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Comments on Demographics and Demographic Ponzi Schemes 6 29 09

Comments on Demographics and Demographic Ponzi Schemes 6 29 09

 Reference The Economist June 27th-July 3rd 2009 “Scrimp and save” and “This is going to hurt”


The Economist reported this week there were 20 people retired for every 100 working in 1980.  By 2050, there will be 45 retired for every 100 workers.  This will transform the world and we need to think outside the box for a moment and contemplate the ramification of this for people in their 30’s who need to retire some day.  We keep the initial premise that IT IS NOT IN THE GOVERNMENT’S POLITICAL INTERESTS to do anything about it.


There are major ironies going on right now in real time, Bloomberg news has just reported Mr. Madoff got the maximum 150-year term.  This will send a message to everybody running a ponzi scheme that the profession is not a viable way to put food on the table.  Mr. Obama swore all last year “no one will get a tax hike under the 250k income threshold.”  This weekend, the house narrowly passed the cap and trade “tax”.  Mr. Obama indicated all last year “healthcare coverage (via reduced costs) is a major priority for all Americans.  With the cost structure initially flawed to allow the doctors to pay their bills based on the amount of pills prescribed or number of procedures performed (not a salary), The Economist indicates Mr. Obama is “concentrating on the symptom, not the underlying disease.”


It is also ironic that the greatest Ponzi scheme in history is right in front of everybody but all eyes have been on the evil others.  According to Bloomberg, Mr. Madoff said to the judge that he always thought he could work his way out of it and pay everyone off.  WE have used this exact same strategy since 1940 right here good ol’ US of A.   



The Multi-Trillion Dollar Ponzi scheme

According to wikipedia, “the first monthly SS payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont. In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, Fuller already had received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92.”

It is easy to read between the lines with this one.  I wish I could invest $24.75 and turn it into 23k, now that’s a return!  This new super-investment was called pay-as-you-go; the next generation has to pay for the prior one.  If it were fully funded, one generation would have to “get left out” of the game to match the future liabilities to expected tax receipts.


Medicare as an example of being duped by the government.

Peter Schiff just noted on June 28th 2009; When Medicare was first proposed back in 1966, it cost $3 billion per year, and the projection was for inflation-adjusted annual costs to rise to $12 billion by 1990. The actual cost in 1990 was $107 billion, and the 2009 estimate is a staggering $408 billion! So much for government estimates on health care.


I am struggling with what to do these days.  It seems the inflate/deflate, Japan/Weimar, TLT/TBT; GLD/Cash debate is about a 50/50 coin flip based on everything I can read as of today.  It just seems like the rate of increase of liabilities that have NOT BEEN FUNDED WHATSOEVER is about to become the “front-month” news issue for 2010+.  I will be watching California.  They are rumored to run of money soon and no one is giving an inch.  This will be the blue print for what the US will do when their “free-checking” account zeros out in under 10 years (my prediction).


So what is going to happen to us in our 30’s?  When/Where/How will we get a return good enough to retire?  As The Economist articles indicate, things will be the worst in Japan where 70% of the population will be retired by 2050.  This is the most lopsided pyramid in the world with 70% of the people requesting the other 30% to fund them.  What will happen here in the US?  It just seems there is no other way to get out other than inflation.  Spending is unlikely to be reduced, and taxes are likely to go up.  Contribute nothing to 401k’s, max out your Roth at 5k-10k per year no mater what and begin to buy precious metals.  You can use leverage in a Roth with any ETF you choose.  Best of all, you pay no tax on the gain.  Just make sure you are right as you are speculating.


So when you add it all up, it just seems a little unfair to make your children pay the tab.  Just as days prior to the scheme being detected, Mr. Madoff pleaded with one of his best friends for another few million to pay redemption requests, Mr. Obama seems to have all his friends duped as well.  My two cents, in 10 years we will not be reading about Ponzi schemes, but Madoff schemes.  The scale of this one is going to render the name Charles Ponzi obsolete.

 Disclosure: Long GLD/SLV/UNG call options, Long KYE/KED, short REITS.