Your Financial Destiny
began with NPCG's Julie Ann Hepburn
offering a thought-provoking video clip from the movie The Matrix
to get participants thinking right from the start.
|Red Pill Blue Pill|
Julie Ann noted that once participants heard what the speakers were going to say, there would be no way for those in attendance to 'forget' what they had learned or continue to accept blindly what they hear on the news about the economy.
With that as an introduction to the day, the first speaker Nelson Nash, author of Becoming Your Own Banker, offered a historical perspective on how our lack of understanding about the government's involvement in the financial and banking industries has led to what he explained as the 401K Hoax.
Did you know that until the late 19th Century, the concept of retirement didn't exist? It was only under Germany's Chancellor Otto von Bismarck that the idea of retirement was put forth to 'make room for younger folks' as there were not many jobs available. As Nelson puts it, "The idea of creativity was seemingly beyond their comprehension."
How did the United States end up with a 'retirement system?' World War II ushered in rationing, wage freezes and other restrictive policies in order to support the war. As a result, how could employers reward employees if they could not give them raises? The idea of 'employee benefits' was put forth -- this was the start of pension/retirement plans and health insurance benefits as we know them today.
With that in mind, Nelson showed participants that all forms of government-sponsored retirement plans including Social Security, 401ks, KEOGHs and IRAs are merely ways for the government to have complete access to your money. Have you ever tried to take your money out of any of these financial instruments before you 'retire?' If you have, then you know that you not only have to pay any tax owed on the money, but you have to pay a penalty for asking to get your own money early.
So then you have to ask -- is the money really yours? Does the government have the right to take the money you have placed in any of the government-sponsored retirement plans in order to shore up budget shortfalls? Recent events in Wisconsin and in several European nations bear this out with government entities seizing pension plans to make up for government budget shortfalls. (See the story in the Christian Science Monitor here.)
With that as the back drop, Julie Ann then introduced economist Robert P. Murphy, PhD who provided attendees with a lay person explanation of the economic meltdown that began in late 2008. One of Dr. Murphy's key points was born out through his presentation, What The Heck Just Happened? "This meltdown did not just happen like a natural disaster just happens. This has been building up over a period of time," he explained.
He offered a very simple breakdown of the housing bubble showing how artificially low interest rates, created by the Federal Reserve (the Fed), prompted speculation in the housing market. Once the cycle began, there was no stopping it and no limit to the number of speculators and investors jumping on the bandwagon until the bubble burst in 2008.
Dr. Murphy's provided an important insight to all about prices and interest rates and how they are signals to the marketplace. Just as red, yellow and green traffic signals direct drivers and maintain traffic order, prices and interest rates are signals for the activities that drive the economy. They tell individuals and businesses whether to buy, to borrow, to invest, to hire, to build or to save, to reduce costs, reduce the numbers of employees and so on. The signals mean something and they guide everyone's actions, which in turn guides the economy.
In an economy that works properly, the radical boom and bust cycles that we've experienced for the last several decades simply don't happen. Growth is controlled by the amount of money being saved by individuals. In this savings-supported economy, business and wealth expand and contract based on the signals sent by people's saving activities. As a result, the marketplace reacts in a more balanced manner.
For example, when a couple begins to save for their child's college, it means that perhaps they don't buy the new car every three years, they don't eat out as much, they don't take a vacation every year, etc. As a result in the decline in their spending, certain businesses will contract or downsize, but because of the additional savings, banks have more money to lend. As a result, this enables other businesses to borrow this additional capital and begin to invest more. In that process they will have needs for employees and in general productivity rises. As productivity rises, wages rise and everyone has more money to spend. With more money to spend, people return to businesses that contracted and these now begin to expand again. The cycle of expanding and contracting continues and the signals sent by this savings-based activity regulates the economy in a more balanced and even way.
As well, when someone injects artificial data into the system of signals, such as falsely lowering interest rates, everyone reacts based on those signals. As Dr. Murphy explained, "When the Fed lowers the interest rate to stimulate the economy, they are artificially putting more money into the economy. This in turn tells everyone to spend, invest, borrow, hire, etc. Yes, it gets the activity going as people and businesses follow the signals, except as we've seen, it's not sustainable."
The end result is that the bubble bursts, as it did in 2008, with repercussions of that bust continuing. Since the Fed is still using this same faulty logic to 'prop the economy up' you can imagine what the likely future outcome will be. And that is about as simple an explanation as you'll ever get about "What the heck just happened?"
Coming in June, we'll feature highlights from Carlos Lara's presentation, How Privatized Banking Really Works and Dr. Robert Murphy's Too Good to Be True: A New Perspective, A New Approach.
In the meantime, for more information, please contact Julie Ann Hepburn via email or at 312.957.9400 x 403.