The crux of any economic
theory starts off with the magic words "first assume that" and then
using dazzling logic follows an irrefutable happy conclusion. The real key to
using economic theory and logic is in the assumptions. Assume the correct
things about the world, and you have a chance of getting the outlook right.
Assume the wrong things, and any model will generate totally unreliable
garbage.
My experience in the business
and investment world over the last thirty five years has taught me a few
things about assumptions, so if you are interested in surviving the slings
and arrows of outrageous fortune, putting some good business policies in
place is crucial. Always assume nothing, verify everything, assume the worst
could happen and, if things can go wrong, they do and will. Even my motto
around the house "if it isn't broke, I can fix that" is based on
experience. I have learned wisdom can be as simple as substituting facts for
assumptions.
As a baby boomer facing
retirement down the road, I can't help but wonder whether there will be
anything left in the Social Security Fund and my personal investments by the
time I need them. I rely on assumptions when making my own investment
decisions and if they are not right, I could outlive my money and starve.
Now, many corporations and government pensions, insurance company annuities,
and retirement advisors rely on investment, economic, and corporate
projections that are all based on critical assumptions. The assumptions used
by big business and big government are all generated and reinforced by
legions of economists, accountants, actuaries and pundits, who, by the way,
are all bought and paid for by the government and powerful corporations. The
experts are paid very, very well. Why? Because, it seems, the experts are
paid twice. The first time is to figure out what an assumption needs to be to
get the result the corporation or government wants to hear. The second time
is to justify the assumption by creating up a bunch of bull to hand out to
the public. The bull in turn is fed to the public by reporters and TV hosts
who are also paid very, very well not to question the experts or their
assumptions.
It's these bull assumptions I
keep hearing that hit me over the head and between the eyes like a two by
four. The biggest bull is that both corporations and state and local
governments assume their investment portfolios will grow an average of 8.5
percent a year. This assumption continues today, despite the fact that 10
year treasury securities have on average yielded less than three percent over
the last three years, and currently yield two percent. So, an 8.5 percent
investment assumption on a safe asset is laughable and only one of many
assumptions about the present and future that might as well be from Mars.
Another such assumption is that banks can hold assets on their balance sheet
at cost and not what they are worth today, or that real economic growth will
be three to four percent a year for the next 10 years. One of the craziest
assumptions, however, is that inflation is contained and the money available
for retirement will cover the future cost of living. These are just a few on
the list of unrealistic and hopeful assumptions that stretches on and on. If
you're a Baby Boomer like me, and fearful of the future, instead of looking
at happy business and government assumptions, perhaps we should all be
looking at hard cold facts and make decisions based on them, not fiction or
hope.
For instance, even if the
reinvestment rate of investment in pension and retirement accounts was 8.5
percent, pensions and retirement accounts are still under-funded by trillions
of dollars. Governments don't want to tap taxpayers, and corporations don't
want to contribute to those funds from earnings. Why? Because it's a
mathematical fact that when you start with underfunded pensions, and have
core government interest rates as low as three percent, virtually all of the
defined pension plans (regardless of whether companies and governments will
be asked to actually step up to the plate and contribute) are close to being
bankrupt.
It's also a fact that the
Federal Reserve has guaranteed to keep short-term interest rates near zero
well into 2013 and beyond. Indeed, the Federal Reserve is running an overt
and knowing policy of keeping the rate of inflation well above the rate of
interest. For a saver or senior depending on a pension, this is not
reassuring. In other words, basing a retirement model on 8.5 percent
investment returns is about as realistic as assuming that pigs can fly. The
government also wants to change the nature and composition of the Consumer
Price Index to keep reported inflation down. Under-reporting inflation will
give Social Security and Medicare less money and save the US Treasury
hundreds of billions of dollars. But retirees are already short-changed by
the government price indexes because most of what retirees pay for is rent,
food, fuel, and other utilities that go up rapidly in price. Meanwhile, the
Consumer Price Index includes a lot of high-tech gadgets and games which show
price decreases because computers run faster and store more data. Much of
what is consumed is videos, games, and social networking. As I get older, my problem
is that I want to eat and drive somewhere, and not play computer games or
socialize with silly twits on Facebook. Over time, Social Security will be
forced to change its name to "Social Insecurity" because cuts in
retirement benefits are coming, and the value of the dollars paid to retirees
will drop because of inflation.
At my age, I've given up
dreaming of winning a Nobel Prize based on dazzling logic applied to
delightful assumptions. Instead, I have settled for simply trying to
understand the interplay of political reality smashing against the rock of
hard economics caused by older workers retiring faster than younger workers
are entering the labor force. In short, I just want to sniff out the bull
that is being handed out as laughable assumptions and twisted by economic
logic into total crap. I'm only looking for a "No Bull" prize in
economics, in a world where in print and on TV the bull never stops.