The 401k Bust

For years, I referred to the investment bubble of the 1990’s as the DotCom Bubble and the bubble from 2003 – 2007 as the Real Estate Bubble.  The entire time, overlooking the most obvious fact of what it really was…

This was the 401k bubble.

The DotCom/RealEstate bubbles were just merely the places that the 401k bubble landed!

Effective immediately, I will only refer to its smaller parts as “The Dotcom or Real Estate portion of the 401k bubble”.  I’d advise for accuracy’s sake, you do the same.

THE PAST:  (Trickle down greedonomics)

The year was 1997, my company at the time (OpCap) had just started participating in our new 401k program.  401ks had been around for 15 years at that point, but very few people in our office knew terribly much about them.  We had a representative from our provider come in and walk us through the plan.  When all was said and done, I was the sole employee railing against this ladies charts stating the “what if” scenarios of market collapses, and the concept of retirees selling of 401ks causing the market to collapse.  (My father worked as a clerk on the NY exchange floor and lost his job during the ruff times, so I knew the possibilities.)  All of my fears were nixed by both the presenter and my co-workers who spoke to the effect that.  “what you put in, you will always have.”  My retorts of: “what if ‘what you have’ becomes valueless because of a crash.” fell on extremely deaf ears.

Of the 200+ employees that were at our subsidiary, 1 person refused to participate.  Guess who?

In the coming weeks, my refusal to sign off on elections/contributions caused a stink in the office.  My bosses deemed it mandatory since they were automatically putting in 2% regardless of your election.  (I was so stubborn that I was passing on that free 2% because the sheet we had did not have a 0% option to check off from my personal contribution)  It eventually led to a meeting with HR, my agreement to invest 2% and dating a girl in the HR group.  (the next year 0% became an option)  –  This is a very TRUE STORY.

The introduction of the 401k in the early 1980’s to the mix of IRA’s, Pension Funds and Defined Contribution Funds eased the complication of getting involved in retirement planning.  The subsequent explosion of 401k investing coincided with their intermingling in Mutual Funds.  In 1990, 401k investments stood at $385 billion and invested 9% of those funds in Mutual Funds.  By 2000, nearly 50% of the 401k assets were then invested in Mutual Funds.  In addition, from 1997 to 2007, US retirement plans doubled from $7.9 trillion to over $15 trillion.  Of that $15 trillion, 60% sits in equity related investments and 17% in “alternative investments” both highly subject to market moves.  (Only 23% sits in “stable” BD/MMKT/etc… funds)

What does this all mean.  ???

In the name of “reducing risk exposure”, retirement plans have become so intermingled with mutual funds and equity markets, that any drain on the now massive 401k investment cycle, will cause a ripple effect to go through every possible asset that a Mutual Fund would hold.  This Net Redemption in Mutual Funds, trickles into selling of all of its underlying assets.

If you take a look at the lifelong chart for the S&P or DOW, you will see the obvious trends.  For the 50 years after 1932, the markets grew steadily.  Come the early 1980’s, after winning the cold war and the creation of the modern computer age, the US saw growth take hold.  Ironically, that also coincided with the birth of the 401k.  Come the 1990’s we saw an explosion of investing in 401ks. During a parallel period, Investment Companies had grown from $2 trillion in 1995, to $12 trillion in 2006.  (with over 93% invested in mutual funds, which further have equity investments of about 25%)

Similar to a CDO, where the mix of toxic assets crashes the value of the CDO, we have the parallel commingling of  Mutual Fund /  Investment Company Assets / Retirement Fund / ETC….  Instead of diversifying risk by spreading out losses…  They are now multiplying the loss factor through diversification, and the net outflow of money mirrors the same problem that exists within the Social Security platform.  The net in CAN NOT SUSTAIN the net out.

So we’ve essentially taken our 2 worst financial creations (Social Security and CDO/ABS/CDS/Risk Diversification) and placed them in our financial markets!

Who was the genius behind those ideas?

As you can see, we wrongly dubbed this phenomenon of gains as the “DotCom bubble”, followed by the “Real Estate Bubble”.   they were neither!

As I stated above:  This was/is the 401k bubble.  The DotCom/RealEstate bubbles were just merely the places that the 401k bubble landed!

To further clarify my point, we have to take a look a “retirement”.  (what I have to say here will not win me many fans.)  …but let’s face it, when the DOW increase from 1,000 to 15,000 in only 25 years (an annual compounding rate of 11%) you have to realize something was wrong!?!?!  Don’t you?

Retirement (The breathing wage)

The current view/concept of “retirement” is extremely flawed.  Is there a more “entitlement driven” theory to life?  …now before anyone gets furious about that statement…   give me a moment to clarify.  30 short years ago, it was common for a household to have a sole provider.  That no longer exists and we have grown accustomed to that being the norm.  (We had to DOUBLE OUR HOUSEHOLD PRODUCTION TO MAKE ENDS MEET!!!)  Well, why would we expect that the typical retirement age to stay the same?  With our life expectancy increasing so much, why didn’t we expect to have to work a much longer time?

I guess I just have a hard time with the concept of EVER NOT BEING PRODUCTIVE.  Let’s face it, retirement is us saying…  OK, I’ve done enough.  Time for payback.  Now I clearly understand that working people have spent their lives “paying into something” with the belief that someday when they look to retire, it will be there for them.  As a 36 year old, am I to believe the same???  I’ve spent 22 years of my life paying Social Security Tax.  Why?  Why should I be paying that tax?  I KNOW IT WON’T BE THERE FOR ME!  …but I’ve been “paying into something” all this time too.  How is it different?  I’ve also been contributing to 401k.  Should I expect 11% annual returns until my retirement?

In its simplest terms, you have to look at retirement as a salary for living.  There is a pool of money that all retires are pulling an hourly wage from just for staying alive.  That pool is large enough to sustain a certain percentage.  Then, when you add the increased life expectancy, and the baby boomers population size to the mix, what you have is frightening.  Instead of paying a living salary to 15% of the population, we will be looking to pay a living salary to 25%-30% of our population…  and not just for a few years…  but for growing length of time as these new retirees live 15+ years beyond their retirement.  At the same time, you no longer have 63% of the population working and contributing…  but instead only 55% contributing.  This pool of money to draw the living salary was not created with that in mind, so naturally, the 401k concept was created to add to the pool.

Now, the 401k pool (which is the market we know) will consistently feel the drag of that outflow drain.

Could this come at a worse time?

Feeding those 2 pools are the working population through SS tax and 401k investments.

Of the working class paying into these 2 retirement funds, the boomers are far and away the largest contributors.  They earn the most money, so their taxed SSTax contribution is the largest, and they also pump the most into 401k to “make up for lost time” (and their higher salary = larger contribution by percent).

What does that mean???  You have to look at what % of net 401k subscriptions are made up by the retiring class of boomers (that will no longer be coming in).  At the same time, look at the incoming job force to see how they make up the difference.

We’ve let our defective Social Security concept infect the market.  We are at the front end of the 401k’s platform to take money out of the system.  This net outflow will drag on the system every single year that the retirement percentage that is collecting a living wage, grows.  Plain and simple!  The only logical conclusion I can see to keep net subscription/redemption level in 401k investing, is A SERIOUS RAISE IN PAY FOR THE EXISTING WORKING CLASS.  …which doesn’t seem too feasible in the current environment.

For demonstrating what I’m saying in simple terms, I have created a mock model below:  (this is over simplified, but done this way to make an easy point)

Year 1 – +$2, -$0   (yearly net = $2, overall net = $2)

Year 2 – +$3, -$0   (yearly net = $3, overall net = $5)

Year 3 – +$5, -$0   (yearly net = $5, overall net = $10)

Year 4 – +$10, -$0   (yearly net = $10, overall net = $20)

Year 5 – +$11, -$1   (yearly net = $10, overall net = $30)

Year 6 – +$13, -$2   (yearly net = $11, overall net = $41)

Year 7 – +$15, -$3   (yearly net = $12, overall net = $53)

The transfer of personal saving accounts for retirement led to a consistent net inflow of cash through the 401k models.  In years 5, 6, 7, you see outflow starting, but the net in continued to outpace that outflow.

Now with the highest paid workers shutting down their investments, (along with “catch up contributors) and the size of the groups numbers that is moving towards retirement, we will see a reverse in that trend.  (A rise in unemployment and companies shutting down employee “matching” programs will accelerate the trend.)  An eventual balance will be reached, but not before the market feels the shock of the size and shape of its first outflow and the subsequent downward push of future net outflows.  Here you see the turning point below:  (remember, this is just the net outflow of 401k contributions…  as a sample, it does not show the net selling across the market in other mediums)

Year 8 – +$13, -$5   (yearly net = $8, overall net = $61)

Year 9 – +$11, -$7   (yearly net = $4, overall net = $68)

Year 10 – +$9, -$9   (yearly net = $0, overall net = $68)

Year 11 – +$7, -$11   (yearly net = -$4, overall net = $64)

Year 12 – +$6, -$12   (yearly net = -$6, overall net = $58)

With the commingling of all types of funds, and cash that has been withdrawn from the markets over the past 25 years and used elsewhere, the market is in a death spiral of self perpetuating withdrawals and asset depreciation.  I fear that Nouriel Roubini is correct in his assumptions that the market will likely need to be frozen at some point in the near future to straighten this mess out.  When I is “straightened out”, I still believe the current levels Are not too far off of where we will be.  (but that will take “help” to achieve)

THE PRESENT: 

 You know the scams and you see them every day…  Hell, some of the readers here have likely partaken (or continue to partake) in a scam!

From the small (double dippers, the disability abusers, tax cheats (the “red flag” limits abusers), to the large (CEO executive greed, Wall Street power brokers, etc…), it’s so painfully obvious where it all went so wrong…  and yet so little action will ever get done.

How many people can we see retire from their jobs, collect a pension, and get hired back as consultants for even more money?  …thus collecting 2 paychecks!!!  How can organizations (like the a particular Long Island Train Co) have 90% of their retired staff collecting disability?  DISABILITY!!!  For punching holes in tickets!  How can the “heroes” of NYC who “work 20 and out” with 75% pay (who work massive overtime their last few years so their pension is inflated – based on their final year average pay) be called “heroes”?  How can teachers unions hold the communities for ransom, forcing bills and pay raises through… or they’ll strike, thus forcing you to miss time from work?  (even when the work 180 days and are off 185!!!)  WHO’S STOPPING THIS?

How many CEO sweat heart deals do we need to see before someone actually does something???  How do executives cry for help, and lay off employees, while taking private jets to bailout meetings?  How do Brokers get away with betting the futures money, for a profit today, and get to walk away with a percentage of today’s profits, with no liability on the futures losses?  The legal system slows to a crawl when pursuing the rich and powerful, but can put 2 million poor people in jail expeditiously!  The Powers That Be and there lobbies are so powerful that even banded groups of people are powerless against them.  WHO’S STOPPING THIS?

DAMNIT!!!  Wake up people. The ghost of Paul Revere has hung himself in shame!

THE FUTURE 

What needs to be done?

Realistically???

Take a look at every thing you owned in 1982.  Assign it a 1982 value.  Now assume we have grown at 3% every year for the past 25 years.  Multiply the value of your net assets by a compounding rate of 3%.  The figure you get is what the average person’s assets should now be worth.  Anything over that figure…  get out your checkbook, and write a check in the amount of the excess to the public who will be paying for the current mess!

If your assets were worth $10,000 in 1982, then you should have $21,500 now.  Anything over that is playing with money that didn’t really exist so you shouldn’t own.

OK, lets take it a step further…  Lets say you were more productive then your neighbor during that time.  Lets say you deserve 5% every year.  OK, then your $10,000 should now be worth $35,500.  Once again, anything over that amount…  get the checkbook out!

As for the brokers, the CEO’s and the various others who cashed in on production-less work; through financial chicanery in higher math and knowledge of how to use formulas to legally rob a system that was not geared to catch ever evolving financial “innovation”, I say:  returning the money and asking forgiveness may be your only salvation.

It’s rather funny that so many posters have taken to calling for “pitchforks”, when in actuality a much scarier day looms!  (Bloggers, in general, are not do-ers.  They enjoy anonymity, and sitting behind the comfort of their keyboards and PC screens.  The reality of their organization through pitchforks is comical.  Maybe, they’ll adopt a symbol for the pitchfork???    =====E   How was that?  It kinda looks like a sideways pitchfork.)

The reality of overseas war coming to an end is just around the corner.  We will soon see an influx of military soldiers returning to a country that is (given its current course) far worse off then it was when they left.  When the reality of job losses hit, in sectors that typically employ ex-military types, you will see a large degree of a new type of disgruntled worker.  A worker that actually put themselves in harms way to find out that scammers and CEO’s are running away with the loot while the people they thought they were fighting to protect are suffering.

It’s my opinion that these ex military, whom will have a better sense of what America is supposed to stand for, will not blog about their displeasures.  I do not condone violence or people becoming vigilantes, but if a true depression hits, I see this as a likely reality. Especially if the justice system is not swift enough or equitable in holding the perpetrators accountable and punishing them.  The American public is armed to the teeth!

As for me, I’m part of the problem.  I own an SUV, had to have an HDTV, and have been known to drop change upward of .99 on the ground…  and not pick it up for shame of looking desperate!  (I’ve also been known to crop dust the cube farm for giggles…  but that’s a story for another time!)

…but I’m looking to change.  I’m getting involved.  I’m focusing in on fuel efficiency.  I’m watching less TV, and spending my free time with my kids and write blogs about social and financial awareness; I’m picking up that loose change and putting it in a big bucket for someday down the line.  I have the audacity of hope.  I no longer have my blinders on.  I’m no longer a ghost in the background.  I’m joining “braintrusts calls” and prepping for meetings.

Thank you all for reading (and breathing).  I may have made some enemies with what I said here, but I felt it had to be said.  Now it’s your turn to speak.

All the best, Miss America, Rich Hartmann

p.s.  What we should expect is:  Stag-re-de-inflation light, with hyper-stagnation reflating, followed by a double mocha latte chino.

C’mon folks???   What’s with these ridiculous terms?  Why do we try to pinpoint past conditions that can’t possibly mirror this unique crisis with these old terms?  Why can’t we coin my term and spread it around the world:  (Started here on the RGE)

Evapor-flation!

…and when someone asks what it means, you just say:  “There was a whole lot of value there yesterday… that isn’t there today.  Now the debt needs to evaporate the same way the credit did!”

Professor Roubini, I’d be honored if you dropped it in an interview.

p.p.s.  Kudos to Outerbeltway on step 1 of what could be a very promising enterprise.  (I think funding is step 2.  Check out the Soros’s project “Center for American Progress”.  I’d bet you there’s someone out there ready to 1 up Soros with a better group/concept/mission.  I can’t stress the power of the “emergency room” analogy!!) Miss Italy I hope you can follow in those footsteps.

p.p.p.s.  Detlef, thank you for spreading the good word.  I only hope it can help someone somewhere.

p.p.p.p.s.  Thank you Paulson and Bernake.  Though we all complain, without the current stimulus steps and hard work you have put in, we would ALL NOT HAVE RECEIVED OUR LAST FEW PAYCHECKS!!!   Now get back to work and start coming up with a better solution!

47 Responses to "The 401k Bust"

  1. Guest   November 21, 2008 at 8:31 am

    Very good points! Let’s educate the public about how the system really works, eliminate the inequitable flaws, demand transparency, fair regulation and accountability and justly serve the hardworking American taxpayer!

  2. Anonymous   November 21, 2008 at 9:17 am

    You’ve mixed some excellent points with a lot of dribble. You general point about the 401k cycle and baby boomers is great. But your point about what you had in 1982 should have gone up 3% – well I hadn’t entered the workforce yet in 1982 and thus had nothing. It’s possible to live below your means and accumulate wealth that way for spending later in life, even if you keep the excess cash under the mattress. I’d like to forward half your article but not the other half.

  3. MA   November 21, 2008 at 10:02 am

    I hear you on the “dribble”.I had so much data that I wanted to put into words and proof… that I just couldn’t figure out a way to write it efficiently. I’d agree that I overwrote a bit, but I didn’t know how to scale back something that didn’t contain enough.I’m working on my writing skills, but surely could use an editor.p.s. If you entered the workforce and attained assets at a later point like me (1994ish) Then you just take that value and pan it out at 3% per year.The real point of the exercise was to show you that even though the market is getting shellacked… It’s likely that what you own in terms of running parallel to growth is still WAAAAAAAAAAAAAY above were it should technically be. In other words, be thankful for what you have.MA

  4. PKB   November 21, 2008 at 10:08 am

    MA,Thanks for your work and insights. It takes nads to say what you do. I agree with your points on retirement and as a business school professor (quant modeling) I always force my students to build a personal retirement stochastic model and examine their future. This exercise has always received rave reviews from my students because it opens their eyes to just what needs to be done, and just how much their future is exposed to the risk of market performance.A highly significant point that goes unattended in your comments is the “Coming Knowledge and Capability Crisis,” which is the loss of “deep smarts” that will take place with the retirement of the baby boomers. Most companies are in daunting position with regard to succession planning of their scientists and key personnel. Knowledge that cannot be captured in a written procedure or computer system. This will have a huge impact on productivity as we move forward.Finally, the next wave of BBoomer 401K selling will likely be huge. Most folks who were not fortunate enough to get out of the market early still feel trapped in. When their account balances begin to approach the pain threshold, where they say “I need to have X amount at a minimum to retire” many will give up on their lingering hope of a quick recovery and liquidate to protect what’s left of their future.PKB

    • MA   November 21, 2008 at 10:53 am

      Bingo PKB.I wish I could’ve summed up the death spiral of your last paragraph in under a 1,000 words. (I tend to be a bit longwinded.)Very good points on lost intellect. Very good!Kudos to teaching your class that retirement model. I remember my 8th grade teachers (Mr Ponzi and Mr Wade putting on a week long simulated stock market game. School was fun for a full week. On the last day of the week, they crashed the market. We didn’t know at the time… but our teachers were running a simulated 1929 boom and bust on us. We all learned the lessons of “margin” and “speculating” at an early age. I still think back to that exercise, and my friends all hold it in high regard too as one of the best learned lessons in our education.) It was ironic that that one of the teachers last names just happened to be “Ponzi”.Sayville JHS was lucky to have them as teachers. I hope they know they had a lasting effect.Miss A

      • PKB   November 21, 2008 at 11:17 am

        Hey MA,You just gave me a great idea. I think I’ll put my students through the 401K bubble that you just described in my upcoming risk modeling course…starting in say 1990 and ending in 2008 by the end of the spring semester. That should have a lasting impact on them. These last couple of years will likely impose a generational shift in attitude as children and young people see their parents stress from job losses, home foreclosure, crashing 401K, etc, etc, etc….PKB

      • MM CA   November 21, 2008 at 11:55 am

        Hey MA I’m form Sayville – grad 1975

        • MA   November 21, 2008 at 12:34 pm

          MM CA… Are you serious?I’m 1990.Mr Prescia for HS Math???

  5. TA   November 21, 2008 at 11:12 am

    Well done. I think you’re on to it. I hadn’t considered the 401K backdrop, but it seems to make sense. What a sham, and you’re right, “you have to realize something was wrong!?!?!” Many did, but just couldn’t put their finger on it.I found your DCF example particularly interesting for two reasons. First, it’s what I’ve used to approximate bottoms for R/E markets (market value prior to hyper inflation compounded at pre-hyper inflation rate of annual appreciation adjusted to meet specific local conditions = @ “correct market value” or the @ “bottom”).Second, using 1982 as “Time 0” rings true. Wasn’t it the same year the “preppie” craze started? I can faintly remember the front cover of Newsweek or Time, with a twenty-something couple darting across an Ave. in Manhattan adorned in their “preppie” corporate attire. Didn’t the term “DINK” (double-income-no-kids) start about the same time?To your point, it also seemed to be the first of several eras of hollow prosperity where although the trappings seemed authentic (i.e. “preppie attire” = “wealth & status”), the prosperity (if it ever arrived) never did.But hasn’t that been the hustle all along? Create an image of wealth & status, and then herd the masses appropriately. It started with LL Bean and Abercrombie & Fitch attire and migrated to Hysteria Lane housing and lifestyles (Desperate Housewives). What’s next? Unfortunately the Dust Bowl setting of Steinbeck’s “Grapes of Wrath” comes to mind first…

  6. Free Tibet   November 21, 2008 at 11:44 am

    Who was the genius behind those ideas?Ans. Ronald ReaganI’ve been saying for a long time the US economy is a cash cow. All those baby boomers in their peak earnings years plowing all that cash into markets. The question has been asked before, what happens when it’s time for them to get out?

  7. GuestConcerned Canadian   November 21, 2008 at 12:03 pm

    Scapegoating the baby-boom generation doesn’t cut it. Take a look at the investment and spending habits of the post-baby boom generation (entering the work force 1975 – 1985) and I think you’ve got it. I call this generation ‘the lack of consceince generation’ who rue accountability. You have only to look at the crumbling of Enron, Wall Street and on down the line to see how pandemic their influence has been.

    • MA   November 21, 2008 at 12:23 pm

      Guest… The accountability is everywhere. Like I said. “myself included”For this, I ran #’s. Strickly #s. As plain as the nose on your face, the numbers stared back at me and said “wholy shit!!! How could you not realize the scope and timing of the inflow of cash to the market… and the places that cash flowed to???”I’m not maliciously taking aim at the boomers… rather, I’m just using the cold hard facts of the 401k lifecycle, and how the flow has been:Net inNet in bigger then last yearNet in even bigger then last yearNet in once again bigger then last year….and then all of a sudden…What???Huh???Net in “not quite as big as last year”???Net in EVEN LESS THEN LAST YEAR.The population size, and contribution stream never had an outflow.It was always in.This shock to the system is exposing money that was looked at a “guaranteed perpetual growth in inflow…The 401k model is flawed.It is the BUBBLE.Miss America

      • MA   November 21, 2008 at 12:30 pm

        p.s.That “guaranteed perpetual growth and inflow” consistantly masked the erosion that was allowed to take place by perpetrators that cashed out and spent large chunks of money that really did not exist. (since its actual existance was not “here and now money” but in fact the future saving of the inflow of cash through 401k retirement savings that was meant for a contributors retirement somewhere down the line.) The masking of this theft was always, legal through mathmatical innovation, as the losses would be made up for by “perma growth”.I smelled the rat 11 years ago. It smells the same today.MA

  8. hazleton   November 21, 2008 at 12:27 pm

    MAThought provoking, as usual. The whole globe is off kilter. The ultimate cause of the crisis is spiritual which is manifesting outwardly as an economic crisis.

  9. Sean   November 21, 2008 at 12:44 pm

    Rich Hartmann, this is a very well though and eye opening article. The media has always played down the boomer’s effect on stock market going forward by stating that they will draw little, but they “forget” to mention that these retired boomers will no longer CONTRIBUTE.I will promote your article on other blogsphere.Sean

    • MA   November 21, 2008 at 1:19 pm

      Sean… Thanks a bunch. Your my new favorite blogger.Hopefully I can someday return the favor with something helpful that I produce.Pay it forward!MA

  10. Opus21   November 21, 2008 at 1:23 pm

    So… big picture… ‘stock market demand’ in long-term decline after 401K bubble. This is compounded by reaching ‘peaks’ in population, energy use, etc. all around the same time. Could we be at/near the historical end of stock market growth and economic growth? Now there’s a challenge for the 21st century….My favorite part of the post – more time participating, contributing and being with kids. WAY back to basics….

  11. A sad American   November 21, 2008 at 1:34 pm

    Sure… and the talk about propping up the stock market during the 2008 election campaign was for the benefit of soon-to-be-retired baby boomers who are getting ready to cash in their retirement plans. Remember that guy in the Obama/McCain town meeting who demanded a 401k bailout?The AARP is the most powerful lobbying organization in America. Cross ’em at your peril.Anyway, the markets are much too big for the US government to finesse. The only way out is robbing other government programs, or printing money.We’re in a checkmate scenario here. The only sure bet is that living standards will go down here in the US. We can’t keep on earning big bucks for work others are willing to do for a tenth the price. Their wages will have to go up (devaluing the US dollar) or ours will have to go down… OR… there has to be some amazing improvement in productivity that justifies the higher wages, an improvement in productivity that can’t be replicated overseas. Nobody can fight these economic forces.I think we had the chance to make that productivity leap in the post-dotcom bubble, but we squandered our resources on the real estate bubble. Now we are too broke to jump a productivity hurdle that nobody else can.

    • MA   November 21, 2008 at 1:46 pm

      Don’t be sad. Be mad. Get active. This may be the kick to the head some of needed!!!MA

  12. Anonymous   November 21, 2008 at 2:52 pm

    MA, great thinking,Consider this, growth is not a sustainable model because the resources on earth has a limit.The source for our “wealth” is called energy and in 1965 we consumed 5 TW, in 2005, we consumed 15 TW.An increase by 2,79% per year.We are at peakoil(now or in 10 years or 20 years, it does not matter) and our ability to produce the growing need for energy is coming to a halt.With the same energy growth as the last 40 years, we would need 30 TW by 2030 and 60 TW by 2050 and then we do not count the desire from 3/4 of the world population to also live a “western comfortable lifestyle”.You say the 401k model is not sustainable, I say our energy consumption model is not sustainable.Then add on our global economical model which only works when everythings growing.How do you put this into your economical thinking? (I´m not a finance guy but I am picking up…)/Toby

    • Guest   November 21, 2008 at 3:11 pm

      Toby… I’m with you 100%. Unsustainable no matter what way you look at our consumption trend.The earth/mother nature will balance the trend if it sways too far.I see alt en as the only possible super-market. Production, storage, efficiency, transport, and “bottling”. By 2060, we will not shape alt en, Alt En will have shaped us.MA

      • pa   November 22, 2008 at 11:49 am

        a return back to indigenous idea (environmentalism) has created a unified thought around the world as we as humans are a part of nature not the masters.ancient wisdom of past peoples speaks to us all especially the speech by Chief Seattle.

  13. Anonymous   November 21, 2008 at 3:54 pm

    MA,thanks, I started to engage myself 3 month ago, reading everything about the finance crises but I did not get it. Not until I got onto the energy path and started to think about exponetial growth and the feeling I have hade all my adult life. It can not go on like this forever, our environment can not take it any more. Our expontial growth of population, exponetial growth of, well, almost anything. The graphs looks the same and the all end by going sky rocket. Different years but they all do.I have looked into smart-grid, V2G & B2G, interesting possibilities but still. We are nowhere close to have found the cheap access to enegry as oil has been.It is clearly so that the worlds expansion has come to a halt and that the finance model has to adopt.Do you have the oversight, I don´t….PS I told my wife and she just replied, well, “just invent more energy then” and then she got on to her day-to-day business. in a way, I really envy her./Toby

  14. Average Jane   November 21, 2008 at 8:10 pm

    MA, a most excellent post, and many thanks. I’ve been ranting for years during my worklife (1978 on) and it never, ever, ever made sense to me that my and/or my employer’s dollars were in the stock market. Back in that day, the only people in the market were those who could afford to lose their money. I too fought the mandatory contributions and still am. Of course all my coworkers, HR departments, the firm’s “financial advisers,” all told me I was not being prudent. So all of our productive workers’ hard-earned dollars kept sloshing into the big casino fund whereupon the “pros” confiscated it and trucked it off by the boatload to Dubai, all under the aegis of “prudent financial management.” How in the hell many financial managers’ jobs and firms were created in the past 25 years to “help” the poor consumer thread his/her way through the morass of the Stock Market? Arrrgghh!!I’ve talked to many people my age, 10 or 15 years from retirement (hahaha), who fully expect to work many more years and do not expect to retire at all, MA. The perception in the Middle Class is out there that we will not indeed reap the fruits of our labors. And I am reminded of my grandmother, who worked for decades peeling potatoes on the graveyard shift at the local hospital kitchen in order to keep food on the table for her nine children–she “retired” from that job, to be sure, but certainly did not stop working.If we baby boomers feel entitled to anything, it is certainly our fault for believing the promises of the Big Casino. All those moneychangers did us no favors, now, did they?So I think many of us are resigned to a lower standard of living, but what that means is very much the purview of the individual. For me it means perhaps I will never be able to buy my own home. That’s not such a bad thing.And as I’ve said on NR’s blog, I am willing to work and certainly not hide behind blog comments. So next meeting of the PFT team (Pitchforks and Torches–what an apt acronym), I will be there.Your contributions are excellent. I thank you for your time and efforts to make ours a better world somehow.

  15. artichoke   November 21, 2008 at 8:26 pm

    The “401K” bubble seems like the US portion of the “global savings glut” that was discussed several years ago, explaining for example the low longterm interest rates because all those savings caused a lot of demand for bonds.Due to our inferior saving rate as compared to Asian countries, they probably have a similar bubble even worse than we do. And indeed their stock markets have crashed harder than ours.In this respect, we are not really different from the rest of the world. Everyone is taking a hit to their retirement savings, rainy-day fund, etc. Worldwide productivity will continue past the point when those folks planned to retire, worldwide.Except, perhaps, in places where that is not allowed. In China, the retirement age is 60 for men and 55 for women. Apparently it’s rather universal there, and will such a large younger population, Chinese companies are unlikely to hesitate much to push the older ones out.

  16. Guest   November 21, 2008 at 9:08 pm

    Military types coming back from conflict overseas…already happened in North Carolina. The whites who owned the tobacco warehouses…the young African Americans who came back from Vietnam…the tobacco drying barns caught fire or were set on fire. The Vets presided from some location, and all the tobacco drying went up in flames, as reported on William Friday’s North Carolina People, UNC-TV.org

  17. 2cents   November 21, 2008 at 10:52 pm

    MA,I like this line of reasoning much better than your alt-energy post. I think you’re skills are best utilized directly in the financial sphere. I do have to agree with Anonymous above though; your 401k section was much more coherent and thought out than the lower section.I like how you’ve tied the housing/.com bubbles together. I would like you to consider taking it even farther. If you look back you will find that there is a method to all this madness. The root lies in some of the posts that I made well over a year ago on RGE., namely that the financial machine needed to take in more feedstock so that it could gear up. All major regulatory, market inventions and operational improvements have had a basis rooted in providing more collateral for institutions to lever against. It got started with regularly putting securities in street name.Putting securities in street name certainly allowed for physical efficiencies to take place and for many a headache to be relieved (except for the runners who lost their jobs). The original intent was honest and obvious, but when the I-banks saw what it enabled them to do it became too good to be true. Not only did they get your trading business, but they soon learned they could use your securities as their own collateral! This was akin to the fractional reserve scheme granted the C-banks!The party was on. In fact the party was so good that the C-banks wanted to get in on the action thus the repeal of Glass-Steagall. I think if someone were to do a retrospective of the driving force behind many actions over the last 30+ years they would find that everything was geared to transport more collateral to financial institutions to allow them to lever it so that the country got the maximum use out of each dollar. 401Ks were another mechanism to feed collateral, drawing foreign investments expanded the available pool, and housing was marketized to again provide more collateral, etc. The .com bubble was just a sign of the levering going on. It was not exactly planned as the others were. The huge amounts of collateral were looking for a home and a good story. The internet was the new economy, it was a story that caught on and everyone enjoyed the ride for awhile.My point is that if an action could increase the collateral available to financial institutions then it bubbled into existence. If an action reduced capital available to financial institutions then it was cancelled. This is the real basis behind the ‘freedom’ allowed to reign in the markets. As a mater of fact, I think that in retrospect we are going to find out that the seed that this grew from was the same buzz saw that brought this all down. You see, all exchange traded securities are now required to be DRS (Direct Registration System) eligible. This has been an ongoing situation since 2006. This new system again was as obvious as it’s older sibling ‘street name’ and had no rational argument against it. Yet, it was the beginning of the end of the feed the collateral game. This was the first major step in reducing capital available to financial institutions. You will find that all major financial players now use DRS and it is the lowly small investor and 401K holder/mutual fund holder who still use street name.You heard it here first, the DRS was the straw that broke the camel’s back.P.S. I also postulate that Disney will be a runt from now til. Just about eternity. ABC will muddle along, feature films will make some money, the theme parks will eventually fall into disrepair (the magic is gone – it was making rooted in making oodles of money and that ship has sunk), and the real killer for Disney is ESPN! What you say! Yes, ESPN thinks that they are sports, the problem is just as the magic is no longer in the kingdom, the $ports no longer will generate the money needed to carry ESPN!

  18. Dennis   November 22, 2008 at 12:57 am

    MA,Great article. You are missing some of the picture though, it is not just Americas fault. The huge investment funds in the middle east, the funds in Norway, the pension funds in the rest of the world all did exactly the same thing.And one of the things they did was put the money BACK into the system, by “investing” in IPOs. This gave the money back to the companies, which gave some people a huge amount of money, which caused them to invest them in the same scheme via investment funds and hedge funds. Which then again fueled itself.This pyramid-scheme was great, it was highly resistant to other recessions. But a recession hitting the world and caused by this bubble in itself will bring it down… Way down.

  19. I M F   November 22, 2008 at 5:21 am

    GOOD Post Rich..or..Rick…?Yes, WE are ALL Guilty of Robbing…OURSELVES……Paulsen took the Treasury Job to become TAX free on his 500 million$ ASSets….was he short GOLD…??It all comes down to LOVING thy selves, more, than thy Neighboor and even OWN children. !!!!Is the whole WORLD economy a PYRAMID scheme….? ?LOOK at the BACK of a 1 DOLLAR bill…if You have one.Albania had a Pyramid scheme going JUST before they had a WAR, & now same thing in Colombia…NO one see’s these coming….WHY….??BECAUSE, Everybody is PLAYING…..Not only have the Sheeple lost 50% of the retirement Assets, but the Goverments will have NO TAXes coming in, & years of tax deferrels/tax Deductables.BUTWHERE HAS the MONEY…GONE…? ? ? ?Wealth is NOT detroyed, merely Transfered.Some-one SOLD at the TOP, SO WHERE is the CASH…? ? ?WHO will defend TAX havens like Nassau,BAHAMA’s & Gibraltar, When the “PIRATES” come Raiding there…??WHY do’es the World/UN/IMF allow these TAX FREE Islands….?? Are they NOT PART of THIS PLANET ? ?I sure Won’t, these Dens of SATAN have sucked the World dry for Century’s….Let them “Walk the Board”.I say NUKE the Bastards or SELL them to the HIGHEST bidder.

  20. Northwichita   November 22, 2008 at 9:48 am

    I plan on investing long term in broad world indexes in my 401 k funds, because country specific fund with young populations are not available. I’m 45. What do you think of that?

    • MA   November 26, 2008 at 7:49 am

      Northwithita401k money is locked in the system for another 14 years. By 2022 I hope we long recovered. For the short term, (next 6 months), on the dips I moved back to equities (40%, 40%, 20% in Blue chip, Global equity, science & Tech… and on the peaks I’ve moved back to “safe” MMKTS.Long term I like my 40/40/20 which I guess would kind of mirror your “broad world index”.My only real advise would be… not all eggs in 1 basket. Make sure that your in more then 1 fund. (2 seperate “broad world indecies”) to cover yourself if their’s a theft/scandal/implosion.MA

  21. publically alone   November 22, 2008 at 11:30 am

    What is fair and decent? Purpose beyond profitsPerhaps humans will have a better understanding of what it is like to have and then not to have. Instead of wondering what the next best bubble is how about your next meal? Humbling isn’t it. To quote Tommy Douglas in 1961 when he was introducing his medical assurance plan in Saskatchewan he argued that health care “is something to which people are entitled by virtue of belonging to a civilized community.”Laws that hide behind the language of its own documents -contracts /over conduct. Deplorable. Homelessness and poverty are selfish!

    • Drsteph   November 22, 2008 at 10:49 pm

      Yes – that is the issue isn’t it – the rule of law becomes the tyranny of the legislation. When one legislates morality excessively, “Is it moral” no longer matters. It is only now, “Is it legal?”.

  22. Anonymous   November 22, 2008 at 12:44 pm

    Money spent does not disappear (the way crude oil burned does). It gets recycled.

    • MA   November 23, 2008 at 10:27 pm

      I wish that were the case.As a simple sample, take $10.Bet $5 on YESBet $5 on NO(knowing that one of your answers has to be right, add those future earnings to your book and go out and spend $5 more on another bet of $3 Yes & $2 NO)Let’s say “YES” won. …but could only pay you $1.Now you’ve lost $5 on the NO bet, $4 on your YES bet, and owe $5 on your new bets!!!TRUST ME… THE MNEY CAN DISAPPEAR!Miss America

  23. Anonymous   November 22, 2008 at 12:47 pm

    What matter is *not* withdrawals from retirement accounts, but instead what matters is:1.Household budgeting2. Population growth or stability (unlike Japan!)3. Productivity gains.The whole idea of worrying about baby boomers retiring is misplaced: they have to work till they’re 70. It’s just that simple. Problem over.

  24. sayitaintso   November 22, 2008 at 1:59 pm

    MA-Interesting post, but I think there is a larger macroeconomic trend underlying the 401k. Yes there was the Baby Boomer inflow, but there was also the ERISA (good ole DB plan) inflow from Corporate and Public Pension plans bubble. Many of these monies went directly into the stock market, or indirectly via private equity and alternatives.Meanwhile, the DB plan was elminated and the risk of retirement via an accident of the tax code 401(k), was transferred to the individual under the guise of portability and ‘free’ choice.Long term, everyone in the investment industry with a brain, realized that come 2015 or so the infusion would be less than the redemption. Well thanks to the spectacular use of leverage we are now in 2009 going to look like 2015 or 2017. Stimulus to the markets and the 11pc expected return are gone.Then consider companies stopping your beloved ‘match’ and folks who at 57 or 62 have capitulated (decided a bird in the hand is worth two in the bush) who will no longer invest.Bottom? Quick recovery without leverage?The trend is not your friend. The next generation as you point out and the one after it already feels the decline in the standard of living.I for one used to get in arguments with idiots who touted how much their houses were worth. I just said what about our kids? Why should they have so much debt?So. Cash will be king and we had better start thinking like Argentinians to protect our wealth whether equitable to 1982 or a bit more for hard real work!Yikes!PS Agree the tax havens need to be made to pay their fair share as first order of business globally.

  25. Drsteph   November 22, 2008 at 11:05 pm

    The fear of boomers collapsing the stock market through 401k withdrawls and causing depression-era yields has been around for a number of years. Fortunately (or unfortunately), that generation seems to have sufficiently drunk the kool-aid to keep themselves investing “for the long term” infinitely – or at least until they see the 40% decline in their ‘wisely diversified’ portfolios come end of december. “Of course I am diversified. I have large, mid, and small cap equities.”The main problem is that younger workers do not equal in number those retiring, do not have their savings and earning potential, and are equally unwilling to purchase equities at those stratospheric P/E levels desired by the older generation. Despite policy attempts to do so (automatic opt-in into an ‘age based’ fund which is over 50% equities unless you are imminently retirig), the shortfall can’t be replaced. Not enough immigrants coming in to effect sufficient population growth.Taxes on younger workers will ultimately cause a decision – pay me more to compensate for my higher taxes to support you, or I will work less, and you need my services. The legislated free ride for the boomer generation will end as they are enfeebled and need other’s assistance. Blue collar workers collecting two pensions will see young workers flee the tax traps of the aging old economy centers for young cities with new infrastructure and less taxation. They will be left alone in their high-taxation states with homes that decline in value as nobody in their right mind would choose to live there.I wonder if MPT (modern portfolio theory) will be relegated to the dustbin after the next 5 years? An interesting but temporary correlation that existed at a particular point in time.Organization requires a purpose and a vehicle. Do you know what an NGO (Non-governmental organization) is, and how to use one? Perhaps Fabius Maximus over at his blog could help…. These ideas seem to be core conservative principles (read fiscally responsible, small government, laissez faire, NOT republican or neo-con). There must be someone out there interested in assisting/funding/helping to organize such organizations. PNAC started as a website in ’97, suggesting that these things take years. Do not underestimate the power of the blogosphere – people realize that mass media does not necessarily represent their interests and seek out information accordingly.

  26. blindman   November 23, 2008 at 2:02 am

    rh, well done. very thoughtful and intelligent writing here, but somehow i suspect there is a fallacy of assumption or definition in your argument. you write… ” For years, I referred to the investment bubble of the 1990’s as the Dot Com Bubble and the bubble from 2003 – 2007 as the Real Estate Bubble. The entire time, overlooking the most obvious fact of what it really was…This was the 401k bubble.The Dot Com/Real Estate bubbles were just merely the places that the 401k bubble landed!” ….this sounds good and i think you have rightly identified an overlooked correlation but i don’t think it is really true. here are my objections.the savings, investments into mutual funds trend increased and will or has begun to decrease as you describe but that is not a bubble. it is not an artificial inflation. it represents compensation for work done. it may have been a boomer surge but these people were real working people with income. if you argue that the incomes at the base of those investments was artificially inflated then i could follow, however, that would lead to the debate concerning just compensation for labor.the bubble of the dot com period was due to speculation of earnings that never materialized. ridiculous price to earnings and lots of venture capital. speculation of high yield combined with available capital. bubble. investment money lost to financial industry and dot com start ups.real estate 2003-2007. speculation of high yield combined with available capital. bubble. investment money lost to financial industry and real estate interests.in both cases much of that transferred wealth was 401 k money, if it was, but that doesn’t make the earnings of the boomers a bubble. like i said, that argument could be made but i don’t think you made it and i don’t think you want to make it?still, i think the piece was sort of brilliant in many respects. and your greatest insight was your response to a comment where you said .. ” It’s likely that what you own in terms of running parallel to growth is still WAAAAAAAAAAAAAY above were it should technically be. In other words, be thankful for what you have.”i think you underestimate the incideous nature of bubbles because they have such a playful name. your young at heart miss america. but honest and that’s why we love you.

    • MA   November 23, 2008 at 10:40 pm

      Thanks blindman.Maybe you’re not so blind??? Anyhow, with regards to this article, I did a lot of data scrubbing. …and I unfortunately left a lot out. (but if I didn’t, this would’ve been 15 pages long.)Anyhow… To follow the cash… You’d really see (data speaking) that the 401k was the “financier” of it all. (Mutual Funds & private investment exploded because everyone wanted to get in on the rally that was going on… The market was going up, up and away. so a self propetual rally began. …thanks to the new constant “guaranteed inflow of 401ks that was getting bigger and bigger and bigger ever day)MA

      • blindman   November 24, 2008 at 1:29 pm

        ma, every once in a while i have something to say but even so, i’m pretty sure i’m blind. we all suffer from the same problem, and admire those who appear to successfully solve it, and that is “overcoming” the limitations of our single almost infinitesimal perspective. this problem plagues even the well informed mind. anyway.. the mechanisms of these artificial inflation’s, bubbles, need to be differentiated from the basis of the speculation. if we don’t understand the “junkification” method of creating leverage we will suffer bubbles growing far more pervasive and destructive and it may be that it is already too late to bother even bringing it up for discussion? if you haven’t read it, here is a great piece by michael hudson. http://www.counterpunch.org/hudson10132008.html.to me it appears we are seeing the financing of a global turf war between competing international bankers and they are leveraging everything and everyone on the planet to do it.the banking “system” has made some really bad speculations concerning their significance and place in the local and global community. i can see how they competed with one another, through unrealistic over leveraging, attempting to out grow their competition with greater and greater opacity and debt and now the surface they built upon is shrinking. in this case you could say the problem is the u.s. economy bubble. or the end of fictive capitalism bubble. i like that one.

  27. London Banker   November 23, 2008 at 3:15 am

    @ RichKudos! Excellent analysis on the 401k and the “savings” meta-bubble (nice ironic term, I think, and quite suited to blogging context).Your tracing the whole fiasco to the greed ethic (which superseded the work ethic sometime toward 1980) put me in mind of the following:”America is great because she is good. If America ceases to be good, America will cease to be great.”– Alexis de TocquevilleIn that light, either America must become good again, or it must accept that its greatness is [email protected] 2cents on 2008-11-21 22:52:41Great comment.

    • Guest   November 24, 2008 at 6:59 pm

      An elderly Cherokee Native American was teaching his grandchildren about life . .He said to them, “A fight is going on inside me, it is a terrible fight and it is between two wolves. One wolf is evil—he is fear, anger, envy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, competition, superiority, and ego.The other is good —he is joy, peace, love, hope, sharing, serenity, humility, kindness, benevolence, friendship, empathy, generosity, truth, compassion and faith.This same fight is going on inside you, and inside every other person, too.”They thought about it for a minute, and then one child asked his grandfather, “Which wolf will win, Grandfather?”The Elder simply replied, “The one you feed.”

      • MA   November 25, 2008 at 3:20 pm

        I love that analogy.I wish it did work that way. Unfortunately, the one you don’t feed just gets hungrier.You can’t have good without bad. You can’t have on without off. You can’t have up without down.You can’t have good… without evil.MA

        • pa   November 25, 2008 at 4:19 pm

          but surely if one feeds the good choice and provides a better return it could neutralize the other

  28. Rich   November 23, 2008 at 9:28 am

    @RichI started in manufacturing in 1980 and came to the realization by 1982 that the ‘real’ economy was being ignored for short term gain. I told my young peers that our country is going the way of Britain. The other day at a gathering to celebrate our graduation from university 30 years ago I was told “We thought you were crazy, but it turned out you were right.”How I wish I were wrong for my kids sake.Thus for my entire working life the US malinvested and rewarded the wrong part of the economy. We have much work to do to sort out of this mess.

  29. macfly   November 23, 2008 at 6:06 pm

    Great post, and great replies too, somehow you’ve shaken off a lot of the froth that clutters the good doctor’s posts. I wish I had some great ideas of ways to fix/solve this crisis, but I’m simply a grateful student of this blog. Following the posts here made me pull out of the market and put my entire 401k into treasury bonds 18 months ago. So long as we don’t loose the dollar itself I hope to be safe by the grace of the shared wisdom found here. When I do re-enter the market your AltEn picks will be at the top of my shopping list.Thanks, and keep up the great work!