Personal Savings Fall to 74 Year Low

<div class='quotetop'>QUOTE(naterprius @ Feb 1 2007, 05:37 PM) [snapback]384100[/snapback]</div>

We purchased this through an IRA vehicle. This means that the land is held in trust for us. When we want to build on it, we have to "buy" the land from the trust and pay the taxes owed (as you would if you cashed out a traditional IRA vehicle). Now, we just have a lot less cash in our IRA account.

For those interested, you can also use this method to use your IRA money to purchase investment real estate and rent out the property. It's a great way to have your IRA money work for you in the real estate sector. Although based on other threads, the timing isn't so great for this.

From here out, we just now have to worry about accruing enough cash so that we can build a small house on the lot and retire there. This is where things get scary. Couple a two year old business with a husband who will be unemployed as of March 31, and it's fairly grim. We tried to get as prepared as possible by consolidating debt and "cashing out" some money, just in case. If he finds work, we'll be paying our mortgage down w/ this cash out.

A lot of my friends are currently supporting their parents w/ mortgage or rental money assistance. I want to feel secured enough w/ my finances, that I hope not to be such a burden. It would also ease a whole lot of stress.

 

chogan, thanks for the SUPERB post. I think that you are spot on that the housing boom is being used to artificially cover up the indebtedness of the US public. Now that sub-prime ARM loan foreclosures are accelerating, which will deflate the boom some more, we will see how healthy the US economy actually is.

Regarding this question of mortgage or not: I just took out a home loan on my paid off home for investment purposes and tax arbitrage, so my opinion is out of the bag. Really though, dogmatic statements saying YES, or NO ignore person specific AMT, tax deduction, loan interest rate, and investment returns that are not all the same, let alone bets and hedges what the future economy will be like.

fwiw, in my specific situation I break even if my invested loan returns 4.6%; AND I gain an inflation hedge. It was an easy choice.

ymmv. Best to make an informed choice.

Oh yeah .. I'm hoping to save 150% of my gross this year. I've been saving for a while, though.

 

<div class='quotetop'>QUOTE(Beryl Octet @ Feb 1 2007, 05:11 PM) [snapback]384123[/snapback]</div>

Yes, that's my understanding as well. It's been an issue in my industry (health economics) because a large proportion of persons filing for bankruptcy have significant health-care-related debts. Doesn't meant that health care problems caused the banruptcy but they appear to contribute to it for a surprisingly large fraction of all personal bankruptcies. So there have been objections raised on those grounds, but my understanding is that it has become far more difficult to shed debts via bankruptcy.



<div class='quotetop'>QUOTE(EricGo @ Feb 1 2007, 05:28 PM) [snapback]384137[/snapback]</div>

Quite welcome. That's your tax dollars at work. The only pity is that it didn't give me the answer I wanted to hear.

On the mortgage thing, I'll offer my 2 cents. I sweated to pay mine off in a period when interest rates on time deposits were low. And I live in a teeny house by modern standards. Even at that time I figured it was at best a wash, but it made me feel better, being the financial paranoid that I am. The real benefit turned out to come years later, when I had the opportunity to go into business for myself. Coward that I am, I never would have done that if I had a monthly mortgage payment to make. I actually started the business on April Fools day, so that, well, if it folded, hey, it wasn't that serious, and I'd still have the house, and so on. But it worked out well.

So, I'd add freedom from worry as a plus of paying off the mortgage.

 

chogan,

I looked at the article you linked to. It was written in 2002 -- right around the time the tech bubble burst. Did savings rates jump up in the ensuing three years ? I don't think so.

 

Chogan,

As an economist, maybe you'd like to comment on what one can expect in the next decade or so. I inquire as it seems the future is bleak. However, as a layperson I cannot be assured that my perspective is correct.

Outsourcing of jobs to other countries has to be my biggest concern right now. At the very least, won't this drive down labor prices in the U.S. (I recognize that the worst case scenario is mass unemployment) and then subsequently drive down other sectors?

Edit

I just reviewed the link that you posted a little more in depth concerning their perspective of the near future economy and outsourcing wasn't even mentioned in their equation. Evidently, it's not a significant piece of the overall equation.

 

<div class='quotetop'>QUOTE(nerfer @ Feb 1 2007, 07:07 PM) [snapback]384121[/snapback]</div>

it's only a question of interest rate, and that's key... it seems like years ago, if your finances went to hell and you claimed bankruptcy, you simply could not acquire any type of credit, such doesn't seem to be the case these days. I personally know people with somewhat unique lifestyles where sometimes they make a huge amount of money, go nuts, get spectacular homes, pop into the Ferrari dealership, and pick up a 360, then pop on over and get an H1 for the "bad days". Next year or two, slim pickin's, house gets foreclosed, Ferrari gets repo'd or wrecked, they pull a 7, and repeat the cycle on their next big payday....

on a more down to Earth level, I've known people who have gotten homes less than two years out of a 2ND chapt. 7, they really don't care, as long as the payment is right, they'll take it, and there's always someone out there to lend...

 

I don't save anything. What I have beyond my needs goes into my Tax Sheltered Annuity towards my retirement. I think it's close to $1,000 a month. I'd rather put it there than in a savings account. And I'd rather put all of it there than part there and part in a savings account. That may not be the best fiscal management plan but I've done it for thirty years and it works for me. Of course I don't go to the movies, eat out much or take much in the way of vacations. When I travel, it's mostly work related.

 

<div class='quotetop'>QUOTE(Godiva @ Feb 1 2007, 08:44 PM) [snapback]384203[/snapback]</div>

You're saving and that's more than a lot of people think that they can manage. I'll have to look in to that tax sheltered annuity, my savings account's getting too big.

 

<div class='quotetop'>QUOTE(JackDodge @ Feb 1 2007, 08:49 PM) [snapback]384208[/snapback]</div>

Mine is a special one for teachers. But I'm sure there is something like that out there.

Good thing I started when I did. Our dear Governor is going to balance the budget by taking away our tax deductions. Seems teachers are way too rich and are not paying our fair share. (That's aside from the 50-60 hour work weeks and the $2,000-$4,000 or more a year we pay out of pocket for instructional materials not supplied by schools.)

 

<div class='quotetop'>QUOTE(Godiva @ Feb 1 2007, 09:09 PM) [snapback]384227[/snapback]</div>

My best friend is a (recently) retired teacher, my mother-in-law is a retired teacher, we have a couple of kids in public school here in Fairfax Co, VA, but I have to say, whenever my wife and I have been exposed to actual classrooms full of actual kids, we both come away with the same thought:

Whatever we pay teachers, it's not nearly enough.

You could not pay me to spend my day dealing with 120 different little adolescent personalities, as my best friend used to do as a 9th grade earth science teacher. I'd be stark raving mad and/or indicted for murder before I got through a week of it.

So I don't care what the pay is, it isn't enough, and it's short sighted to cut it.

I mean, when you get right down to it, my kids see more of their teachers than they see of me, by a pretty fair margin. So I want you to be better for my kid's development than I am. And it's not very smart to think that should come cheap.

End of rant. Thanks for listening.

 

<div class='quotetop'>QUOTE(chogan @ Feb 2 2007, 01:58 PM) [snapback]384539[/snapback]</div>

Any opinion of Joel Greenblatt and his "The Little Book that Beats the Market". He has a website magicformulainvesting.com. It's sort of like dogs of the dow, but you buy companies from a list of stocks his formula generates, and you update the list annually.

 

<div class='quotetop'>QUOTE(burritos @ Feb 2 2007, 04:41 AM) [snapback]384671[/snapback]</div>

I liked that book! But my inate distrust of any 'system' just will not let me use it.

 

<div class='quotetop'>QUOTE(EricGo @ Feb 2 2007, 03:30 PM) [snapback]384612[/snapback]</div>

I didn't know about GM but 10+% but that's not surprising, I guess.

If you've read Graham on valulation of common stocks and I'm guessing Malkiel's random walk down Wall Street, you've hit two of the best of the classics.

And yes, in theory, no publicly known, easily implemented theory should give above-normal returns. I was really bring that up as an illustration that a focus on the stocks nobody wanted worked as well as a focus on stocks being recommended. And it's cheap to implement. And I find it appealing. Over a long enough period, the apparent excess returns to that strategy get pretty small -- over 15 years, less than 1 %/yr for the dogs, less than 3%/yr for the small dogs of the Dow, which is plausibly not a statistically significant difference.

My problem witih picking stocks any other way is that I'm no good at it, and of course, I'm an amateur competing with all the pros who are trying to do the same thing. And there are just long stretches of time where if you try to be a value investor, you get hammered. The catch phrase is that the market can stay irrational longer than you can stay solvent.

On the issue of what I would call general over-valuation of stocks, the first fact to get in mind is that by historical norms, the market is not overvalued at present. It's not cheap but it's not overvalued. The price-earnings ratio for the S&P 500 is something like 16 now, where the historical norm is 15. Go back to 2002 and golly, it was something like 45.

Here's a nice graph:

http://www.comstockfunds.com/files/NLPP00000%5C026.pdf

Mind the fact that its a log scale, so constant rates of growth are straight lines.

So if the issue is whether the underlying stocks are showing the current earnings to justify the current price level, which is really the simplest kind of value investing, then yes, it looks OK. It looks more OK than it has in a long time. And of course, the ratios up because earnings are up not because prices are down.

So even though I'm with you in sentiment regarding index funds, fact of the matter is that your argument was a lot better in 2002 than now. But ... the markets can stay irrational longer than I can stay solvent. Or, of you prefer, people were correctly anticipating the higher earnings that would occur five years down the road, which imho is more like mysticism than like analysis.

So if you're expecting a burst of the bubble, you'd have to count on either a falloff in the real economy (reduction in earnings) or that people would demand a higher yield/lower PE (e.g., if interest rates rose a lot).

Anyway, if you're worried about market risk -- that the whole shebang is going to to pop, and your chosen stocks will get trashed along with it -- there are ways to hedge off the market risk, but it sometimes required more nerve than I can muster, and for small collections of stocks, it may not work so well. Also, if you guess wrong and the market goes up you lose those gains from the general increase, but ifyou think that's largely a random walk you can be OK with that.

You can, for example, short the spiders (SPDRs) while you buy your stocks. The SPDRs are a standard and poor's index. If it all goes to hell, your short profit covers the losses on your stocks. I've managed to lose money on that one before. And I vaguely recall that if your short the SPDRs you in effect have to pay the dividents that you would have reeived if you own them long, though in retrospect that makes no sense at all. Anyway, I don't do that any more. A better plan, which my mother-in-law uses, is to pick a sector (e.g., retail), then buy what you consider most undervalued and short what you consider most overvalued. This makes you neutral to overall market and sector changes, and leaves you only the pure play on the relative merits of the companies. She did that go great effect in a head-to-bead between Wal-Mart and K-Mart. But you have to realize that if you pick wrong, you lose money twice as fast as you otherwise would. So, where she picked Wal-Mart, I bet on a turnaround at K-mart. Big mistake. Yet a third plan is to buy a bear fund like BEARX, which has a fair reputation for not losing all your money and will do well in a down market offsetting other losses.

Anyway, the gist is that I don't try to pick stocks any more. Takes more talent than I've got. And I don't even try to guess the turning points -- I mean, look at that chart for 2002, and then tell me you expected the market to remain stable? Nope, the market remained irrational and/or properly discounted the far distant future and/or there's no particular explantion for short-term moves.

Instead, I've become a stodgy old man. Buy and hold. Give me something that I'm OK with buying and holding. Where I think I won't take too bad a beating, where if all goes to hell I'll still have something of value, and so on. Trying to think on a timescale of decades.

So, for example, I used to like the I-bonds -- inflation-indexed US savings bonds. The rates have fallen off, so I haven't bought any lately, but the concept of locking in a real rate, you get held (kind of) harmless for inflation, it's tax deferred, in all likelihood it will be paid back. That's one where you put it in the safe deposit box and you don't have to worry about it. Mediocre return, no risk -- fair deal.

I'm rambling. My only real point is that the current P/E ratio is not out of line and not nearly as outrageous has it has been in the recent past.

 

<div class='quotetop'>QUOTE(chogan @ Feb 1 2007, 11:33 PM) [snapback]384267[/snapback]</div>

No Child Left Behind (Another bright Bush idea...except he forgot to fund it). :mellow:

 

I may be the only person here who's actually had a friend go bankrupt. While I'm sure there are people who fit the profile of immoral high-spending wastrels, that's not typical. The typical bankrupt is working poor with some hard luck. As with many things, the popular media give a hugely distorted view of the typical picture, because, hey, it's not nearly as entertaining to think of the typical bankrupt as a janitor with cancer or some similar hard-luck story. It's not a good moral tale.

So as always I was motivated to look up the facts. Stumbled across a nice study here at the Dept of Justice:
http://www.usdoj.gov/ust/eo/public_affairs...ocs/abi1099.htm

Median income of their random sample of bankrupts was $24,000, in 1998. Total unsecured debt (not sure what that means, but I assume that's essentially credit cards) was $21,000. That's the median, so its the person exactly in the middle of those distributions, not the average amount per person.

The relevant quote from this DOJ study would be this:

"The income trajectory of a consumer debtor is a meaningful measure of the debtor's financial world. Whether on the way down or on the way up, consumer debtors in 1998 are overwhelmingly on the lower rungs of the nation's income ladder. "

Then you get into these real oddities. So, which state is the most shiftless and lazy, in terms of the personal bankruptcy rate? Turns out to be all those shiftless Latter Day Saints in Utah. (Please, that was irony.) The link below is a very detailed study of Utah bankruptcy. I found it a nice read on the subject.

http://extension.usu.edu/files/publication...ub__8159727.pdf

Page 4 goes through the principal reasons for bankruptcy. My main thought in reading it was there but for the grace of God go I. Job loss, divorce, serious illness, and so on. Median monthly income of Chapter 7 filers was $1300. Median income of Chaper 13 filers -- the ones who are trying to pay back part of their debts -- was $1100. Basically, these are poor people who ran up a bunch of credit card debt.

Back to the savings issue, their take on this (not directly supported by their data) is that most bankrupts consist of working poor with no savings, for whom some bad event triggers a slide into debt. So they blame the lack of an emergency fund in the bank as a proximate trigger for bankruptcy. So it does get back, at some point, to the lack of savings.

OK, and here's a list of states with highest and lowest bankruptcy rates. Take a guess before you peek: where do all those spendthrift high-tax lefty liberal east coast states end up? I mean, Taxachusetts has to be at the top of the list, right? Versus the hard-working independent down-to-earth midwesterners, who obviously are going to be at the bottom?

http://www.bcsalliance.com/bankruptcy_statestats.html

Nope, exactly backwards. Which suggests is more related to income than anything else, though clearly there's a lot of randomness there.

Finally, here's the article I was searching for, which brought the bankruptcy issue into the arena of health care:
http://content.healthaffairs.org/cgi/conte...thaff.w5.63/DC1

Now, the findings of this have been disputed, and the authors are definetely well-know lefties, but I thought that the data were pretty interesting. Under their rather loose definition, they concluded that about half of bankruptcies were due to medical causes. Indisputably, 28% of their respondents literally stated that illness or injury was the cause of bankruptcy, the rest are people for whom there was evidence of high debt burden from medical bills. That doesn't count another 15 percent or so of bankruptcies for which a birth or death in the family was listed as the proximate cause for the bankruptcy.

Well, I've wasted enough time on this. The bottom line is that the typical bankrupt is a poor person with no savings, some hard luck, and $20K in credit card debt. Imprudent? Sure, I guess so. I've never tried to save money raising a family on $24K/year, so I'm not sure how harshly I'd be willing to judge. For at least a quarter, maybe as much as half, that hard luck was an illness or injury. Another 15%, that hard luck was a death or birth in the family that they couldn't deal with. Divorce ranks up there, based on other studies.

On the other hand, regarding the change in law, it does not appear to me to be as harsh as it was made out to be. As far as I can tell,the main change is that if you have income that is above the median income for your state, you no longer have the option of filing chapter 7 (total forgiveness of debt), but instead must file chapter 13 (multiyear plan to pay back as much as you can). From the statistics cited above, most bankrupts are well below the median incomes in their states. Unless the reforms did far more than that, I'd say that the net effect was on the middle-class and better filer. Poor people with hard luck would seem to be largely unaffected.

 

I remember in the late 70's when I was in that 7-9yr old age range how every now and then, on a Sunday we'd stop by the small town burger joint for lunch. We didn't do it much, and it really seemed like it was a special treat to do it. I can still remember processing the thought... That was over 10 bucks, wow is that expensive, no wonder we don't do it often.

We weren't poor and 10 bucks to our family wasn't even significant.... but, as a family, we weren't 'spenders' and as a kid then, 10 bucks was a big bill. It was a different mentality then, at least for our family than it is for most families today.

Most people I see/hear scraping by these days has a completely different meaning. Most that are living paycheck to paycheck have:

Car payments (usually a fairly new model)
CC debt (usually for stuff they didn't need that they don't still use)
An expensive cable TV feed into the house
A really nice TV
A house that brought them to within dollars of making ends meet at the time they closed on the house
A vacation every year that most people can't afford
Are out to dinner and movies more often than most others I know who aren't struggling so hard
$160 at the hair salon? How often?

The list is much bigger than this, but more or less, I don't have a lot of pity for people scraping by when this is what 'barely making ends meet' means.

In order to get debt cleared in any kind of bankrupcy, the participant should have to prove that the money that's being wiped off the record didn't come from idiotic reckless spending.

I have a brother who subscribes to the theory "When the whole system collapses, I don't want to be the only one who had his house and cars paid off".

He figures the system will eventually buckle and everyone will lose their debt, so why would he want to spend his money paying stuff off when he can just buy more stuff and pay nothing off.

Pay as you go and save as much as you can in the mean time.

 

<div class='quotetop'>QUOTE(SSimon @ Feb 1 2007, 03:50 PM) [snapback]384080[/snapback]</div>

For me, the goddess of saving money is Amy Dacyczn, aka the Frugal Zealot. Some of the stuff she does is just way, way out there. For example, she has one chapter on dumpster diving techniques for the middle-class consumer. But most of what she says is very practical, and the main worth of reading her books is absorbing the basic ideas. Mainly, figure out the payback from doing something in terms of the pretax hourly wage that the savings pay you. Then, do the things that pay you well. And when you buy something, figure out how many hours you have to work to generate the after-tax income to pay for it. And so on. All very reasonable. Plus the specific things she does.

I see that Amazon has her collected works (The Complete Tightwad Gazette) for about $15.

Then again, a lot of it boils down to 'you are what you are'. I'm a miser by instinct, and have been that way all my life. It's not a recipe for happiness but it is one for financial stability. My wife, by contrast, is a bit of a fritterer: whatever money is available to be spent, that's pretty much what does get spent. But not on big-ticket stuff, just on ... stuff. (I believe my wife would agree with me on both counts.) My friend the bankrupt, he was more of a splurger: he would make 100 really good, sound money decisions followed by one really horrific, really expensive decision. My take on it is that the Dacyczn approach only works well for those with the miser instinct. For others it just frees up cash that they'll spend elsewhere. So, you have to know yourself before you start. If you're a fritter, the only thing that works is keeping the money out of your hand via payroll deduction or any of several similar options (automatic US savings bonds, most mutual funds have automatic contribution, etc.) If you're a splurger, the only thing that works is eliminating all sources of ready credit (cutting up your credit cards) and paying cash for everything. (Whereas cash in the pocket is wrong for the fritterer.) If you're a miser, saving isn't the problem, failure to spend when you ought to (and then complaining about the cost when you do) is the problem.

 

<div class='quotetop'>QUOTE(naterprius @ Feb 1 2007, 04:37 PM) [snapback]384100[/snapback]</div>

hi. i'd like to introduce myself :lol:

(is it kinda sick that i find our whole situation almost funny now?)

we used to be real sock-it-away-type people. we had the money, we bought the car, the rest went into savings. and man did i have a little nest egg built up. he's still dropping about 10% of gross into a 401k plan (the max contribution) but that's all we've got going for us now.

like chogan points out, bankruptcy can also be a consequence of hard luck. so can negative savings rates. it's not necessarily that *everybody* is splurging... some of us just got screwed by circumstance.

not to say that there aren't plenty of financially irresponsible idiots out there as well, i am certainly not trying to argue that's not a factor here. i know lots of them personally and it amazes me.

 

<div class='quotetop'>QUOTE(SSimon @ Feb 1 2007, 06:10 PM) [snapback]384149[/snapback]</div>

Those are really weighty issues and I can't do them justice on the fly. Plus, as the phrase goes, I've predicted 14 out of the last two recessions, so realistically my projection of conditions in 2017 is worth little. I'm pretty much a stopped clock -- the fact that I'm occasionally right does not mean that I actually provide any information.

Nevertheless, you are basically right. The full picture is that outsourcing is to loss of high-paying service jobs what imports of goods is to high paying manufacturing jobs. In both cases US workers are put into competition with low wage foreign workers, and yes, it depresses US wages to do so.

For manufacturing, reduced international transportation costs (e.g., the advent of containerized freight, low fuel costs, and supersized container ships), plus the recovery and growth of non-US manufacturing capability that took place throughout the 1960s and forward both contributed to this. (Personally, I would also add a change in consumer sentiment. I used to be a rabidly buy-American shopper. For example, I own and use a US-made microwave. When's the last time you saw one of those? If I did that today there'd be nothing for me to buy, so I don't even bother.)

So, this has been happening to US manufacturing for decades, and has only accelerated in recent years. And if you look at the employment data, you will see declining manufacturing employment going back decades, and stagnant to declining real wages. In part, that's due to increased productivity, but the lion's share of it, at least in recent years, has been the substitution of imported for domestic manufactured goods.

Overseas outsoucing of service work has been going on for a while, but as with manufacturing, there were underlying changes in technology that accelerated the trend. Mainly, as I understand it, it was the laying of undersea fiberoptic cable. Before that, a phone call from here to (say) India went via satellite, was fairly expensive, and more to the point, you heard pauses in the call due to the limitations of the speed of light (because the path up and down to the goestationary satellites is very long). Plus, capacity was severely constrained -- you couldn't handle much throughput. The fiber optic cables changed all of that, making it so the consumer could not tell that the call was from overseas, and making rapid exchange of large volumes of data and information relativel cheap. Plus, as was the case with manufacturing, other nations have been building their capacities to perform this type of work, so we no longer have a lock on it.

And the upshot again is that, as with any commodity, competition from a cheaper source depresses its price. So, this constrains US wages, and, in recent years, with few exceptions, essentially all the growth in US employment has been in low-paid domestic service work.

So, who benefits. Well, we get cheaper goods and services, and that keeps the rate of inflation down. Nobody holds a gun to your head to make you shop at Wal-Mart, but any observant person would realize that most of the stuff there was made in China. I defy you to go to Wal-Mart and find any toy sold there that was manufactured in the US.

Probably the single toughest conundrum that macroeconomists faced in the last decade is that the money supply has been growing like a weed, but inflation has been under control. In previous epochs, that would never have happened. As the late Milton Friedman pointed out, inflation is always and everywhere a monetary phenomenon. The price level tends to grow in proportion to the money supply. But what distinguished this epoch from prior ones is the opening of China, with a billion new low-wage workers keeping prices down, and more importantly, removing all bargaining power of the American worker. Add the high rates of immigration (where the competition comes not from imported goods, but from a swelling pool of low-wage domestic labor), and its no surprise that labor has no leverage in anything, and that, in the words of Paul Krugman (ihmo the smartest economist alive today), we don't have the wage-price spiral of the past because, well, we're missing the wage part of that.

The other winner is, of course, domestic capital. It is completely unsurprising that the US capital owners have been getting very good returns, and that their share of national income has risen. (I did not check that last fact, but I believe it to be true.) The first business owner to outsource puts the profit from that in his pocket. So to speak. The ready availability and low price for labor means that a greater share of the revenue stream goes into the pockets of the owners (well, in what we call capitalism these days, a big chunk of it goes into the pockets of the managers rather than the owners, but you get the drift), instead of the laborers. So you have a dynamic going on that the first to adopt outsourcing put the money in their pocket (until all do it and competition drives down the price of their outputs), while later ones are forced to do it to be able to compete. That's no different from any other cost-saving innovation.

Shoot, my wife and I were in our local park a few weeks back and ran into some aquaintances. Guy was quitting his job to join a consulting firm, the gist of which was that this little 2-person firm was underbidding established firms by outsourcing all the underlying computer programming to India. As a guy who largely makes his living by writing programs just like that, all I could do was fix a smile on my face and say "how nice for you". So I think I can see the writing on the wall in my own industry.

I don't think there's much that can or possibly even should be done about any of this. Let me put it this way, I don't think anything is going to stop it.

Will it impoverish us as a nation? The classical economic answer is no, it will make us more wealthy as a nation. Our unemployed will go do something else, we'll all find our comparative advantage, and both the US and the rest of the world will be better off. That's the classical economic response. Don't fret, it's just Adam Smith's invisible hand at work, all will be well.

I'm a bit more of a believer in the invisible foot, myself. Sometimes the markets act as if an invisible hand is guiding us to serve our fellow man in the most efficient way possible (Smith's take). Sometimes they stomp the hell out of people (hence, the invisible foot). More sophisticated modern economists have rightly challenged that classical view based on a better understanding of the dymanics of technology and of possible changes in the "terms of trade" vis-a-vis foreign competition. So, while the simple classical models say all will be well, and that's probably the projection you'd get from most economists, more rigorous modern analysis says maybe it will and maybe it won't. All I'm saying is that people with an econ 101 understanding of this will give you the invisible hand speil, but in fact, it's not nearly as cut-and-dried as that.

Right now, economic conditions are good, by any historical standards. Not great, but good. But the whole issue of the debt burden and credit quality and negative savings and large balance of payments deficit, not to mention the absense of growth in "middle class" occupations, all cast a pall over all that.

What'll happen by 2017? Well, I'll rely on the two smartest people I know regarding macro trends.

First, In 1998, the billionaire George Soros said that the US had the choice of being either a military superpower or an economic superpower, not both, and that if we tried to be both, we'd fail as an economic superpower. Further, that the signs of failure will be a move toward eliminating the dollar as the international reserve currency, and replacing it (probably) with the yen. I have seen nothing in recent history to dispute his conjecture, and I have seen many moves by foreign central banks and others to reduce dollar holdings and to move toward other currencies as their reserve currencies. I don't believe that Soros is infallible, but I do know he's made more money by being right about currency movements than I could every hope to earn in a hundred lifetimes. So you sort of have to respect the opinion at least a bit, and by his standard, we've done exactly what he said we were not capable of doing, and the consequences are already starting to occur. So, if you follow Soros' line of reasoning, we'll end up as an economically depressed military superpower, until such time as our resources will not support that (ie, we'll go like the Soviets, just three decades later.)

Second, Warren Buffet shorted (bet against) the dollar a couple of years back, and is actively buying foreign as opposed to US firms. He's the smartest investor in the world, so again, ignore that at your peril. He expressed regret at having to short the dollar, but that's what he did. When Buffet shorts it, you know that's a major red flag.

So there's two giants saying, for differing reasons, get out of the dollar. I'm a pessimist, so yeah, I've been doing just that. Smart money has been moving to real assets (part of the reason for the real estate boom, I think), but whether it's too late to make money by doing that now, that is far beyond my ability to know. I am in fact a lousy investor and the last person whose advice you should take in that regard.

Finally, people still don't quite grasp what may happen to the Federal government's finances in the forseeable future. They are going to go down the toilet, and the flush is going to last 2-3 decades as the baby boomes retire. You see a lot of baloney tossed around on this by both sides, so a word of clarification is in order. Right now, we collect more social security taxes than we spend, and the balance is used to fund the rest of the government. So, on net, right now, I believe that social security and Medicare pay for themselves, and that the surplus in social security amounts to about 5% of all Federal revenue, or something like $100B or so. Starting around 2017 or so, Social security will begin to have negative cash flow. The "trust fund" won't be empty, it's just that expenses will exceed revenues. That negative cash flow will then accelerate for the next couple of decades. So instead of a positive $100B cash flow from social security, we'll have negative cash flow and have to borrow to cover it.

The point is that even if we have a stable economic climate, the projected growth in the federal debt beyond that point is difficult to fathom. But why listen to me when you can read with the Fed Chair has to say here:

http://www.bis.org/review/r070119a.pdf

He tosses around phrases like "unprecendent level of federal debt" and gives CBO projections showing a quadrupling of the annual budget deficit by 2030, or a budget deficit of roughly 9% of GDP at that point.

Obviously, anybody's long-term projections are uncertain, but the Fed Chair's projections carry some weight.

That's not to say that this will happen, but to point to what I think we are most likely to do to solve it, which is to inflate away the value of the debt. You only get to do that once every couple of generations or so, but my guess is, that'll be what they do. We can't pay for it, so we'll just cheat.

So, I see a brilliant speculator and a brilliant investor each, in their own way, predicting the fall of the dollar as the international reserve currency and/or primary world store of economic value. I see the CBO and the Fed Chair saying, in effect, we can't possibly make the payments on the retirement packages we've offered our citizens. I see a hard and painful solution -- actually pay what we owe, with somebody having to take the heat for doing that, and a nebulous, unaccountable solution of just inflating away the value of the debt. Call me cynical but I'm betting on the second option.

So, foreign and domestic pressures all tell me to get out of the dollar. That's what I'm trying to do.

What kind of world will 2017 be for my 11-year-old son? I don't know. Too much can happen. I don't see anything in the works to reverse the outflow of middle-class jobs. But we're good innovators, sometimes. So the only happy thought I have is that maybe he'll find something both lucrative and cutting edge that he enjoys doing. Beyond that, I just try not to think about it.