Making the Occupy People Go Away

As I sat reading the latest Economist magazine and all of the injustices spouted off by the Occupy folks, I wondered if we all are as helpless as they portray us to be. In their worldview, we are all pawns of the “wealthiest 1 percent.”

Sorry, but I don’t believe that. We (the collective “we”) have more power than they imagine. Here is a simple plan that would a) sock it to the wealthy and b) improve the security of your balance sheet all at the same time.

Step 1: If you earn less than $200,000, sell 10 percent of all your stock-holdings (401k, IRA, day-trading, etc.) over the next year. This sell-off would put downward pressure on stock prices in the stock-market. Whooaa, won’t that be bad?

Well, if you’re concerned with socking it to the wealthy, the drop in the stock-market will primarily hit them. As shown in the chart below, for folks making more than $200,000 net capital gains (gains minus losses) account for 10  percent of their income. For those folks earning less than $200,000, capital gains rarely break 1 percent of income.

It gets even more skewed as you dissect the data even further. For folks with incomes over $10 million or more their reliance on net capitals gains is a whopping 34 percent!

Overall, 84 percent of all net capital gains income is accrued to those earning more than $200,000.

Chart Showing Net Capital Gains by Income Group as a Percent of Adjusted Gross Income for 2009

Step 2: Take the money from selling your stock and use it to either pay down debt (that includes your mortgage) or if you have no debt put it into a traditional savings account. This will increase your own personal financial security as well as buttress the overall economy from future debt-fueled financial shocks.

Step 3: Repeat steps 1 and 2 next year, and the year after, etc. until you have completely removed yourself from the stock-market. If you are trapped in a 401k, move your money into a bond fund (preferably Treasuries).

So to the Occupy folks . . . no, we don’t need higher taxes or more government spending to fix the economy. We just need to recognize that the stock-market was never designed as place to passively park your life-time savings. The stock-market is meant to manage the flow of capital to the most economically efficient companies.

And yet . . . the stock-market has been rigged against you, but not in the way touted by the Occupy folks. Inflating the stock-market with retirement funds has transformed the market into a casino and less of an exchange. Since the wealthy had/have more of their wealth invested in the stock-market, it’s no surprise that this inflation has benefited them the most. Of course, the opposite (deflation) is true as well.

As an added benefit, unlike capital gains, paying down debt is non-taxable. For instance, if you have a $200 credit card payment, you will need to earn $250 to $300 (depending on your federal tax bracket and the tax burden where you live) in order to pay that bill. Paying off your credit card means you no longer need to earn money to pay it . . . unearned money is untaxed money 🙂

And just maybe these actions will also help prevent the decapitalization of America.

The Decapitalization of America

Main Bay 2
Creative Commons License photo credit: SmithGreg

Kevin Dowd and Martin Hutchinson have a report published by the CATO Institute titled “Easy Money and the Decapitalization of America” which is a succinct account of many of the major strategies used by Wealth Alchemist.  I particularly like their Austrian account of the economic ills created by repeated bubbles:

Federal Reserve monetary policy over the past 15 years or so has produced bubble after bubble, and each bubble (or each group of contemporaneous bubbles) is bigger in aggregate and more damaging than the one that preceded it. Each bubble destroys part of the capital stock by diverting capital into economically unjustified uses — artificially low interest rates make investments appear more profitable than they really are, and this is especially so for investments with long-term horizons: that is, in Austrian terms, there is an artificial lengthening of the investment horizon. These distortions and resulting losses are magnified further once a bubble takes hold and inflicts its damage, too: the end result is a lot of ruined investors and “bubble blight” — massive overcapacity in the sectors affected. This has happened again and again, in one sector after another: tech, real estate, Treasuries, and now financial stocks, junk bonds, and commodities — and the same policy also helps to spawn bubbles overseas, mostly notably in emerging markets right now.

We also have to consider how periods of prolonged low (and often sub-zero) real interest rates have led to sharply reduced saving and, hence, to lower capital accumulation over time. U.S. savings rates have fallen progressively since the early 1980s, falling from nearly 12% to a little over 6% by the end of the decade, bottoming out at 1.4% in 2005. It then recovered somewhat, but even after the shock of 2008, the savings rate rose in 2009 to only 5.9% — well below its long-term average of about 8% — and the most recent data suggests that it is now declining again.

Even without federal budget deficits, it is manifestly obvious that such savings rates are inadequate to provide for the maintenance, let alone growth, of the U.S. capital stock (or, for that matter, its citizens’ desires for a secure retirement): the U.S. economy is effectively eating its own seed-corn. Now add in the impact of federal budget deficits of around 10% of GDP and we see that the deficits alone take up more than the economy’s entire savings, without a penny left over for investment. It then becomes necessary to supply U.S. capital needs by foreign borrowing — hence the persistent and worrying balance of payments deficits — but even this borrowing is not enough. Hence over the long term, low interest rates are decapitalizing the U.S. economy, with damaging long-term implications for its residents’ living standards: in the long run, low interest leads to low saving and capital decline, and they in turn lead to stagnation and eventually to the prospect of declining living standards as America ceases to be a capital- rich economy.

Not to put too fine a point on it, savings have been suppressed for close to two decades, preventing the natural accumulation of capital as baby boomers have drawn closer to retirement, while much of the country’s magnificent and once unmatched capital stock is being poured down a succession of rat holes.

Do read the rest.  Oh, I also very much like their title of their recent book: “Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System”