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Tying up some loose ends
Old 05-01-2015, 09:56 AM   #1
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Tying up some loose ends

Pension, Bonds, Interest rates, Banks, Inflation, Deflation, Bankruptcies, Derivatives, and the Supreme Court. An attempt at perspective.


Taken one by one, perfectly understandable. Putting them all together, a little more difficult. It has to do with debt, and overly simplistic, "kicking the can down the road"

Starting off with a current example:
Chicago, similar to Detroit, has an enormous debt, and like Detroit, has much to do with borrowing for city projects of all kinds. When you have a poor credit rating, it costs more to borrow, and issuing bonds can mean higher interest rates. Typically, over the past decade, these bonds carried variable interest rates... always adding to the long term debt. As the payments came due, one of the ways of paying these rates was to combine the many contract payments into one lower payment, by taking our higher risk loans... with potentially lower rates... in high risk derivatives. For many years, the derivatives have been hugely profitable... but variable. As the derivative settlement dates came closer, the risk was (supposedly) lowered by creating "swaps" where the trades were engineered between the tradiing parties... including the banks, and investment groups. This had the same effect as in the italics, above.

The initial bonds owed by the cities to the banks... still exist. The basic debt still exists. Eventually, the interest payments become so high, that the city can only make the payments by borrowing... Now by much much higher rate. Even paying the interst rates only, becomes difficult if not impossible. When the city defaults on the loan, the bank can call the entire amount due to be paid immediately. When this happens, the city can be driven to bankruptcy.

Now, with a few twists... replace "city" with "pension", and their long term obligations. Unfunded liabilities. Long term payout requirements exceeding the ability of the "fund" to pay out to later retirees. As these funds were hit with lower returns, when interest rates dropped, the natural response by the boards of directors was to look for higher paying investments. The led to more trading in derivatives... and so the cycle continues. Higher rates being reduced as swaps spread out the risk. Swaps eventually to have "due date".

Next... using the same sequence... switch to government debt.
Unfunded liabilities 96 Trillion.
Total current debt 61 trillion
Current interest 2.5 trillion

None of this makes sense (on a national basis) as the world economy is becoming less stable. Looking closely at the recent concerns about negative interest rates, it comes down to the trust in the value of the individual country's ability to back it's currency. Now... taking this to the next step, when the value of a national currency... ie. lira, dollar, pound, euro, rupee, franc etc... comes into question, there is a rush to banks, to withdraw savings etc, in cash... One way to reduce that risk, is to require monies or the equivalent to be kept "safe" at a cost... thus the negative interest rates.

The greatest fear for many people is for the derivatives market to be at risk.
12+ trillion in cash value, 700+ trillion in notional value, tied to contracts of 1.2+ quadrillion. Numbers that make the eyes glaze over.

Supreme courts in many states are considering pension rules, while several times removed from the direct subject of connectivity, will be ruling of pension guarantees. Chicago will certainly be involved. Look for some of the state cases to utimately end up with the U.S. Supreme Court.
.................................................. .................................

This is just my take on the way all of these issues are ultimately connected.
The time-line is another factor. Almost all of these different factors have been on the table for 10 to 20 years, with prophets of doom predicting global disaster to be eminent in a few days or weeks during those decades.
On a personal note, I seriously doubt that any of this will affect me, but thinking longer term, for younger persons... that understanding the economy in a multidimensional setting could lead to better, safer choices in personal finance.

As always..YMMV.
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Old 05-01-2015, 10:01 AM   #2
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So if you had about 40 years of retirement to go, what would you do?
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Old 05-01-2015, 10:16 AM   #3
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So if you had about 40 years of retirement to go, what would you do?
Shhhhh....Plastics...!
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Old 05-01-2015, 10:24 AM   #4
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Shhhhh....Plastics...!
Hmmm... shoot lots of politicians, bury them and sell the lot as "oil futures"?
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Old 05-01-2015, 10:31 AM   #5
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The time-line is another factor. Almost all of these different factors have been on the table for 10 to 20 years, with prophets of doom predicting global disaster to be eminent in a few days or weeks during those decades.
I make a point of ignoring prophets of doom and paranoia peddlers. It makes my retired life so much more peaceful. There's nothing any of us can do about doom on this scale, anyway! And I think that most of them just want to make a buck and find that frightening other people is the easiest path to riches.

Mahatma Ghandi said something like, "Be the change you wish to see in the world". That is what we can do, and actually it is probably all that we can do. We can live our lives in the best way we can, love life, appreciate the universe, and spend our remaining time in the best way we can.
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Old 05-01-2015, 10:56 AM   #6
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They just want the "profits of doom," these "prophets."

And future generations will muddle through just as all the previous generations have.
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Old 05-01-2015, 10:56 AM   #7
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I make a point of ignoring prophets of doom and paranoia peddlers. It makes my retired life so much more peaceful. There's nothing any of us can do about doom on this scale, anyway! And I think that most of them just want to make a buck and find that frightening other people is the easiest path to riches.

Mahatma Ghandi said something like, "Be the change you wish to see in the world". That is what we can do, and actually it is probably all that we can do. We can live our lives in the best way we can, love life, appreciate the universe, and spend our remaining time in the best way we can.
This is a wonderful post, W2R!
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Old 05-01-2015, 11:01 AM   #8
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I make a point of ignoring prophets of doom and paranoia peddlers. It makes my retired life so much more peaceful. There's nothing any of us can do about doom on this scale, anyway! And I think that most of them just want to make a buck and find that frightening other people is the easiest path to riches.

Mahatma Ghandi said something like, "Be the change you wish to see in the world". That is what we can do, and actually it is probably all that we can do. We can live our lives in the best way we can, love life, appreciate the universe, and spend our remaining time in the best way we can.
Thank you for that. I really needed something just like that today. I'm taking that second paragraph printing 10 copies and putting it everywhere in the house.

Thank you, you made this a better day.
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Old 05-01-2015, 11:16 AM   #9
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My observation is that the media convinces us that all these things are important to you personally. They're not.

What my own city's mayor does and works on impacts me 1000 times more, and on a daily basis, than anything any President does.

I haven't been to Detroit or Chicago (or Baltimore) in a long time and have no plans to go again. If you live there, you care and it's important to you, but I'm not sure why I should devote a lot of emotional energy to what goes on there. Their pension/bankruptcy/societal issues are interesting but....

Personally, I find that it's just too overwhelming to get emotionally involved in the 'weekly crisis' on TV. I find myself eventually backing away saying "wait a minute...how does any of this impact me?".

Selfish, maybe but I need my sanity more. I RE'd to focus on the more important things in MY life, not to obsess about what CNN tells me is relevant.
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Old 05-01-2015, 12:11 PM   #10
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You've got a good handle on the government dilemma. It's just a tiger chasing it's own tail. Eventually that tiger's going to catch its tail, take a bite and he's not going to enjoy the pain.

The future generation is simply going to have their hands full. They're spending and not saving. And they may have to work until they die because my generation may spend all our retirement funds (and IRA/401K's) to where our children inherit a net nothing.

The future may be truly difficult, and I'd hate to be 25 years old starting to save for my retirement when interest rates are being held at a net nothing. They've just got to play the stock market aggressively as there's no where to go other than there.
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Old 05-01-2015, 12:24 PM   #11
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The future generation is simply going to have their hands full. They're spending and not saving. And they may have to work until they die because my generation may spend all our retirement funds (and IRA/401K's) to where our children inherit a net nothing.
A few people said that to me about my generation 45 years ago.

They also told me that SS would be long, long gone by the time I'd be of age.

(Some also said that all the world's oil would be depleted by now and we'd be entering a new ice age, but that's another story I suppose.)
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Old 05-01-2015, 12:30 PM   #12
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Old 05-01-2015, 01:14 PM   #13
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Old 05-01-2015, 01:42 PM   #14
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So if you had about 40 years of retirement to go, what would you do?
Thank you for the question.

I think the first thing I would do, is try to understand what would affect me personally, and then to look for the people in government who would lean towards those areas that could help me the most. And then I would vote... for those who were working in my best interests.

If one understands the policies and the direction of those who are making the rules... and if one is comfortable with the direction being followed, then by all means... that person deserves support.

But IMHO, the most important thing a person with a longer timeline can do, is to take the time to understand how government decisions will affect the future.

From a totally selfish standpoint, if I were so inclined, I would prefer that the government take on as much debt as possible, and double my Social Security payments.

Being not so inclined, I care about my family... some much older than many of our friends on ER... and so look to fairness and a workable plan for the future... and to encourage them to think for themselves. To take the time to understand how world-wide economics works, and to play a part in the voting process. Not just to go along with blind acceptance of what they are handed, but to look ahead and be able to intelligently exercise their right to vote.

Being somewhat a student of Ghandi, this is my take on responsibility.
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Old 05-01-2015, 01:44 PM   #15
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(Some also said that all the world's oil would be depleted by now and we'd be entering a new ice age, but that's another story I suppose.)
So now we're exporting petroleum products and warming is going to make us boil over.

I just don't know whether to run in right-hand circles or left-hand circles! So I'll just go sit on the back porch and have a drink.
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Old 05-01-2015, 02:19 PM   #16
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I just don't know whether to run in right-hand circles or left-hand circles! So I'll just go sit on the back porch and have a drink.
Whether you run in right or left hand circles, you end up at the same place. I'd choose the porch and drink rather than the circle running.
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Old 05-03-2015, 07:45 PM   #17
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'Whether you run in right or left hand circles, you end up at the same place. '

Not in NASCAR, left hand all the way. A right turn puts you into the wall.
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Old 05-04-2015, 08:23 AM   #18
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Here's what Bill Gross had to say about the subject that I was trying to look at.
What rang true, was the opening parts of a long overview on the world economy... particularly when if begins with"turning 70". No timeline, but a put-together of of Central Banks.
Not sure how I got to the site, but it had to do with looking up info on Repo rates for Brazil and Russia...
Anyway, not for the faint of heart, but for those who have an interest in world economics.
https://www.janus.com/bill-gross-investment-outlook

The intro put me on the hook for the rest of the article:
Quote:
Having turned the corner on my 70th year, like prize winning author Julian Barnes, I have a sense of an ending. Death frightens me and causes what Barnes calls great unrest, but for me it is not death but the dying that does so. After all, we each fade into unconsciousness every night, do we not? Where was “I” between 9 and 5 last night? Nowhere that I can remember, with the exception of my infrequent dreams. Where was “I” for the 13 billion years following the Big Bang? I can’t remember, but assume it will be the same after I depart – going back to where I came from, unknown, unremembered, and unconscious after billions of future eons. I’ll miss though, not knowing what becomes of “you” and humanity’s torturous path – how it will all turn out in the end. I’ll miss that sense of an ending, but it seems more of an uneasiness, not a great unrest. What I fear most is the dying – the “Tuesdays with Morrie” that for Morrie became unbearable each and every day in our modern world of medicine and extended living; the suffering that accompanied him and will accompany most of us along that downward sloping glide path filled with cancer, stroke, and associated surgeries which make life less bearable than it was a day, a month, a decade before.
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Old 05-04-2015, 11:22 AM   #19
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Something similar to the German hyperinflation of the postwar years perhaps?

Except for several bouts of revolutions of the pitchforks and guillotines kind, the landed gentry seems to do quite well in human history. If financial instruments fail, you can always eat the crops growing out back, right?

In terms of economic turmoil, hard assets (land/real property) would probably provide the best backstop. Maybe that's why hedge funds are buying up cropland and bidding the prices up to ridiculous levels?

Of course I'm hoping the music doesn't stop while I'm still finding a seat. This was a depressing thought to start the week.

Edit: those are blocks of German currency the kids are playing with. Utterly useless otherwise during those years.
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