(Week 15 - Wednesday, Nov. 19)
In yesterday's column I talked about how the Social Security Trust Fund is not a pool of money deducted from paychecks and held in trust, as is commonly assumed, and that the political recriminations over the supposed "raiding" of this fund to cover the general expenses of government are misguided in that there is no way that these funds realistically could be withheld from the general revenue flow without creating an effective need to borrow an additional sum into circulation at "interest" from the private banking system to replace the monies so sequestered. Thinking of it as a fund that is being "raided" distracts our minds away from the fact that the remedy for the "trust fund" issue is dependent on making the transformation from a "debt"-based private monetary system, to one in which our money supply is issued directly out of the U.S. Treasury.
The problem with private retirement funds, including 401k's, Keoghs, company pensions and other private-nest-egg accounts, is similar, though it manifests in a somewhat different way. Rather than being used to make up for deficits in other sectors of the Federal budget, private retirement accounts are effectively capital funds for monetary speculation in the financial markets (government accounts other than Social Security can be a mix of the two). Within the context of an economy whose money supply is borrowed at "interest" from private banks, this could hardly be otherwise.
Most people realize their nest-egg money is being "invested", and generally approve of the idea. After all, the earnings are being applied towards growing the balances of their accounts. To be sure, this is one way their money can be managed, but I would suggest that if people thought through fully the implications such an arrangement, they would see the high cost that they, and the social order in general, are paying for the widespread practice of providing for retirement accounts via private "investing" of "debt"-based money.
To understand this, we need to take a look at the basic dynamics of the free-enterprise market cycle. Goods are produced, and then they are sold in the marketplace. The cost of bringing goods to market is accounted for exactly by the wages, salaries and profits paid to those who are responsible for producing them. In the aggregate, the number of dollars paid to those responsible for producing goods (i.e. the cost of production) always matches, to the dollar, the income they take receive as they transition to the role of consumers (i.e. gross income). This is a mathematical identity, and its balance cannot be upset any more that a drop of fluid circulating in a closed system can avoid coming back to the place where it started, unless, that is, there is a leak in system.
In a market cycle within which the circulating medium is "debt"-based dollars there is indeed a leak in the system; specifically the leakage cause by the obligation to pay "interest" for the use of the currency. The way that works out is this:
Let us say that a worker gets paid $2000 for whatever value he is responsible for producing. He takes home his paycheck and pays his bills. Let suppose that he makes a mortgage payment of $600, of which $200 is applied to the retirement of the loan, and $400 is credited towards the "interest" payment.
In his role as producer, our consumer accounted for $2000 dollars worth of goods, but on the consumer side of the equation he has less than that to spend. The $200 dollars applied to the retirement of the loan is actually accounted for as purchasing power, because it is part of the sum of money he borrowed to compensate other people for building his house. For the $400 paid towards the "interest", however, he receives no goods of tangible value. This means that by the time he has spent his paycheck he will be able to purchase only $1600 dollars worth of goods, and an equivalent of $400 worth of unsold goods will pile up in some producer's inventory.
If money paid out as the cost of production does not show up fully as disposable income, goods go unsold, orders for new goods decline, workers are laid off, less goods are produced, and the market cycle goes into a spiraling contraction. The only way this tendency can be prevented is for someone to keep borrowing more money into circulation to buy up otherwise un-sellable goods.
Just as "interest" charges attached to the creation of money cause a shortfall in purchasing power, so does the subtraction of money from the income of a working person to fund a retirement account. Rather than being used to buy up goods produced in present time, purchasing power deferred until retirement is "loaned" back to workers in the economy indirectly through "investments". These will include buying up the "debt" contracts that people will increasingly be obliged to take on in their lives by the very fact that the deferring of purchasing power represented by these retirement accounts will rob the economy of the ability to complete its own market cycle, and so make such borrowing necessary.
Thus, a pernicious cycle is set up whereby income earned becomes purchasing power deferred, which is compensated for by its transformation into "money loaned". The irony is that the very funding of retirement accounts with "debt"-based money eats away at and eventually destroys the economic base that retirees will depend upon. The cumulative burden of this snowballing "debt" and speculative expectation is precisely what is causing millions of retirement accounts at present to lose much of their value, or go belly-up altogether.
None of this is to say that the material wellbeing of the elderly portion of our population cannot be provided for. On the contrary, to do so is both a moral and an economic imperative. We will be exploring ways to make it happen on a sound and consistent basis as these columns continue.
The complete set of columns from this series is posted at the following websites.