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Posts Tagged ‘401k’

Now  that the U.S. and the world have experienced a financial catastrophe comparable only to the Great Depression, the thing we might want to ask is this: are we safe now? The answer is no. Even while Ireland is facing financial devastation, because they followed a path that mirrors George Bush’s economic “thinking” for the past several years, the U.S. is seemingly on the road to recovery. That’s because the newly elected Democrats instituted a major stimulus program (admittedly a weak and barely sufficient stimulus – but far better than what the misers of the Party of Herbert Hoover would ever offer).

The problem is that we are a myopic country. Our Congress is incapable of looking down the road beyond the next election cycle. And that is exactly where the problem lies.

The crazy, mind-boggling, economic policies of Ronald Reagan and his Republican successors will soon bear their bitter fruit. I am talking about a little time bomb created by the Reagan administration called section 401k of the U.S. income tax code. It is what governs the 401k plans that most Americans have instead of the old employer-guaranteed pension plans. Reagan’s lunatic idea was that throughout your working life you would contribute tax-deferred money into your 401k account, which would sometimes be matched by employer contributions. You take charge of this money while you are working and cleverly invest it in the stock market. Then, when you retire, you live in grand style off your earnings from the stock market! For as long as you live!

Complete economic rubbish. Complete deception of the American people. However, the good news is that your former employer is completely off the hook, and you are on your own! Isn’t that just grand? It’s a Republican Tea Party dream come true.

If you care to look at the history of the U.S. stock market, you will see that, for the thirty years or so before Ronald Reagan’s administration created the 401k  idea, the Dow had very anemic growth. It was only  when America’s workers started pumping large chunks of their salaries, via the 401k plan, into the stock market that stocks really took off. This soon led to two stock market bubbles (one NASDAQ and one NYSE). Remember the “irrational exuberance” of ten years ago?

A couple of years ago, we had the  housing bubble that led to the world economic collapse. This was enabled by Congress changing the income tax laws so that you could buy and flip houses every two years and not pay income tax on the profit. This gave the false hope to many people that they could still build up a nest egg even though their 401k accounts that had been destroyed in the previous stock market bubbles.

So what has Republican Reaganomics achieved for  our economy (and, while we are on the subject, where is Ireland’s heading)? The answer: A gigantic smouldering ruin.  High unemployment, low wages, a devastated real estate market, and little to hope for. Could things get any worse? As Tea Party Palin would say, “You betcha!”

A large part of our population is about to enter crisis mode, and we are totally unprepared.  The World War II baby boomers are now reaching retirement age and most do not have employer guaranteed pensions. However, most do have those good ol’ 401k plans.  Of course these 401k accounts have been savaged by the Voodoo economics policies of Republican Presidents Ronald Reagan and George Bush. But wait – won’t  Social Security save them? Hardly. Well, yes, maybe from starvation, I suppose. Maybe. Unless, that is, the Republican Tea Party succeeds in cutting or privatizing Social Security, which they would love to do.

We are on the verge of having an entire generation enter a situation so desperate that they cannot meet their own living expenses because the 401k thing was just a gigantic Ponzi scheme and their not-fully-paid-for homes are only worth half of what they used to be worth. It will be a financial catastrophe.  Many have virtually nothing left in their 401k accounts. They will be lucky to survive a year if they have to depend only on their 401k plans – but many have life expectancies that would take them into their 80’s or beyond. What can they do?

Expect another wave of house selling as the boomers divest themselves of this last piece of wealth they partially own. It’s a young Tea Party Republican’s dream of course – think of how cheaply these houses can then be bought and then flipped! What a chance to make a killing! It’s the chance to make a small fortune! The question, of course, is who is going to buy them and at what price? And what will this mass selling will do to an already bleeding real estate market?

The baby boomers are a huge bulge in the population of this country, and as they have gone through life their generation has always had major effects on the U.S. economy simply because they represent such a large part of the population. When they were young, schools had to be built for them. When they earned money they spent it and the economy boomed. When they objected to war, they caused chaos in the streets.They changed the culture. They changed the environment. They changed the way we worked, shopped, ate, vacationed. They changed America because there were just so many of them. Now they will change America again.

Soon, a  significant number of the boomers will start leaving the work force. They have to. They are getting too old to work. They will soon stop putting money from their jobs into the economy. But, they will still need  money to meet their living expenses. Sadly, for many, their 401k money has gone up in Republican smoke.  They have little other savings. In the near future the U.S. will soon be facing another major financial crisis, because millions of these boomers have almost no retirement funds, and they won’t be able to survive on their paltry Social Security check. This is a recipe for financial disaster.

And nobody, as usual, in our government is thinking about it or planning for it.

But the Boomers are coming, and they’re coming soon.

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It began during the reign of Ronald Reagan, although he certainly was not the architect of the idea.  Even so, he must have wholeheartedly approved. Why? Because it was good for business.  If there was ever a gigantic hoax put upon the unsuspecting American public, it is embodied in section 401k of the U.S. tax code.  It is this provision that provides for employers to set up tax deferred 401k retirement accounts for their employees. You know, so that when that day comes, in the dim and distant future, you will have a great big nest egg awaiting you, so you can have a long and comfortable retirement.  – Oh, and by the way, since all you workers now have these great 401k plans there isn’t a need any longer for your employer to provide a pension plan, is there?  So – goodbye pension plans. American workers, you are on your own.  How very Republican.

Oh, but wait.  There is one other little detail. You know all that money you can put in your 401k account? Well, you can’t put it in a bank and earn interest like other money you save. Of course you could of course put it in a money market account  with your broker.  There you could earn 0.003 percent interest and then watch the actual purchasing power of your savings drop by 50% or more in the next 30 years before you retire. (because of inflation. Or… you could invest it!  Yes, that’s the ticket!  You can put all of your money in the stock market – you could even buy stock in the company you work for!  And don’t worry. This isn’t gambling with your retirement money – it’s investing for the future!

Well, the future is here. As far too many boomers have found out and far to0 many children of the boomers have learned, there is no gold at the end of this rainbow, just a pile of horse manure – all of it a  gift from your government and big business and the IRS. Wasn’t it wonderful for them? Think of it. For so many years before the invention of the 401k scheme the Dow Jones average was essentially flat. The stock market was a no growth system.  Stocks had hardly moved since the Great Depression. Then, as if by magic, as soon as the 401k ripoff began the stock market started going up.  And the more our 401k dollars went into the market the more it went up!  Isn’t that incredible – just like the housing market! Of course the housing market went the way of all good Ponzi schemes…. and so did the stock market, because that was just an artificial bubble too – a scheme contrived by the arch Capitalists of America to use their employees wages to fuel the growth of their businesses, and all the while calling their scheme a retirement plan.

I’m afraid the chickens have come home to roost. Too many 401k plans are nothing but a smoldering ruin now. Too many retirees will be getting most of their retirement income from Social Security, not their 401k plan.  Thank God for Franklin Roosevelt, perhaps the last honest President this country has had.  But wait. It’s not over yet.  The 401k system still hangs over the heads of our youth. Cunning businessmen and government “servants” tell us to invest our 401k money wisely. Better still, young man, take the money and run.  Don’t listen to the advice of the big businessmen and certainly don’t listen to the government people who are owned by the businessmen.  They have worked out a system where your employer no longer has to give you a pension.  Even worse, a lot of people in power would like to kill Social Security as well.  Avoid the advice of businessmen and government hacks, they mean you no good.  We are truly floundering in a Republican world now – you are on your own and you will sink or swim by your own wits and not with any help from your employer or the government.

Meanwhile, a new crop of people are reaching retirement age every day. They are being pushed out from their jobs by mandatory retirement rules.  They can’t survive on what is left of their puny 401k and their Social Security benefits don’t come close to paying the bills. And WalMart doesn’t need anymore help. They’ll need to sell their homes now, but to whom? There is no market for houses anymore. It is like the retirees are stepping off the deck of the sinking Titanic only to find that there are no lifeboats in the water.  It is a slow moving catastrophe.  It is happening one day at a time, but it never makes the headlines.

How can a government tell its citizens to gamble in the stock market with their pension funds?  How can an employer look an employee in the face and shut down their pension plan while at the same time telling them to invest their savings in the company’s stock?  Today as people retire in their 60’s they can look forward to living a long life, perhaps into their 90’s or more.  But how will they pay for their housing and how will they buy food? The 401k catastrophe is only beginning. Wait a few years.  Wait until the retirees have spent what little is left of their 401k money.  Wait until they try to survive on their paltry Social Security payments. And just to rub salt into the wounds of these unsuspecting workers, wait until they try to take their money out of their 401k plan and they find they have to pay tax on each withdrawal – It was tax deferred, remember? Ah, but the IRS is sneakier than either you or I could ever imagine, for you not only have to pay tax on the money withdraw from your 401k, for if you also take additional money from your 401k to pay the 401k tax, you have to pay tax on that money too! So then, if you take out more money to pay that tax, well…you have to pay tax on that too! So you are paying tax on the tax on the tax. Isn’t that wonderful?  It’s a tax collectors dream.  And it all comes out of your 401k.  How perfect!

Happy retirement, America.

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One year ago, the entire American banking system was on life support.  It was only through the intervention of the Federal government, using the promise of a semi-infinite supply of tax dollars that some of the banks survived.  If this infusion of billions and billions of dollars of cash had not been made our entire banking system would certainly have collapsed. The question we need to ask – but we haven’t – is this: is there a message here?

Thanks to the extreme measures the Federal Government took with the TARP program we still have some functioning banks, but a more important thing to consider is this: do we have a functioning economy?  The answer to that question is to be found in the history of the Dow Jones Industrials average for the past forty years.  The thing to note is the behavior of the Dow before the year 2000 and after the year 2000.  Notice anything? How about those two massive bumps?  I mean the one about ten years ago and the one a year ago. You know what those are? Those are bubbles, the signs of an economy that is being artificially and irrationally stimulated – an economy on drugs.

The other thing to note is that Bump #1 didn’t start in the year 2000, it started long before, its roots were in the 1980’s. Until then the Dow had been pretty tame, slowly inching upward ever since World War II. So what happened in the 80’s? The government created 401k plans and artificially stimulated massive investment in the stock market by average people who would have otherwise never invested in the market.  The same thing happened again with the 529 plans.

However, for the people who run our government that wasn’t enough. So they changed the tax laws again to provide a massive income tax credit for anyone who sold their house – and they made a provision so that you could do that every two years. That artificially fired up the housing market.  Then we had also the tech boom – a boom that the Fed actually opposed.  They didn’t like all these upstart companies on the NASDAQ sucking up all the investment money from the old money firms that made up the DOW.  So, the Fed killed Tech by ratcheting up interest rates until Tech collapsed.  After Tech was a smoking ruin, the Fed drastically cut interest rates and thereby fueled the housing bubble even more.

The thing to realize is that our economy, for the past twenty or thirty years has been a dying economy, kept alive by infusions of money from unsuspecting citizens contributing to their 401k plans and their 529 plans. It has been kept alive by people buying and flipping houses every two years.  It has been kept alive by one scheme or another while the true engine of our economy, manufacturing, was exported to China.  But nobody cared because you could buy Chinese stuff cheap at Wal-Mart and everyone was doing well in the stock market or the housing market.

Well, the party’s over, isn’t it?  True, the banks are alive again, having dined on the lifeblood of the taxpayers.  However, there are very few green shoots out there. Does anyone have an idea where our new economic engine will come from? Is it possible for our government to think of another economic scam that will power the country for another ten years? Or, are they running out of ideas?  Does anyone really think we can get by on our American manufacturing capability?  Let’s face it we just don’t make enough stuff anymore.  The future of manufacturing, at least for the next twenty years or so is in Asia, not North America. So what is our government thinking? Well, since the only thing they saved is the banks, one must assume that they figure that’s where the money will come from – i.e. lending at interest. But, let’s face it, the lendees are unlikely to be Americans, are they? No, the money (that’s your tax dollars that you gave them as TARP rescue money) will go to developing countries so they can develop their businesses and then pay back the banks at high interest rates.

Meanwhile, back at the ranch, what can we expect?  The truth is: not much. Our Capitalist engine doesn’t have a transmission anymore. In fact we lost it a long time ago.  We’ve just been coasting along.  The thing we don’t want to…don’t like to…admit, is that we are witnessing the failure of Capitalism.  Unregulated Capitalism – something we have had from many years – soon morphs into Predation: the strong preying on the weak. We have witnessed that. The Predators in our society, i.e. the financial community, have feasted on us.  There’s not much blood left to drink anymore.  They’ll move on, looking for victims in other countries – still propped up by our government.

Here, in the USA, we won’t admit Capitalism has failed – we can’t – it’s like denying religion or something. It’s like being unpatriotic.  It’s like stepping on the flag.  Capitalism is sacred in America – beyond criticism. It’s hard to figure why – after all, can’t we all see that it doesn’t work?  We can’t we simply acknowledge that it is an economic theory and system that just doesn’t work?  I know, I know ,we’re all afraid of the other two “isms”, Socialism and Communism. So we stick with our belief in Capitalism, even though the wheels have come off and we no longer have an engine for our economy – we still believe. We believe. We believe even though we are in a screaming nose dive.

If the past twenty or thirty years have proved anything, they have proved that unfettered Capitalism is a disaster. For proof just look at your bank account.  If we can’t bear to consider Socialism or Communism, then there is only one solution.  We need a new “ism”.  Call it Americanism if you like.  We need a new approach to economics. We need creative minds in our government who can see beyond the payoffs from lobbyists and the pressures of the fat cat bankers.  We need a new voice in economics, a voice of intelligence who can lead our economic recovery with a sound understanding of what went wrong. We don’t need idealogues, whether they are Capitalists, Socialists, or Communists; we need realists: practical, intelligent people who can understand what is broken and fix it. We simply need a new way of running our economy, a new economic theory for the 21st Century.

The question is this: do we have the intelligence and the courage to change the way we do business? Because if we don’t, it won’t be long before we don’t have any business.

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The 401(k) section of the Internal Revenue Service code was approved by the U.S. Government in 1978 and became effective on January 1, 1980. This plan supposedly allows employees to invest in the stock market in order to create funding for a comfortable retirement.  Ever since the 401(k) provision was created Congress has passed more and more 401(k) related legislation to encourage more workers to invest more of their retirement money in the stock market.  Employers loved the idea because it removed their obligation to provide defined benefitension plans for their employees, i.e. plans that provided a specific, guaranteed income.  Instead, employees were sold the story that these 401 (k) “defined contribution” plans could provide them fabulous amounts of money because the stock market always goes up.

Take a look at the history of the Dow Jones average since 1900 until now.  First of all notice that the chart is logarithmic.  Stock analysts like to use log charts, they seem so much more well-behaved than linear charts.  However if you look at a few dates and take the numbers from the vertical scale you can see that, in the linear world, they are not so well-behaved – and, by the way, the world we live in, and the money we own, is linear, not logarithmic.  For example, lets take the extreme case.  Suppose you had invested all your money in the Dow components in the 1920’s. By 1929 the Dow had reached a peak value of about 380.  By 1932 it had dropped to about 43.  This is a drop of about 89% in value.  And remember, this is the Dow – a 30 stock index of the biggest companies in America.

On the other hand, suppose you had a 401k plan in 1929 but a lot of it was not invested in the Dow but in some of the smaller companies.  It is likely you would have lost even more because a lot of the small companies simply evaporated as the country entered the Great Depression.  Fortunately, 401k plans didn’t exist then. Unfortunately, a lot of people who thought they might be able to make it in retirement from company pensions or other funding were rudely awakened when their company pensions vaporized as well as their life savings because a lot of the banks failed.  Many retirement-aged people in the Great Depression were destitute and it was for this reason that FDR created the Social Security system. (Imagine where we would be today if George Bush had gotten his way and converted Social Security into a plan where each individual invested their Social Security contributions in the stock market – just like the their current 401k plans).

The Dow Jones chart shows that time and again the stock market drops as drastically as it rises. Over all it can be expected that the value of the Dow will drop dramatically between 20% and 50% every four or five years, with a few exceptions where it may not drop quite so much and others where it drops a lot more. Overall, it doesn’t seem to be the sort of thing you would want to bet your retirement on, does it? And that’s just the Dow, the biggest companies in America. That is not taking into account all the little companies that just vaporize when things get tough. Even more disconcerting to note is that of the original companies that made up the Dow, there is only one left! The others are gone or morphed into something else or downsized into insignificance.  The one original company that is left is GE.  GE’s stock traded at $6.66 today, only about a tenth of its value in 2000. So much for safety in the Dow.

Look again at the historical chart of the Dow Jones average.  Notice that from about 1960 until 1980 it just oscillated with no upward momentum. But in 1982 it took off! Of course it took off.  Everyone began plowing all their retirement money into the stock market – just what American business and our Republican Party dominated government wanted. The market skyrocketed from about 800 in 1982 to almost 14,000 in 2007, a gain of almost 1650%!!! Compare that with the period 1960 to 1980. The Dow went from about 700 to about 800 in twenty years, a gain of only 14%.  Could it be that our economy magically took off in 1982 and never looked back because our business community suddenly figured out some new business plan?  Hardly.  It was because of all the money that people innocently put into their 401k plans.  The American working man was the victim of a monumental Ponzi scheme cooked up by a business/government coalition that didn’t give a hoot about the welfare of the American citizen. The 401k scheme was just a clever idea to get the ordinary American citizen to plow his earnings right back into the business world so the wealthy could get even wealthier.  And it worked.

Now, as the world of banks, finance, and insurance has been shown to be a community of cheats and liars who gleefully defrauded each other as well as their investors and the American public, the typical American is looking at the smoldering ruin of his 401k plan and wondering how he can ever retire – or worse – if he is already retired, what will he do now?  Will he be able to afford a house or food?

There is only one good solution for retirement money: Social Security.  FDR had it right.  If people are going to contribute to a retirement account it should be a Social Security account, backed by the full faith and credit of the United States government.  401k plans should be eliminated.  Investing in the stock market is for people who can afford the risk.  The average American can’t. The American people have been robbed by the largest Ponzi scheme imaginable, and as the stock market continues to tank we are headed for a crisis of truly vast proportions.  Many, many millions of American’s have lost their only hope for a viable retirement because of the 401k Ponzi scheme.

I can only wonder, when will our government take serious note of this human disaster, and what in the world will happen to all these people now?

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I think I’m beginning to see a trend here, one cow said to the other. Have you noticed that whenever any our friends go into that red building over there that they never come out again? I think I figured out why: I don’t think the farmer is entirely on our side…

How many people would rather not look at their 401k statement these days? Most probably. We’ve heard a lot about the economic meltdown, the collapse of the stock market, and the resulting devastation of the average American’s 401k. For people who are close to retirement the loss of 40-50% of the value of their 401k is devastating news and means that many will not be able to retire.  Many of those who have recently retired are now wondering if they will have to go back to work and if there is any work available for them.

We haven’t heard much about the devastation of people’s 529 funds. These funds are similar to 401k plans in that they encourage people to put money into them that will then be invested in the stock market. 529 plans are intended to be used as a way to save money for children’s college tuition expenses. Last year Congress passed legislation making these plans even more attractive by making 529 contributions and the earnings exempt from income tax.  People poured money into these plans hoping to thereby have enough money to send their kids to college.  Now their 529 plans are pretty much in ruins, just like their 401k plans.

Our Republican President and Republican members of Congress have repeatedly tried to alter the present Social Security System of guaranteed government pensions to one where people would invest their Social Security contributions in the stock market, just like the 401k and 529 plans.  Imagine the devastation that such a modification would have had for our nation’s retirees, especially those who depend completely on their Social Security check for all of their expenses.  Taken collectively, these actions and proposed actions by our government might seem only stupid or irrationally exuberant – as Alan Greenspan might say. Maybe they were just dangerously optimistic. There is however another way of looking at it.

It is my contention that the ultra wealthy class of America – the top 5% of the population who are overwhelmingly Republican – and who control our present government, feel no sense of responsibility for the average American. Rather, like the farmer, they look at us as sheep to be shorn or cattle to be led to slaughter.  So it is that they make new laws and entice us into the trap of investing in their businesses, knowing that the stock market is anything but a sure thing and is the last place you should put money that you know you will need in the future.  These wealthy students of Machiavelli look at the general population as a source of money for them – period. And they use the power of government to enable their schemes to lure innocent, untrained, trusting citizens to put their hard-earned dollars into stock that will inevitably fail – but not before the ultra-wealthy sell off their own shares. Don’t worry about them- most of them (except maybe the incredibly greedy financial guys) know when to sell.

Now our government is using billions of taxpayer dollars to bail out the banks and insurance companies that are owned by the wealthy, and to make loans to businesses.  It just goes on and on.  Come to think of it, calling the current Republican-led government Machiavellian would probably be an insult to Machiavelli.  These people are in a league of their own.

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Dear TV Network News Financial Analyst,

I am a faithful watcher of your news network and I particularly enjoy hearing your analysis of the terrible events that are happening in our business markets. Because I have complete confidence in your views I wonder if you might answer just a couple of questions I have about my 401k portfolio?

1. I have really taken your message to heart about my 401k; you know, the one where you say “buy and hold”? I think that is really good advice because the worst thing to do is to panic and sell just because everyone else is. I am now in my “hunker down” mode, and I want you to know you can count on me – I won’t sell anything for years because I trust your judgment.  Here is a list of my current stock holdings, note that I have heavily favored financial stocks because they have out-performed so well in the past:

Lehman Brothers

Indymac Bank

Washington Mutual Bank

Wachovia Bank

Bear Stearns

Merrill Lynch

AIG

Fannie Mae

Freddie Mac

To tell you the truth, with all the bad financial news these days, I’ve been afraid to look at my 401k statements for the past few months, but I am sure we can ride this out with the buy and hold strategy you keep talking about. 🙂

2.  I do have just one other question. You know how you have that chart that shows how if you invested $1000 in the DOW thirty years ago you would have about a trillion dollars now if you just stayed invested? Well, I was wondering about one thing. I know that one of my favorite stocks, AIG, had been a part of the DOW, but just recently, after it’s unfortunate, but I’m sure temporary slip, it was removed from the DOW!!!

I noticed that during the last few weeks that AIG had been a part of the DOW the DOW average had been really dropping fast, but now that AIG is no longer part of the DOW it is doing a lot better.  I was just wondering if you thought that there was any relationship between the removal of tanking stocks from the DOW and then replacing them with stocks that are doing really well has any relationship to the way the DOW has historically done so well over the last thirty years?

Thanks for you help. I really appreciate your insights.

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