Boomers Need to Pay Attention to their Money

Here's a little secret that all of you boomers should know. 

Unsustainable U.S. deficit spending will eventually catch up with us.  Government forecasts are unrealistically optimistic as Trump maintains unsustainable spending, following in the footsteps of every president since Clinton, our last president who did not deficit spend.  To be fair, you must actually understand the difference between the debt and the deficit. These two terms are misused quite often by the politician's and news media. So, how much economics do you really want to learn to understand this? 

To explain, a debt is how much money you owe to someone. A deficit is how much money you are spending more than you have coming in. You can have a debt while having a surplus (you are actually paying down the debt) and you can have a deficit with no debt (you are spending your savings). The deficit measures how fast we are going into debt. 

We have had a federal debt every year since 1790. Yes, that is every year since the present United States government was formed by the signing and ratification of the US Constitution. While the actual numbers may be scary, the real problem with debt is the ability to repay it (think of how much you owe versus how much you make each month). For the government, this is considered as the debt compared to the gross national product. It actually peaked during World War II when we owed more money than could possibly be paid back (debt was over 100% of the GNP). Our current debt is about 30% of our GNP (really Gross Domestic Product, which we started using as a comparison fairly recently). 

You also have to understand that almost half our national debt is really an accounting shell game. It shows up as debt if we are going to have to pay it out someday in the future.  Half our debt load is the money we are obligated to pay for things like future social security payments and military retirements. 

For a very interesting, while not too hard to understand, brochure on the national debt and the deficit, please click on the below link. It is a 90 page booklet from the government explaining the debt. And for those who are trying to make this a political discussion, please check the facts and use the right terms. Clinton had a surplus, while we still had a very large national debt. 

The problem with the deficit is that much of our debt is to China.  If China demands payment our government would have to print more money to pay it.  Keep in mind that for every dollar that gets created out of thin air, the value of your assets, savings, investments and real estate goes down.  When the dollar devalues, we all lose...

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 un-affordable due to the threat of torts, litigation, malpractice claims and layers of attorneys and insurance companies that are living off the health care system.  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 absolute terms) 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 as a result of carrying all that debt. 

describe the imageWe have 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 valued in dollars. 

So what are we to do.

With home values up in some markets and down in others, many boomers hope to pay for their retirement from the value of their home.  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 since many have taken equity lines of credit to pay for other things, like vacations, to pay off debt or for home improvements.  There is not sufficient demand from younger generations to take all this housing inventory off our hands.  The cold hard fact is that the housing market is going to fluctuate 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.   If you were to do a market appraisal, whether on a cost basis, income basis or comparative basis, some people simply paid more than their homes are worth.  Prices change based on demand and demand changes based on economic activity.  When a large factory closes or new jobs are created, demand changes too.  As we boomers are looking to downsize, we need to develop 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 some of 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 the Costa Rican colon (their currency) was one of the most stable currencies on the planet over the past 12 years.  Why is that?  First of all they have a healthy economy.  Second, the US has exported tons of jobs to Costa Rica; Intel, Proctor & Gamble, Colgate Palmolive, Firestone, American Standard, Kimberly Clark, HP, Microsoft, Bridgestone, Eaton Electric, Microsoft, Boston Scientific, Citigroup, etc etc, all have huge facilities in Costa Rica. Thirdly there is international demand for property in Costa Rica, their economy is based on tourism, they have affordable health care, their taxes are low, their government is well run, their people are happy.

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 recently was legislation to keep citizens from moving our savings out of the country.  An "exit tax" much like inheritance tax has been 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 2008-200, the government bought up a bunch of bad assets, mostly real estate related, to avoid a total collapse of our banking system. Banks are still failing, technically the term is insolvent, in some markets, especially in places like the midwest where jobs and population is declining. This continues the decline in real estate values in those areas, think Chicago, Cleveland, Erie, Detroit.      

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.  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.