election, we will have a certain population of Americans taking these people’s suggestion and “getting the fuck out” not because they bail on the ideals of this great country but rather because they feel that those ideals have been forsaken by the likes of whom you speak of and consequently feel threatened by the infringement on their personal freedoms and the consequences of similar ignorance. What do you think?

It seems that Ryan supposes that this year, many people will be exercising their right to “vote with their feet.” I’m not sure this year is any different than any others. And I think voting with ones feet is simply one more iteration of the “lesser of two evils” game. Where are they going to go? Some other country that sucks just as bad in some areas, worse in others, and is marginally better in maybe a few areas?

The point of my post was to challenge the notion that one is obliged to leave if he doesn’t like the system. I don’t think anyone should have to make that choice. It’s unfortunate, if it’s coming to that.

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My friend Brad left a comment on Of Greed and Charity

I remember the same conversation we had with Garrett in Grand Bend. Remember how he felt it was okay that rich people (or average income people) should have to be taxed more to help the less fortunate out. This guy Ryan feels the same. Nobody should be taxed on their income.

Mike Gogulski at NoState.com has an excellent post on the topic of this loser mentality, The Golden Rule is Insufficient. According to Mike, some people say,

I want to be taxed to provide essential services for other people. I want this because I know that I, like others, am greedy, and would not otherwise contribute to their well-being. This is especially important with respect to the well-being of others incapable of providing for themselves.

That sounds exactly like what Garret was saying. Mike responds to this idea, probably better than I ever could:

The Golden Rule is a poor ethic to apply when your morality legitimizes violations of yourself. Until you are possessed of a morality which regards other people as ends in themselves, rather than means to be exploited for whatever grand goal the day demands, using the Golden Rule as your ethical yardstick admits all manner of horrors.


Very, very, very well said. I love Mike’s writing.

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That’s all for now.

Comments on Comments #23

August 7th, 2008

Regarding the Zoo millage, which passed overwhelmingly:

“I’m thrilled,” said Liz Kaczmarek, 30, of Clinton Township, who takes her nieces and nephews to the zoo frequently. “I don’t know a person who knows about the zoo millage who said they were going to vote no.”

I didn’t vote at all.  But even if I had, Liz, you wouldn’t have given a damn what my opinion was, because there simply aren’t enough of me.

Eric Ogunbase left a comment in response to my original post on the subject, A Zoo is Not a Public Good:

Growing up in San Diego makes one a “Zoo Snob”. However, I’ve been to both zoos (born in Hutzel Hospital many moons ago). I think the tax dollars of those in Wayne, Oakland and Macomb counties could be used for more pressing matters.

The Zoo is not one of them.

I couldn’t agree more. As long as the government is spending money, it should be doing something mildly productive with it.  Subsidizing people who want to play with big cats or cute penguins all day doesn’t count.

Meanwhile, Jeff Molby was busy commenting:

I take my son to the zoo regularly and I’m gonna go to the polls specifically to vote against this. BTW, I don’t even own a house.

That’s alright. Property taxes are passed forward to consumers of rental properties, too.  But it didn’t matter that Jeff voted against it.

The measure passed by a 2:1 margin, and is expected to raise property taxes about $10/year.  Why can’t the 2 who voted for it pay $15/year, and I pay $0/year?  That seems fair.

According to the article,

The tax, which is to cost the owner of a $200,000 home about $10 per year, will generate almost $15 million a year toward the zoo’s $26-million annual budget. The rest comes from admissions, concessions and donations.

Does the Detroit Zoo really only take in $2MM in concessions and donations revenues, annually?

Must be some sort of “new” math.  If the zoo is $15MM short, that means it only brings in $11MM/year. The zoo boasts over 1 million visitors per year, and an adult admission is $11 with discounted fares available to children, groups, and elderly. I’m going to assume an average fare of something in the neighborhood of $8.  That’s about $9MM in revenue, right there.

One commenter at the Free Press forum said,

It is just a shame that they didn’t ask for more money and make it free admittance. Then maybe people would go and utilize it…then sponsors would come…then the zoo would expand and get better…and more people would come…and more sponsors.

Right.  Just what we need – even more corporate welfare.

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Jeff Molby left a comment on Consumer Price Index (1800-2007)

 I’m no fan of the Fed, but I couldn’t find a source for the estimates used in the chart. It’s pretty, but meaningless without a list of the assumptions used.

You could look it up at MeasuringWorth.com (via EH.net).  They indicate $51 in 1800 is approximately equivalent to over $800 today.

Robert Evans left a comment, as well:

In general, statistics demonstrating that there has been inflation do not convince anyone that anything is wrong, because public opinion normally holds that a low but constantly positive level of inflation is good for promoting growth. That’s the belief that needs to be changed. Otherwise, you’re just preaching to the choir.

Robert! I think the point of that chart is that a “low but constantly positive level of inflation”  is not what we’ve experienced over the last 100 years.  This chart should give even the staunchest Friedmanites pause.

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Jeff Molby left a comment on Fiat Credit is NOT a Loan, in response to my position that “A credit card is not a loan. Sometimes they are characterized as unsecured loans, or unsecured lines of credit, but in truth they are not loans.”

You’re not suggesting that credit cards themselves are a source of the problem, are you? It seems to me that a credit card could be completely legit in a hard money economy. If the bank pays Best Buy in hard money, the bank is temporarily and conditionally surrendering an asset on my behalf.

Your title implies that we agree on that, but I think you should clarify your third paragraph to make it clear that the underlying fiat system is the problem rather than the practice of supplying credit via a standardized form of identification.

Yes and No. I think that credit cards as we know them are essentially a product of a fiat money system, in that regard the system is the problem and the cards are merely a symptom.

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Kip commented on Money From Nothing,

the Fed does not and cannot “monetize the debt.” Only the Treasury can do that. Federal Reserve Notes are not “the national debt,” Treasury securities are. The Treasury redeems them, not the Fed — either with tax revenues, proceeds from new debt or with currency (monetizing).

I consider the Fed and the Treasury to be two sides of the same coin, no pun intended. It doesn’t much matter which party technically monetizes the debt. The broader argument, that inflation is fraud, still holds, regardless of which half of the oligarchy is pulling the levers.

There were a number of comments on this subject, to which I’m still crafting a reply.

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On Chrysler Kills the Auto Lease I forgot to mention something.

When determining the lease price for a vehicle, the lessor must know at least two things.

  1. The fair market value of the vehicle at inception
  2. A reasonable approximation of the vehicle’s value at fulfillment

Most of the news reports are citing vehicles’ lower-than-anticipated value at lease termination as reason for killing the lease as a financing alternative. This is only half of the problem, for which their economic model certainly should have accounted. The other half of the equation is always overlooked.

My best guess is that for most of the vehicles leased in the last few years, the value of (1) was ridiculously overstated. Combined with the failure to accurately predict (2), the financing woes for the auto companies was exacerbated. Had they started from a reasonable value, their exposure to macro-economic risks like a recession would’ve been lower.

Of course, it’s a result of over-capacity, brought about (at least in part) by malinvestments encouraged by loose monetary policy.

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Kip, Esquire responds to my accusation, that governments are per se illegitimate in Comments # 22

You toss around the word “illegitimate” a little too recklessly. The argument is that “legitimate” is not a discrete quantum, but a continuum. One government can be more or less legitimite (sic) than another, and the metric by which legitimacy is measured is inoffensiveness to competent adults who have a natural right to life, liberty and the pursuit of happiness.

But to summarily dismiss all government as per se “illegitimate” is circular: you’re just assuming the answer.

I granted the idea that there is a continuum:

Conceivably, if and only if a government were to handle everything with kid-gloves, tread lightly and carry no stick, it would be less illegitimate than it currently is.

But this is a continuum of illegitimacy.  Since there is no “contract” and can never be any such “contract,” (which would qualify as “legitimate”), the endpoint, “legitimacy” is not within the operative range of this continuum but is instead an unattainable ideal state.

Sure, the less deviation there is from an impossibly hypothetical contract, the better off everyone ought to be, but when examining a legitimate contract, the parties must have had the opportunity to avoid the contract in the first place. This is a binary condition: either the parties had the opportunity to forge a valid, consensual contract, or they had no such opportunity.

Since nobody ever had a choice in the matter, I’m willing to defenestrate any pretense of legitimacy.

I mean, let’s call spades as they are. The fact of the matter is this: You are not allowed to disagree with the non-existent contract without ultimately getting shot.

(Anything wrong with this proposition, from a libertarian perspective? Just asking.)

Any government proclaiming any degree of legitimacy ought to recognize that killing people for mere differences of opinion is an heinous policy to pursue.

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One of the greatest black marks on American history was the Civil War. How is it, that every other western nation was able to eradicate chattel slavery without the bloodshed that beseiged the nation during the 1860s, claiming three-quarters of a million able men?

Not being a history scholar, I have no idea how the other nations managed to do it, but Vache Folle offers one solution to the problem in What was so great about slavery?

I don’t really understand why Southern elites hung on to the institution of slavery for so long. They would have had the same cheap labor force to exploit if they had emancipated their slaves and made them free laborers. They would also have gotten more Congressional representation since a freedman would count as an entire person for the purposes of apportionment.

Seems like a no-brainer, to me.

Of course, most people believe that the Civil War was in fact fought over slavery. I believe this was perhaps the popular cause, the rallying cry if you will. In fact, the Civil War was fought to “preserve the Union”, thus invalidating the sovereignty of allegedly free states and people.

no third solution

Blogging about liberty, anarchy, economics and politics