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As the debt bubble grows exponentially worse, more attention is being placed on pensions. Pension funds are severely underperforming and fighting to stay liquid as this monetary experiment continues. Historically-low interest rates have placed tremendous stress on these institutions, as determined by the World Economic Council. Quantifiable data shows that the combined pension deficit for 8 countries is $66.9 trillion. This trajectory would take the deficit to $427.8 trillion by 2050. Countries in this group include the U.S., Australia, U.K., Canada, China, Japan, Netherlands, and India. Of the $66.9 trillion, $50.3 trillion (75%) is unfunded government and public employee pension promises. Some analysis shows that the $66.9 trillion pension shortage is 1.5x these countries’ GDP. If you looked the $427.8 trillion, that would be 10x greater.

This pension deficit includes both the non-productive and productive taxpaying base. Discounting the non-productive portion of the government taxpaying base, the deficit becomes 2x the productive GDP today and 13x in 2050. Another issue with the pension deficit problem is that people are living longer than ever before. North American babies born in 2007 can expect to live to 103 if WW3 doesn’t break out. Additionally, the global dependency ratio is expected to decrease from 8:1 to 4:1. The global dependency ratio is a metric that measures the number of workers compared to the number of retirees. Not only is the labor participation rate at historical lows, but so is the velocity of money. Pension problems today stem from a low interest-rate environment, which affects bond yields. Investment returns are based on current bond yields and long running assessments of equity markets, including dividends. Returns are at extremely low levels, which requires pension funds to hold more reserves that are harder to obtain. Simple math tells you that a pension fund with $1,000 earning 2% is $20. If the fund needs $40 in income, the reserves would need to be double that to obtain the investment goal. A basket of bonds and equities has been a great investment strategy from the 1970s through the early 2000s. Central bank intervention has driven investors to equity markets, as bond yields have fallen significantly. If you believe the official inflation numbers, you can see that the 30-year bond will soon be lower than price inflation, as measured by the CPI. My contention is that we’ve been living in that scenario for several years and owning bonds doesn’t make sense to me as the yield on a 10-year bond is less than price inflation. Central banks have bought an estimated ⅓ of government bonds, driving up the price and pushing yields down, which has killed pensions. The old traditional inflation hedges no longer work.

Over the last 50 years, the dollar has lost 97% of its purchasing power, and 75% as measured by CPI. This is why it would make sense to have an allocation to gold, as the prices for goods in gold have fallen and purchasing power has increased. An analogy goes something like this: as a new retiree who is fit like the dollar ages, his health or purchasing power degrades to the point where he cannot maintain it. Owning gold (sound money) works in the opposite direction: as the retiree gets older, the purchasing power of those medical bills becomes cheaper when they really need it most. With life expectancy increasing, the average American can expect their pension to erode for 37 years. As you can see, there is a negative correlation between the rate at which currency loses purchasing power and the conventional inflation hedge to protect pensions. A financial crisis is brewing, as the benefits of credit expansion are not economically viable.

 

Cheers,

 

Colin

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