Here's a little secret that all of you boomers should know.
Unsustainable U.S. debt has finally caught up with us. Government forecasts are unrealistically optimistic as Obama continues to pump money into the economy to help stimulate demand and get us out of the downward spiral we are in. The money they are pumping in was not earned, it was created out of thin air. For every dollar that gets created out of thin air, the value of your assets, savings, investments and real estate goes down.
There are some fundamental reasons why we are in this mess. Some major factors include the fact that we have exported many of our jobs, we are carrying huge amounts of debt, we continue to import more than we export, we have been unrealistic in the value of our homes, we have failed to save effectively, banks have adopted a very tight lending strategy, our cost of health care is unaffordable due to the threat of torts, litigation, malpractice claims and layers of attorneys and insurance companies that are living off the health care system and our government has recently privatized much of the debt that was being carried by foolish investors. Even in a good economy, our Social Security and health care benefits are unrealistic. Our government has now built up the largest debt level in history and sooner or later someone has to pay it off. The single biggest threat to us boomers is the instability of the value of the US dollar. The dollar has continued to slide against more stable currencies, eroding the value of your assets and savings. For most of us, our assets are things like our home, our stock portfolios including retirement funds and our savings. As the dollar drops in value, our net worth falls on a global basis.
Unfortunately our government has a tremendous amount of debt that is payable in dollars. It is in the best interest of the government to pay off this debt with cheaper dollars (devalued). As more money is printed by the treasury, the value of the dollar is driven down, making debt in dollars cheaper to pay off. This is an advantage for the government, pay off our debt with cheaper dollars. The ones who have the most to lose are us baby boomers. For most of us, all of our savings, assets including real estate and stocks are denominized (valued) in dollars.
So what are we to do.
With home sales at record lows, don't expect to sell your home to finance your retirement. I hear this statement over and over again, "as soon as we can sell our home". Keep in mind that our boomer generation controls most of the wealth of the nation and we are all trying to cash out at the same time. Many of these home loans are under water. There is not sufficient demand from younger generations to take all this housing inventory off our hands. Sell and be sorry but sell. The cold hard fact is that the housing market is not going to recover for years to come. When institutional organizations like Fannie Mae and Freddie Mac teeter on the brink of bankruptcy, you should get the picture by now. Open any Sunday paper and look at the list of foreclosures. The numbers continues to climb. Most of these foreclosures are on homes that sold three to five years ago for much more than they were worth. If you were to do a market appraisal, whether on a cost basis, income basis or comparative basis, people simply paid much more than these homes were worth. Until the correction reaches bottom and the excess inventory gets absorbed, the market for real estate will continue to suffer. As we boomers are looking to downsize, there is not a market available to take these homes off our hands
What about your savings and investments? You need to be on the Defense....
We are in a global economy; I recommend you get your savings and investments out of dollars, that is move them into assets that are measured in another currency. That can be things like bank accounts in foreign countries or real property, funds in other countries, etc. When choosing where to park your life savings, you need to look at the fundamental stability of the economy in which you choose to invest. It is interesting that I mentioned this in my blog over a year ago only to learn that the Costa Rican colon (their currency) was the second fastest appreciating currency on the planet over the past 12 months. Why is that? First of all they have a healthy economy. Second we have exported tons of jobs to Costa Rica; Intel, Proctor & Gamble, Colgate Palmolive, Firestone, American Standard, Kimberly Clark, HP, Microsoft, Bridgestone, Boston Scientific, Citigroup, etc etc, all have huge manufacturing facilities there. Thirdly there is international demand for property there, their economy is based on tourism, they have affordable health care, their taxes are low, their government is well run.
Don't count on our government to look out for us.
The US government is now looking at the savings and retirement funds of boomers as a potential source to stabilize our economy. There is current legislation to keep citizens from moving our savings out of the country. A proposed "exit tax" much like inheritance tax is now being legislated to keep us boomers from dumping our dollars, moving money into other more stable currencies and repositioning our assets into things like real property outside the US. Keep in mind that good assets go up in value while overvalued assets drop in value. Supply and demand dictate how asset value is determined. If a bunch of us boomers are all looking to divest of our homes, stock portfolios and other "dollarized" assets what does that do to both the value of these assets and the demand for them as well. More importantly what does it do to the value of the dollar. Remember that we boomers control the lions share of these assets.
The government has worked to support the banking system in hopes that credit would loosen up. The government bought up a bunch of bad assets, mostly real estate related, to avoid a total collapse of our banking system. The banks however are protecting their own positions, many of them teetering on collapse, therefore keeping excess cash in reserves rather than lending it out. The FDIC is nearly bankrupt and bank failures continue at unprecedented levels. This continues the decline in real estate value as loans for purchase are harder and harder to get. We all want to sell but the banks aren't lending money to those who want to buy.
Consumer spending declines
At the same time, consumers have finally curbed spending. We are suddenly paying off debt at record levels but this requires a reduction on spending. This has also helped our balance of trade as less goods are coming from China. As spending declines, inventories increase and employers feel pressure to lay off workers. There is a further concept called the money multiplier that indicates that as I spend one dollar less, the net effect of that decrease in spending is about 7 dollars less in economic activity. This is because the dollar I would have spent would have gone to someone else, who would have in turn spent most of it and saved a tiny fraction. As this person spends most of it, it goes to the next person, who again spends most and saves a tiny bit. When consumer spending declines, the net effect is much larger on economic activity, contributing to a spiral downturn in spending, employment and jobs creation. This is the primary rationale for Obama's stimulus package, an attempt to turn around this downward spiral.
I'd like to remind any of you reading this that I spent 7 years studying international business at Northeastern University in both their undergraduate and MBA programs. This is just my personal opinion but any of you who know myself and Kristina are well aware that we have made great choices in our investments and wealth management. We sold our rental properties in 2006 and 2007, paid the capital gains and used that money to buy property in Costa Rica in the development we now represent. I also advocate considering the use of a self directed retirement program to get your money out of US based assets. Contact me for more information about setting up a self directed retirement program that allows you to move the total value of your existing IRA's, 401k's, SEP's, Simple plans, Keoghs, etc into non dollar based assets. As the government continues to look at our (boomers) assets as a way to stave off further economic losses, those who took proactive action will the winners in the long run. You earned it now make sure you get to enjoy it.