How The Federal Reserve Side-Steps Blame For Generational Income And Entitlement Gaps

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Retired billionaire hedge fund manager Stanley Druckenmiller (see write-up at Wall St. Journal) is on tour at college campuses to say the current Baby Boomer generation, now entering Social Security and Medicare age, is ripping off the younger working class.

He urges students to rally together to plug this age gap in benefits as they pay today’s Baby Boomer pension checks that will not materialize when they reach retirement age.  In fact, Druckenmiller says next-gen’s will not even inherit an empty Social Security trust fund, but actually owe on it.

This is kind of like blaming the troops on the battlefield for the mistakes made by the generals.

Means testing would be nearly meaningless

It appears Mr. D wants means testing for Social Security, but what would that accomplish?  You only have a very small percentage of people at the very top who wouldn’t get a pension check anyway.  The amount they would contribute to the pool if they forfeited their Social Security checks would be miniscule.

Younger workers entering job market later, paying less FICA

Where the younger workers are getting pinched is that many can’t find adequate jobs (or any job for that matter; unemployment is 22% not the fed govt. quoted 8%) and are entering the job market late and not contributing to Social Security and Medicare, so in a maligned way, as a group they aren’t contributing what earlier generations contributed.

Inflation: paying tomorrow’s debts with inflated dollars

But the real problem is inflation combined with eroding incomes.  The “generals” behind the scene who cooked up this problem are retired chairmen of the Federal Reserve bank that determines and distributes the nation’s money supply.

Social Security payouts don’t reflect real rate of inflation

The average Social Security check in 1980 was $321 and in 2011 it was $1183.  According to the government’s CPI inflation calculator, $321 in 1980 is equivalent to $911 in 2013 in purchasing power.

However, these numbers emanate from government inflation calculators.  When inflation is calculated the way it was in 1980, not the manipulated way it is today, that $321 monthly pension check in 1980 would have to be $3636 in 2013 to have the same purchasing power according to economist John Williams’ ShadowStats.com whose website provides this calculation.

If electing to start taking a pension check at age 65, Americans will receive checks for an average of 15.3 years (males) and 19.6 years (females).  (That is an average number.  Millions of Americans die early, especially smokers –10 years sooner–, and that is money SS doesn’t have to pay out.)

If pension checks are frozen at the current $1183/month X 15.3 and 19.6 years = $216,489 and $276,822 males/females over that time span.  Mr. Drunkenmiller says the lifetime payout would be $327,400, which probably reflects increases for inflation.

American incomes don’t keep up with inflation

When you don’t have stable valued money (went off gold-backed money in 1980) and money printing erodes its purchasing power, even with the understated rate of inflation the Federal Reserve uses, an American worker making ~$35,000 in 1980 would need to make ~$98,000/year to have the same purchasing power today.  (Even this number is understated; see below.)

Actually, according to ShadowStats.com, it would take a salary of $396,536 today (2013) to equal in purchasing power a $35,000 income in 1980.  That means diminished real incomes among younger American in terms of purchasing power are contributing to the Social Security trust fund to pay for retirees today.

Even using the government’s misleading inflation numbers, the median household income in 2008 was below the pre-1973 to 1975 recession highs.  Shadowstats.com notes, as of 2008, real earnings are down 15.8% from their 1972 peak.

Diminished savings and less equity to fall back on

Also, since 1980, real net worth (savings, home value) has declined ~25%, so the equity that Americans can tap into to survive in lean times is diminishing, even vanishing.   Since early 2008, approximately 60 million U.S. homes have lost a combined 5 trillion dollars in value.   That is a lot of lost equity Americans can’t tap into now.

So there is less money being made to contribute to Social Security and less equity to live off of when those pension checks don’t cover living expenses.

Inflation has also eroded savings.  $10,000 in the bank in 1980 would need to have grown to $113,296 in 2013 to be of equal value. (Shadowstats.com) That banked $10,000 in 1980 would have to yield about 8% compound interest over 33 years to equal $113,296 today.  That never happened.

Today, the real inflation rate is ~9.3% to ~9.6% while the yield on savings accounts is less than 1%.  Five more years of this and ~$8 trillion in US savings accounts will only buy ~$4 trillion of goods and services.

Social Security Trust Fund holds a bunch of IOUs

Another large factoid hidden from view is that the Social Security Trust Fund holds a bunch of IOUs.  While Social Security officials say its trust fund will not be fully depleted till 2026, it currently has to rely upon money from the general fund (current collected taxes) to meet all its obligations.  Economist John Williams notes here that the government doesn’t use generally accepted accounting principles (GAAP accounting) that would reveal the full extent of its debts and dependence on borrowed or printed money.

The US government says it collects ~$2. 4 trillion in tax revenues and spends about $3.6 trillion, for a -$1.2 trillion shortfall, but when Social Security and Medicare outlays out of the general fund are included, annual spending is ~$6.6 trillion, for a shortfall of ~$4.4 trillion! (Source: Shadowstats.com)

Ready to end the Fed?

When a grey haired retired Congressman suggested America “end the Fed,” most Americans were clueless as to why.  Well, now you know why.

What would the US monetary and lending system look like in a post-Fed world?  Gary North once chimed in to answer this question.  It is worth reading. America is repudiating its debt

Gary North appears to be correct.  The next generation is not going to incur the burden of paying down these debts.  Murray Rothbard first suggested repudiation of debt as a way to resolve private debt many years ago.   Even the Bible describes a practice of clearing all debts every fifty years (Day of Jubilee/Book of Leviticus).

While a society needs to teach responsibility in paying down personal debts, even the Bible says there comes a planned day when society needs to stiff the banksters and clear all accounts!

Just look – young Americans aren’t paying down their student loans – to the tune of $1 trillion.  The interest on many home mortgages has been written down and many more simply defaulted and walked away from the debt on their devaluated homes when the 2008 real estate bubble popped in 2008.

Next-genners need to do what?

Mr. Drunkenmiller is rallying the next generation to do what?  If the next generation wants to have a future, it needs to end the Fed.

Right now the Fed has engineered a practice where the nation’s banks are taking a near-free money supply and using it for their own gain on Wall Street and not lending money to grow new businesses and fund auto and home loans.

Wall Street is a recipient of this near-free money and is now hooked on it like a drug junkie.

Presumably Mr. Drunkenmiller’s investment portfolio continues to grow because of the Fed’s “more money for the rich” policies.  He tacitly admits he is a recipient of the free money (quantitative easing) the Fed hands out.

But blame the senior citizens for all their entitlements!  If the value of their money hadn’t been eroded by the Fed, senior Americans wouldn’t need to be on the government dole, Mr. Drunkenmiller!

As an American reading this report, what do you think of a country that allows a single class of people (bankers) to use most of the money supply for themselves while Americans see their banked money diminishing in value due to a hidden rate of inflation that far exceeds interest paid on savings accounts?

In an article at MarketWatch.com, Drunkenmiller is quoted to say: seniors are “stealing from our young.”  Yet just today (10-19-2013) I read where a major lender is paying a $4 billion fine for misleading Fannie Mae and Freddie Mac on the quality of loans sold to them.  Mr. Drunkenmiller is not pinning the tail on the correct donkey.

(Sadly, that billion-dollar fine goes to government, not the people who were lured into shaky mortgages and eventually lost their homes and small fortunes.)

It is no wonder Mr. Drunkenmiller is not pointing his finger at the Fed.  It is no wonder The Wall Street Journal gives him a stage from which to misdirect the next-genners at Stanford and Berkeley.

How much longer will the banksters plunder America? I hope America doesn’t have to wait for the next generation to end the Fed.

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