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Here's some real data to validate the need for Commerce through Capitalism! It is hard data backing everything I have been saying about Finance for the last two years! This data came from the St Louis Fed!

Economic Free Fall

Dear Reader,

Our own Bud Conrad has a standard retort when presented with a testable economic hypothesis, “Let’s see what the data says!”

Along those lines, for no particular reason, this morning I found myself on the website of the St. Louis Fed, which is always good trolling ground for data – albeit data that first goes through a government filter.

The first chart that caught my eye was this, showing the history of surpluses and deficits in these United States. A couple of things are noteworthy, starting with how, until about 1970, the deficit picture remained largely unchanged. But then, in the 1970s, things started to go wobbly.

Could it have been Nixon’s closing of the gold window and the advent of a pure fiat system in 1971 that is the culprit? Sure seems that way to me. Regardless, if today’s free fall in government finances, especially in the historical context, doesn’t set off loud alarm bells in the back of your cranium, then you are not paying attention. Or you need to get off your meds.



Another chart from the Fed that I find notable is this, of the CPI. The airwaves and nettrons are still full of deflationary expectations and prognostications that gold, among other tangible assets, is in a bubble. Further, there is a loud cheering section for bonds. But looking at the CPI figure, other than a blip during the worst of the crisis, it sure looks like prices are remaining stubbornly high.

And if you think the price of stuff is high now, just wait until the monetary inflation begins to work its way back into the system!



Next up, and to the point about bonds, I would refer to the following chart showing the latest data on 30-year conventional mortgage rates. What does this tell you? To me, it says a lot. For instance, given that the mortgage industry has been nationalized – and it has – today’s low, low rates are reflective of nothing more than a massive meddling by our keepers.

With almost 10% of the nation’s mortgages now in arrears, and almost 5% in actual foreclosure, how does the government exit this industry without rates soaring to cover the inherent risk?

Answer: I have no idea.



Speaking of housing, here’s a somewhat less-than-cheery picture of recovery. As I have said before, and I say again now, if you are in a business that depends on a recovery in housing, give serious thought to building skills valued for a different career.



Recently, the press has made much of the fact that consumer debt has fallen. Including this reference out of the Financial Times today…

Americans reduced their household debt for the first year on record last year as they aggressively cut back on spending to cope with the recession, Federal Reserve figures showed on Thursday.

US household debt contracted by 1.75 per cent in 2009, according to the closely watched “flow of funds” data. It was the first annual decline since the Fed began tracking household borrowing in 1946 and marks a sharp shift from the euphoric borrowing that led to the recession.

Good news, right? No question, they have aggressively cut back on spending because, as you can see here, part and parcel with high unemployment, incomes nationally have taken a hard punch in the gut and remain doubled over.



But cutting back on spending is not the complete explanation for even the slight reduction in consumer debt trumpeted by the Financial Times. This from MarketWatch earlier this week…

CHICAGO (MarketWatch) -- Credit-card debt has been falling for 16 straight months but consumers aren't paying off their financial obligations as much you might think. Instead, they're walking away from the debt, forcing credit-card issuers to write off as much as 90% of that reported drop, according to a new report by

U.S. banks charged off a record $83.3 billion in credit-card losses last year. That makes up the bulk of the $93.2 billion drop in outstanding credit-card debt that was reported by the Federal Reserve for 2009.

Full story here. 

In any event, while there have certainly been some small improvements in the economy from the depths of last year, it would be a mistake to assume those blips signal the sort of robust economic recovery that one hopes for following a “normal” business cycle downturn.

Simply, there is nothing remotely normal about what is going on just now. So, be careful in all the important ways. And with the S&P once again trading at about 23 times earnings, right at the top of the historic range, be especially careful in buying and holding stocks.

(Ed. Note: For the first time ever, we are going to have a Portfolio Planning panel at our upcoming Crisis & Opportunity Summit in Las Vegas, April 30 – May 2. Its sole purpose will be to help you calibrate your personal risk-and-reward ratios and to allocate your overall portfolio intelligently in these uncertain times. More on the Summit here.)

(Ed. Note on my Ed. Note: Yesterday I received an email from a dear reader that, while generally complimentary, suggested that we stop promoting our various offerings in this service. And, insult of all insults, compared our passing commercial plugs to the sort of fare one might find on the home shopping network!

I do understand, and do appreciate the sentiment. But I also hope you understand that we have a business to run, and as we charge zero for this particular service, one must find other ways to pay the bills. Further, we are proud of our various services and so want them to gain the widest possible distribution. Which is why we offer a very generous refund policy that puts all the risk on us during the first three full months of any subscriptions you try.

Even so, if you are completely uninterested in our offerings, please just fast forward when you see one of our shameless, albeit always sincere, commercial plugs.)

And now, for something entirely different and, for some, perhaps a bit controversial… from our own Vedran Vuk.

When Soda Was a Nickel and Social Security Wasn’t Much More

By Vedran Vuk

Every generation scolds the next one down the line and blames society’s ills on the guy up at bat. Considering past policy decisions, this common perspective doesn’t make much sense. Just look at the Great Depression generation, both known for its great character as well as the worst policies of the century. Clearly, older generations did not always make the best decisions.

One of those bad decisions, Social Security, still haunts America today like the grim reaper waiting to take his harvest. It’s strange to think the same men who courageously stormed the beaches of Normandy didn’t have the political courage to dismantle this ticking time bomb. If it wasn’t for WWII veterans, many believe that this article would be written in German. That might be true. But due to an exploding national debt and that generation’s failure with Social Security, we’ll be speaking Chinese sooner than German.

The lack of political will isn’t surprising since most past retirees were net gainers from Social Security while new retirees are net losers. Older folks love bemoaning runaway spending, welfare queens, and handouts. But often they don’t consider their own gains from the welfare state.

As Social Security taxes increased over time, so did the benefits. Essentially, previous generations paid into the system when taxes were low and retired when the benefits were high. A retiree’s maximum tax loss from Social Security in 1940 was $923 in today’s dollars. Compare this to the current maximum of $13,243.

To find the dividing line between net gainers and losers, we created a projection assuming an individual with a salary equaling the top taxable Social Security limit for 45 years (to get an idea of this amount, consider the limit was $3,000 dollars in 1940 and $106,800 in 2010 – both nice salaries). Our test dummy paid the maximum Social Security taxes every year.

On the other hand, upon retirement, he would receive maximum benefits. According to the Social Security Administration, maximum taxation is a prerequisite to maximum payouts. Next, we added Social Security benefits received over 13 years (derived from the average U.S. life expectancy of about 78). Finally, we calculated the difference between taxes paid over 45 years and the payouts received for 13. The results were shocking.

Before 2007, our projected retirees were net gainers from Social Security. 2007 retirees were the first net losers at -$411. By 2011, retirees will be -$40,403 in the red.

In the ‘80s, a Greatest Generation survivor retiring at 66 in 1985 received a net gain over his expected lifespan of $113,350 in 2010 dollars. Just a decade down the road, a 1995 retiree still profited by $67,982.


While welfare is often equated with public housing residents, perhaps nursing home residents should be considered too. These Social Security payments outweigh many welfare handouts. For example, California’s maximum TANF (welfare) payments for a family of three were $9,373 a year in 2005, inflation-adjusted for today. It takes over 12 years of welfare to equal the 1985 retirement net gain. (To be fair, if housing subsidies, food stamps, and other benefits were included, the number of years would be lower.)


So, are pre-2007 retired generations complete bums? Well, not exactly. It depends on how the money would have been spent otherwise. Suppose that instead of paying Social Security, the same amounts had been placed into an account earning five percent a year.

After 45 years starting in 1940 and ending in 1984, this account would have been worth over $297,000 in 2010 dollars. This is $44,000 more than 13 years of Social Security benefits starting in 1985.

Hence, older retirees are bums on a case-by-case basis. An investment-savvy penny-pincher would have lost from Social Security. Without the program, he could have invested privately. But spendthrift retirees benefitted enormously. The responsible saver is punished and the careless spender rewarded – the same old story of welfare retold for an older generation.

[And this note as an afterthought:

How Much Do You Really Pay for Social Security? 

The government has pulled a fast one on most people. You pay half the Social Security tax and your employer pays the second half, right? No, wrong. You actually pay both.

Let’s go through this example to understand the point. Let’s say that a person earns $100,000 a year and pays $6,000 in Social Security taxes and the employer pays $6,000. In the eyes of the employer, the person’s services are worth $106,000 ($100,000 salary + $6,000 in Social Security taxes), that’s how much he costs the employer.

Now, imagine what would happen if Social Security taxes disappeared overnight. For a little while, the employer would profit by paying $100,000 for an employee worth $106,000. However, in a free market, prices move toward levels equaling the underlining value. Just like good underpriced stocks will eventually move up, so does the price for good undervalued employees – although, both may not be immediately appreciated.

Eventually, the person’s wages would be bid up in the market from $100,000 to $106,000. Because of this, the employer’s half is actually your half too. Without Social Security, your wages would be close to your value to the employer, in this case, $106,000. So, in reality, the person pays $6,000 in taxes and makes $6,000 less than he would in a completely free market, meaning that the real loss is $12,000 per year.]

(Ed. Note: This is the kind of stuff the editors of The Casey Report spend sleepless nights over. Where is the economy going? How much does politics influence the markets, and in which direction? How can we profit? Answers to these and more burning questions you’ll find in The Casey Report… this month with Bud Conrad’s musings on “The Point of No Return.” Is the U.S. economy beyond repair? Find out with our risk-free 3-month trial. More here.)