The Magic World of Guaranteed Retirement Accounts

Posted on May 20, 2011 by MN Gordon

The pursuit of ignominy is nondiscriminatory.  For it’s with equal opportunity that each individual’s granted the occasion to act a buffoon.  Most rare is the man who heeds the calling, ascends to the highest ranks of public office, and preserves his dignity.  More often, he takes his cue, steps center stage, and behaves like an utter jackass.

For example, here in the land of fruits and nuts confessions of the former Governator’s secret love child with the family maid were plastered across the Los Angeles Times this week.  No kidding…it’s been quite a hoot.

But even more hilarious were front page pictures of the unshaven Dominique Strauss-Kahn, head of the International Monetary Fund, and who was to be the next President of France, doing the perp walk in a New York courthouse for alleged sex crimes against a hotel maid.  What a week… Could a Hollywood screen writer have come up with better cheap entertainment than this?

We don’t doubt it…but no comedic fiction could’ve caused a pother in Paris quite like the images of France’s favorite son handcuffed and jailed.  For this alone, the cheap entertainment’s been priceless. Continue reading →

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When Return Of Your Money Beats Return On Your Money

Posted on May 17, 2011 by MN Gordon

Wild absurdities are taking place in the debt markets these days.  Near impossibilities like negative real interest rates are going on at this very moment.  We blink our eyes with disbelief…but sure enough, the price for money banks are paying depositors is less than zero.  In other words, savers are loaning their money to banks at a loss.  What gives?

To review, negative real interest rates are when the inflation rate is greater than the interest rate.  It takes heavy handed government meddling with markets – like quantitative easing – to pull off such a feat.  During a period of negative real interest rates, savings accounts are penalized.  In the Fed’s best laid plans, negative real interest rates are designed to get people to spend money, to boost economic growth.

We are currently living in a period of negative real interest rates.  But what you should do about it, at least in the short term, may come as a surprise.

When we signed off last Friday morning we noted that Bank of America Certificates of Deposit are currently paying an annual percentage yield of 0.35 percent.  Several hours later the Labor Department reported that the Consumer Price Index rose 0.4 percent in April – or 4.8 percent on an annualized basis.

What this means is that in less than one month’s time, inflation will wipe out the CDs total annual real return.  What’s more, over 12 months the CD will yield a real return of minus 4.45 percent. Continue reading →

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Debt Default

Posted on May 13, 2011 by MN Gordon

There’s something both amazing and astounding going on.  Last month, Standard & Poor’s lowered its long-term outlook for the federal government’s fiscal health from “stable” to “negative.”  Since then yields on 10-Year Treasury Notes have dropped 18 basis points.

Here at the Economic Prism we may not know exactly how the world works.  But we have ideas on how we think the world’s supposed to work.  One of these ideas being that higher credit risk demands higher compensation.

Obviously, junk bonds are supposed to pay more than investment grade debt.  Who wants less compensation for buying riskier debt?

Hence, when a credit rating agency lowers its long-term outlook on the U.S. government’s fiscal health to negative we expect the 10-Year Treasury to pay more – not less.  If deficit spending isn’t reduced soon, not only will the credit rating outlook be lowered, the actual credit rating will be lowered too.

Surveying the fiscal landscape of the U.S. economy, and the bozos balancing the books, Standard & Poor’s came to a simple conclusion…

“Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” said Standard & Poor’s credit analyst Nikola G. Swann back on April 18.  “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.” Continue reading →

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Ending the Business Cycle with Guesswork

Posted on May 10, 2011 by MN Gordon

In the fall of 2010, the U.S. economy had been in recovery for about 18 months.  At least that was the official word from the National Bureau of Economic Research, which dated the recession from December 2007 to June 2009.  But for many it felt like the recovery had yet to come.

If there was in fact recovery it wasn’t the sort of robust growth one would expect following a great recession.  Rather it was the sort of lethargic recovery of an octogenarian from pneumonia.  Given enough antibiotics the virus may be beaten back…but the old fellow still gasps for breath after a short trudge to the corner mailbox.

So to, larded over with enough easy credit, the U.S. economy had been able to fry up several quarters of positive GDP.  Yet the misallocations of the bubble years were still hanging around like an overstayed party guest into the late night hours.  If recessions are supposed to purge out the rot leftover from the preceding expansion, this one failed immensely.

It had been a peculiar recovery for anyone who bothered to think about it.  It wasn’t based on the spending of savings accumulated during the recession.  Nor was it based on capital spending and investment. Continue reading →

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