Tuesday, November 30, 2010
It's all fun and games until somebody loses an IRA.
By now we're all familiar with the games central bankers play... print a little money here, prop up the market there, pass the buck like a hot potato, and do everything possible to keep the charade going.
But we can't ignore what's going on in Europe right now.
Last week, Ireland's government announced it would use (confiscate, seize, steal) $30 billion from the country's public pension program to purchase Irish government bonds. Hungarian officials announced a similar program using $15 billion of public pension assets. French officials also surrendered to the idea and are putting $45 billion of pension assets into France's sovereign debt.
Just to be clear... Much of the proceeds these governments receive from selling bonds are used to fund social programs such as welfare, health care, and unemployment benefits. So, by using pension fund assets to buy these bonds, the governments are taking long-term savings from hardworking, industrious individuals... and giving the money to those who are currently down and out.
What happens years from now when the hardworking, industrious folks decide to retire and discover their money isn't there, or it's worth only a small fraction of its original value?
Of course, government officials will argue this is a temporary measure to bridge the funding gap caused by the weak global economy. When the economy improves, tax revenues will increase, and they'll be able to pay down the debt and replenish the pension fund coffers.
The funding problems are systemic. They're not the result of economic downturns. They're the result of stupid politicians making stupid promises to stupid people. "From those who can to those who need" may sound good on paper, but it fails miserably in practice.
The real issue, however, goes beyond the politics of socialism and/or communism. What does it say about the quality of a government's debt when the only entity willing to purchase it is the issuing government itself?
Now, you can dismiss this as a European problem – just a bunch of Irish, French, and Hungarian politicos doing whatever they can to appease the masses and keep their cushy offices. Why should we care?
We should care because it's happening here too – in the good old U.S. of A.
The Fed is already using taxpayer money to prop up the bond market and keep interest rates artificially low. Once again, what does it say about the quality of a government's debt when the only entity willing to purchase it is the issuing government itself?
And... does anybody remember the trial balloon the current administration floated several months ago? You know... the one about using public pensions to buy annuities backed by U.S. Treasury securities.
None of this happens by accident.
Central bankers talk to each other. They know the ticking time bomb everyone is trying to kick down the road. And they know if it gets to the United States, it's a dead end. There's nowhere else to go.
So what can you do?
First, if you're a government employee and have a government pension, you need to do whatever you can to take control of the assets yourself. NOW. Talk to your administrator and find out what your options are.
And if you're a speculator and you're willing to bet the jig is up within the next several months, shorting the long-term Treasury bond market is the best no-brainer idea since I wrote about betting on a dollar rally in October.
Best regards and good trading,
Last month, Jeff bet on a rising dollar just weeks before it broke out of its falling-wedge pattern. Reread his last "no-brainer" play of the year here: We Could See a Huge Rebound in the Dollar Right Here.
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