Tuesday, May 23, 2006


I've been more interested in economics lately. Although my understanding of it is shaky at best, I recently read a few things which are scary to say the least.

First - the impending baby boomer retirement. Now, everyone already knows about the trillions in healthcare costs that this means, and that the younger generations will be shouldering that without enough people in the workforce. But - what about all the 401(k)s? I just read an article in the Economist that goes like this: When everyone retires over the next 10-15 years, everyone is going to be cashing in their 401(k)s. In other words, everyone of retirement age is going to be converting those stocks and bonds into cash to live on. How? By selling them on the market. But....who is going to buy them??

There are not enough younger people in the workforce, in the US, to buy up all of those stocks and bonds. What does this mean? It means that the stock market is headed for a deep dive, because of simple supply and demand. Without sufficient demand, the prices are going to dive, because of the glut of stocks and bonds on the market. This means that, for instance, my 401(k) is going to tank, unless I convert it into some other asset (cash, usually), which of course exacerbates the problem.

The authors of the article basically propose that the only real solution for this is going to be to make it as easy for Chinese and Indian workers to buy these assets as it is for Americans, thereby increasing demand. Alternatively, grow our own workforce by leaps and bounds, by.... oh, I don't know.... granting amnesty to tens of millions of Latinos, who would now be eligible to buy stocks and bonds?

It's fascinating, because it's so basic, and yet such an unexpected result.

So, speaking of cash. Some years ago, the US went off of the gold standard. Up to that time, the US government guaranteed that you could (in theory), go and give them a dollar, and they would give you a little bit of gold (not really, but bear with me). In other words, money was only printed as a substitute for gold, which they maintained in large vaults. This was the gold standard, and it ensured that the government printed no more money than they could back up with gold.

Why gold? While it is pretty, gold is basically in limited supply. What causes a thing to have value? Well, it could be useful, or it could be in limited supply. When you buy stocks, you are betting that the company is going to produce something that people want, thus your stocks are valuable because they allow someone to produce something useful. Gold is easier to understand - it's valuable because there's not much of it. If it was easy to produce gold from, say, dirt, then gold would be as valuable as dirt. Having a gold standard meant that the risk of inflation was low, because the government couldn't just print more money unless they could obtain more gold.

Well, the US went off of that standard. Now we have what is basically paper - it is a currency with no inherent value. It is not backed by anything except the government's assurance that it will pay for things (this note legal tender). So what does that mean? Well, the dollar has been falling in value against other currencies. This means that other nations are starting to not quite believe that the US government will back that currency. (Which is reasonable, since we are running a deficit in the trillions of dollars - $24,000 in debt for every man, woman and child).

And the price of gold has gone through the roof. It was about 200 dollars an ounce a few years ago. It is now $653 an ounce. A lot of that is speculation. But some of it reflects real concern that the world's major currency, the dollar, is heading for the same fate as the peso and the ruble - worthlessness. So people are buying metal dug up out of the ground, only because there's not that much of it, so it is inherently valuable. Scary stuff.

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