Pensions and dreams

Many people like to dream about the things they will do in retirement and count on their pensions and savings to make the dreams come true.  For lots of current seniors this has been true but younger people may not get beyond the dream.  All the uncertainties of the economic future come to the fore when one starts thinking about pensions.

One hears two major concerns about pensions:  most  people are not saving enough and too many pensions are based on unfunded liabilities.

The one certainty about retirement futures is that well-being and standard of living will depend upon the quantity of goods and services we are capable of producing and the number of people with whom those goods and services must be shared.  Inflation or bankruptcies could easily wipe out  pensions and savings. In any case an increasing population and people living longer into retirement will put pressure on pensions.

There are two ways we can try to ensure our futures into retirement – we can work our butts off in an attempt to return to economic growth or we can reduce our expectations so that we don’t need so need so many goods and services.  It is possible the second option will be forced upon us.  That may not be all bad.  This blogger knows from experience that canoe camping is a lot cheaper and more enjoyable than the large cruise ships..   I also have to recognize that camping would be a lot less fun if we had to share the lake with 2,000 people at a time.

Most  of us are subject to a lot of media hype about the importance of pensions and saving for retirement.  We should keep in mind that we are in for the long-term while the people selling investments are more interested in their next pay cheque.  What is good for them may not be good for their customers and by the time you find out you may not even remember their name.

Some people are worried about government pensions and see private investments as the answer.  I figure the whole financial system is at risk of either inflation or bankruptcy.

In planning for the future we have to evaluate the potential for a return to economic growth.  If one believes we are going to return to growth then it might  be okay to put a lot of effort into a pension.  .  Personally, I think the best long-term investment at this time is a market garden.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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The future of money: inflation, deflation or disappearance into thin air

The future of money has been getting a little attention lately.  It could go one of three ways – inflation, deflation or part of it could disappear into thin air.  Concerns about money probably reflect concerns and uncertainty about where the economy is going.  Frequently behind these concerns lurk people who want a fixed money supply such as gold or bit coin.

This blogger figures money should be defined as a tool to facilitate the exchange of goods and services.  I do not like definitions that make it a store of wealth or a measure of value because these give money an intrinsic value which it does or should not have.  Money should only have value as a tool. 

One of the most important features of money should be the amount available  in the economy needs to be flexible.  It should be able go to up or down  with changes in the quantity of goods and services we want to exchange.  If the money supply is not flexible then as we change the quantity of goods and services then either prices must go up or down or the velocity, the rate at which money changes hands will change.  It is dangerous to assume there will be only growth.

Inflation happens when the money supply increases faster than the rate of economic growth and deflation happens when the money supply goes not keep up with the rate of growth.    Inflation is good for borrowers as the can repay their loans with money which has less real value.  This is one reason governments and their agents want to see mild inflation.  Deflation is good for lenders as they will be repaid with money which has more value.  The ideal should be price stability so nobody loses.

Our understanding of inflation and deflation has been distorted by the long period of economic growth we have just experienced. Most inflation has happened along with growth and most deflation has resulted from banking authorities trying to restrict the amount of money available.  This happened in the 1930s and todays central bankers have sworn to never again let that happen.

There is some evidence that our time of economic growth has terminated.  It is unclear how this will affect prices.  Quantitative easing which is an attempt to increase the money supply has not led to high inflation.  Past hyperinflations have occurred when governments have increased to money supply faster than the economy was capable of growing.  It appears the money created by quantitative easing has led to inflation in the financial markets rather than consumer markets.

Economists generally understand how fractional reserve banking works to increase the money supply but I am not aware of anyone who has thought out the opposite process.  Money that can be created out of thin air can just as easily disappear into thin air.

In fractional reserve banking banks are required to keep a portion of their deposits as reserves for protection against runs. The rest is loaned out and redeposited with the new deposits subject to the same fractional reserve.  The result is that a large proportion of our money supply is  somewhat precarious.  This blogger and many other people on the internet have explained the process.  Just search “fractional reserve banking.”

Central banks can add money to the system by purchasing financial instruments or by changing the reserve requirements.  The could also reduce the money supply by selling financial instruments or by changing the money supply although it is unlikely they will do either under current conditions.

Another way the money supply could be reduced is if the banks suffer large losses.  Any loans the banks have to write off will directly decrease their available reserves.  (The technical term is high powered money.)  This means they will have to decrease their outstanding loans with the same multiplier effect as the money supply was increased.  We will hear about it as a contraction of credit.

So if the banks experience unusually large losses there could be a drastic decrease in the money supply which could have dire consequences.  ( I have read that a number of Canadian and British banks are highly exposed to the energy industry with unsecured loans.)

If a large part of the money supply were to disappear into thin air in the short term a lot of economic activity would come to a screeching halt.  People have in the past used playing cards or candies as a substitute for money.  In the long term the level of activity would depend upon the physical resources available.

People who talk up monetary reform often want a return to a gold standard or facsimile (bit coin).  It is not clear that either of these would correct the problems inherent in the fractional reserve way of creating money.  Nor would they provide the flexibility that is needed in the total amount of money available.

We all think we know everything there is to know about money.  That is a part of what our parents teach us. However, it is a complex subject which few people understand and there are a lot of unknowns, especially if we have to deal with an extended period of low or negative growth.

Paying the piper/economist and making economic decisions

He who pays the piper calls the tune. This applies to economists as well as musicians and explains why economists have so much difficulty coming to terms with the ideological aspects of their field.

This post was prompted by an article about whether economists are biased towards the free market or towards regulation.  This blogger would prefer to evaluate economies according to who makes decisions.

I get suspicious when I hear economists talk about the “free market”  because they usually mean something different to what I understand is a free market economy.  To me a free market economy is one based on the perfect competition model.  What we actually have is an economy where governments pass legislation to restrict competition.  Copyright, patents, licensing, tariffs, health and safety regulations all work to restrict competition and allow some people to make profits they would not get in a competitive economy.

Sometimes the profit making gets out of control and the way to deal with this is to introduce  regulations  rather than to return to more competition.  Therefore I figure the debate in this article is irrelevant.

What is relevant is who makes economic decisions.  If we had perfect competition most if not all decisions would be made by consumers who would vote with their spending decisions.  Unfortunately there are too many people in this world who like to make decisions for others.

One of the big things which influences decision making is the fractional reserve way of creating money.  In this process money is created when bankers make loans and as they get to decide who gets loans they have a say over what economic activity is  going to take place.  If we had a national exchange trading system as proposed in the essay “LETS to market: Dealing with the economic crisis” on this weblog money would be created via payments to individuals who would then make decisions in their purchases or investments.

The fractional reserve system  also limits decision making in that many people, especially during their working years, carry a large debt load.  As most of us have to work to repay our debts, we are forced to support another person’s decisions.  And the work ethic adds a lot of support.

Governments also interfere with decision making by passing legislation which restricts competition and by accessing large amounts of created money.  This of course allows them to make economic decisions according to their values which don’t always agree with their citizens.

My view of how the economy works is less than consistent with conventional economic wisdom.  Readers will decide for themselves which view  they want to accept but I will point out that economists who don’t promote the conventional view probably don’t stand much chance of holding important high paying jobs.  People in power, industry or government, want to feel they are doing good and it is the role of economists to say what their employers want to hear and most economists are paid directly or indirectly by business or government.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

 

 

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