QE Adverse Side Effect #1: Corporate Pension Underfunding Hits Record $460 Billion Deficit, A $108 Billion Deterioration IN ONE MONTH

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Tue, 09/14/2010 - 11:14 | 580670 contrabandista13
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Expectation, is the mother of all disappointments....  Who's yo daddy....?  

Tue, 09/14/2010 - 11:51 | 580794 Turd Ferguson
Turd Ferguson's picture

Is there any wonder why the Fed is in the market daily, hopelessly pumping it with cash to keep it afloat? Everything in our financial society, from life insurance to pensions to 401(k)s to reserve ratios to endowments to tax revenues to......I could go on and on but why? The Fed can not allow disinflation and a 5000 Dow.

But, in the end, they won't win. The laws of economics are just like the laws of physics. You may be able to suspend gravity for a while but eventually you fall. 

Tue, 09/14/2010 - 12:34 | 580941 HelluvaEngineer
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The way to stabilize it is not to friggin ramp it exponentially.  That will cause the inevitable crash, unless they're willing to step in and buy the whole thing.

Tue, 09/14/2010 - 13:16 | 581089 SheepDog-One
SheepDog-One's picture

Thats what Im talkin about, nature abhors a vacuum, things always must return to equilibrium, this snapback to equilibruim will be particulary violent and millions of people will die, if not billions.

Tue, 09/14/2010 - 13:53 | 581214 Clayton Bigsby
Clayton Bigsby's picture

reminds me of what somebody said about flying in a plane - "Taking off is optional.  Landing is mandatory."

Tue, 09/14/2010 - 15:10 | 581414 stewie
stewie's picture

Not necessarily, let me explain:

You can suspend gravity indefinitely by going into orbit :o)  And the laws of physics never get suspended, the effects are.  The effect of Gravity can be suspended here on earth for as long as you have energy.

Similarly, the effects of the laws on economics can be suspended for as long as you have economic energy, and that is called Fiat Money (or confidence in).  

IMHO, I don't see any reasons why we couldn't maintain that game indefinitely.  I'm not saying it will, but as the monetary aggregate increases, price level does as well, and that enables debtor to service their debt.  The trick is not to hurt creditors too much with fast inflation and maintain them as creditors.  As the increase in money aggregate gets exponentially bigger, everything else does as well, cancelling everything out.  Who cares if you owe 10 millions on a billion salary!

Tue, 09/14/2010 - 16:23 | 581611 UninterestedObserver
UninterestedObserver's picture

STFU Ben - it will never work

Tue, 09/14/2010 - 16:56 | 581682 stewie
stewie's picture

Very informative reply Chicken Little, thank you for this brilliant analysis.  

But sarcasms aside, why not?  

Tue, 09/14/2010 - 17:53 | 581795 UninterestedObserver
UninterestedObserver's picture

What sarcasm?

Tue, 09/14/2010 - 18:53 | 581932 stewie
stewie's picture

You might find this informative:


Tue, 09/14/2010 - 19:43 | 582023 mikla
mikla's picture

Jumping in, IMHO Stewie makes an interesting observation that I *do* tend to think about:

IMHO, I don't see any reasons why we couldn't maintain that game indefinitely.

Given the comparison (one can suspend the effects of gravity, but not suspend the laws of physics), one might wonder if this *can* be done with our current economic system (absent something really stupid, or possibly a black swan, which could always screw up even a good system).  In short, could today's economic system *actually* behave as a stable system?

IMHO, I've concluded "no" (i.e., the system is inherently unstable).  Your (valid) assertion contains the poison pill:

As the increase in money aggregate gets exponentially bigger, everything else does as well, cancelling everything out.  Who cares if you owe 10 millions on a billion salary!

The Friedman "monetarist" idea is that you can multiply/divide the value of the currency unit, and everything would be the same.  However, in practice, it is not:  Wages are sticky, and existing contracts/agreements were denominated with assumptions that are increasingly untrue.

For example, wages don't rise with the rate of debt service.  (In real terms, the middle class is broke and getting decimated, and there's no possible/good economic nor political response to fix that by jacking up wages.)  As another example, as the interest rates change, one party on the existing 30-year bond is increasingly *screwed* (those are always zero-sum with an exponential penalty on one side).

That's the "short" response.  However, IMHO, the "long" response relates to my fundamental conclusion as to why sustained growth/inflation like this can't work, even if controlled by "smart" people with good motivation:

  1. People tend to think and speculate in terms of linear growth (e.g., wages).
  2. The existing system behaves in terms of exponential growth (e.g., leverage, debt service through the compound-rate-of-return).
  3. Societal productivity (e.g., the ability to produce "wealth") does not correlate to (1) nor (2).

The "very long" response relates to the friction in the system, and the "big pools" of things that accumulate and get unwieldy (e.g., when a rounding error at 0.0000001 will wipe out the entire solar system).  For example, blowing bubbles in real estate causes bubbles-and-vacuums in other strange places that cannot be controlled (nor anticipated).

So, I've concluded "No", the system even in its theoretical state is unstable (e.g., exponential != linear != productivity).  When you further throw in "reality" (e.g., government incompetence, fraud, corruption, regulatory capture), there's not a chance to pull this off.  People eventually figure out they've been screwed, and pull a French Revolution.

I give Europe a year, maybe two for the US.

Wed, 09/15/2010 - 07:21 | 582784 Popo
Popo's picture

True that. There is always an unintended consequence. But this article fails to mention a very important detail: corporate pensions are guaranteed in the USA by the federal government under the PBGC. This is the other side to this coin: many corporations have been planning on defaulting on pension obligations for years. Why sweat it, when you can throw up your hands and let Uncle Sam (ie: the taxpayer) foot the bill?

Tue, 09/14/2010 - 11:53 | 580804 Dr. Richard Head
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Your comment reminds me of conversations I have with my brother-in-law.  He is a police officer and he keeps talking about how in five years he is expecting 80% of his pay for the remainder of his life thanks to the wonderful police pension program. 

I asked him what would happen if the pension plan is underfunded because of the actions of the Federal Government and Steal Street?  What would happen is the promise is one where fingers were crossed. 

Good luck with that buddy. Better start harassing more civilians and shake them down some more because of loud stereos, speeding, window tinting, and other victimless crimes. 

I am still surprised he gave me an FOP card.

Tue, 09/14/2010 - 12:17 | 580879 three chord sloth
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I've had the same conversation with a retired Port Authority cop I know. He thinks his pension/health care is rock solid, 100% golden.

I pointed out that he is not insulated from globalism like he thinks; the purpose of globalism is to eliminate the first world. I pointed out that his retirement package was promised in a first world nation and takes a first world tax base to support. As the private, taxpaying sector becomes ever more second/third world, eventually his retirement will be unaffordable. Guaranteed.

Cities and states will be forced to choose between funding essential services and paying retirees. The actual choice will not be hard at all; the retirees will take a big hit. The only difficult part will be spinning the blame away from the political class and onto the designated whipping boy, whomever that is down the road.

He hasn't spoken to me since that conversation back at the cookout on the 4th of July.

Tue, 09/14/2010 - 12:41 | 580960 Dr. Richard Head
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Add to the mix the fact that over 50,000 troops deployed in Iraq are now receiving "non-combat" pay and losing out on possible college reimbursement and you are starting to piss off the people with the guns.  People with guns that are very well trained. 

I believe Zimbabwe, during it's hyperinflationary collapse made sure to try and pay their troops and police according to the hyperinflationary rate.

I talked with a CIA recruitment guy a few weeks back and the military is not too happy with Obama at this point.

Things will be getting more interestinger as the pension schemes start to unravel for the gun slingers.

Tue, 09/14/2010 - 14:43 | 581332 Yophat
Yophat's picture

They are planning for that.....look at Obama's EO in January creating 10 governors to rule the (most likely) 10 FEMA regions.  Might investigate NORTHCOM while you are at it.

Trust me that option is well planned for!!!  You might think XE (Blackwater)...or any number of similar private contractors that rule the roost behind the scenes!

FYI - Obama is CIA!  So was Bush Jr & Sr....and Billy Bob Blythe the third was money launderer for CIA Mena AR cocaine flow!  The only one in the past 5 decades who wasn't pro-CIA was JFK and he didn't live long after declaring he was going to smash them into a thousand pieces (not to mention firing Prescott Bush's BBH banking buddy Allen Dulles....who ironically had the last laugh as a member of the Warren Commission).  Of course Reagan may have initially had issues but a member of the Bush family friends...the Hinckley's helped shape his views (actually it was the secret service agent who landed on him....unless of course you believe in those magic bullets).

Tue, 09/14/2010 - 11:17 | 580671 hedgeless_horseman
hedgeless_horseman's picture

Leo, I understand that a good plastic surgeon can effectively make you unrecognizable to your former clients and their beneficiaries.  Or you can hide out in Greece, where everyone is complicit.

I'm waiting for the echo from the insurance cos.

Tue, 09/14/2010 - 11:18 | 580685 Cognitive Dissonance
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Exactly. The insurance companies, especially the life companies, must be peeing their pants right about now.

Tue, 09/14/2010 - 11:54 | 580807 AccreditedEYE
AccreditedEYE's picture

"Guaranteed Annuity? We guaranteed WHAT rate of return for HOW long?!!"

Tue, 09/14/2010 - 14:40 | 581330 EscapeKey
EscapeKey's picture

I was under the impression that annuity effectively is a bond/gilt, so the guarantee is implicitly the guarantee that the British/American/whatever government won't default?

Tue, 09/14/2010 - 14:57 | 581380 AccreditedEYE
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Tue, 09/14/2010 - 14:55 | 581382 AccreditedEYE
AccreditedEYE's picture

It's a contract. (like a derivative) It is between the insurance company and the annuitant. As I'm sure you are already aware, they make promises to pay income for life, provide income off of high water marks, etc. All of these "promises" are backed by the full faith and credit of the insurance company, not the government. (However, who the hell knows...give the Fed enough time...)

Tue, 09/14/2010 - 12:23 | 580908 AnonymousMonetarist
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Life insurance companies are a tricky beast.

Most of 'em were ignoring the 'toxic' assets long before it was cool to do so...

Also, take TransAmerica for example, per a conversation with a C-level fella awhile back if every life claim came due tomorrow they would only have to put out a total of ~8% of face.. the rest is hedged...well, at least they 'think' it's hedged :)

Tue, 09/14/2010 - 14:45 | 581348 Yophat
Yophat's picture

Gonna be a rude awakening on multiple fronts as the sheep get their anus hardwired!

Tue, 09/14/2010 - 11:29 | 580724 taraxias
taraxias's picture

I have it from a good account that Leo is already growing a Cretan style moustache practically hiding half his face. Hope to God, his clients don't recognize the other half.


Tue, 09/14/2010 - 11:17 | 580679 bob_dabolina
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Side effect #2:

The price of commodities. Who gives a shit about the price of food as long as DOW @30,000 is achieved and home prices remain unaffordable to most people.

Hungry and homeless citizens with IBM @50,000 p/sh. Good job FED and government, you got us really good this time.

Tue, 09/14/2010 - 11:17 | 580680 Ragnarok
Ragnarok's picture

Alarm bells and light bulbs should have sounded/lit-up when companies started to issue 100Y bonds. 

Tue, 09/14/2010 - 11:18 | 580686 HelluvaEngineer
HelluvaEngineer's picture

The damn boomers need a slap across the face.  Maybe they'll "get it" just before they go senile.

Tue, 09/14/2010 - 11:31 | 580726 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Boomers blew their own retirements. They blew their children's, grand children's and great grand children's inheritance and economic futures. I guess it is OK since they are the "special" generation from the '60s. Yeah, you changed the world........ for the worst. The road to hell is paved with good intentions.

Tue, 09/14/2010 - 11:55 | 580808 Id fight Gandhi
Id fight Gandhi's picture

They'll be in retirement as soylent green.

Greedy improvident fuckers.

Tue, 09/14/2010 - 13:15 | 581084 DR
DR's picture

Boomers( oldest is 62) are just starting to collect what they have put into the pot over 30-40 years. The later boomers will find the pot empty. It is the boomers that will get screwed

Tue, 09/14/2010 - 15:32 | 581456 minus dog
minus dog's picture

I might feel sorry for them, but only in the same way that I feel sorry for all those retirees who get taken by Nigerian scammers.  

In the same way, but not in the same amount - both groups were sold on a scam, but unlike the poor fools taken by the Nigerians, the boomers should have known the numbers didn't add up. 

Tue, 09/14/2010 - 11:21 | 580690 Paper CRUSHer
Paper CRUSHer's picture

**"US retirees better pray that their Schwab accounts will rise forever and ever, because if they rely on defined benefit pension plans, they are fucked"**

LOL.Ho Tyler!

No point reading the rest of the article is there.I mean ya summed it all up right there.No conclusion needed.

Tue, 09/14/2010 - 11:48 | 580789 JLee2027
JLee2027's picture


Must be bad

Tue, 09/14/2010 - 11:58 | 580816 bronzie
bronzie's picture

"they are fucked"

actually, we could have stopped reading at that point

Tue, 09/14/2010 - 11:19 | 580691 SpeakerFTD
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In your sunset years, we wish to welcome you to the SeaBreezes Retirement Villas and Serfdom Farms.  Spend your days luxuriating in the sun, working the fields to earn your supper and the evenings playing cards and sharing the gossip of the day with your friendly Cell Block Coordinator. 

Tue, 09/14/2010 - 12:37 | 580949 Saxxon
Saxxon's picture

For many, white bread honky retirement in the U.S. is already a vapid wasteland.  I have travelled widely in so-called disadvanteged countries and seen that the children take care of their parents; old age is respected; that village/farm life provides a continuum with nature and the proceeding generations that the pitifully cut-off and sterile retirement villas can never provide.

No way in hell I retire (Age 49 now) in the U.S.A. or any other honky First World country.  No way I retire at all, the way things are going.  I'm fine with that, things change and I would sooner kick it on a small rice farm with my chickens and home grown.

Tue, 09/14/2010 - 12:44 | 580968 SteveNYC
SteveNYC's picture

Thailand, here I come! Beautiful people, beautiful country, beautiful weather 9mths out of the year.....count me in!

Tue, 09/14/2010 - 12:58 | 581020 three chord sloth
three chord sloth's picture

We don't need to flee the country to find a better retirement model, just roll back a few years. It was only a generation or two ago that elderly parents routinely moved in with one of their children. Heck, we still call a small efficiency apartment added onto a house an "in-law apartment".

Tue, 09/14/2010 - 15:39 | 581473 minus dog
minus dog's picture

" I have travelled widely in so-called disadvanteged countries and seen that the children take care of their parents; old age is respected; "

And that is commendable.  I'm willing to bet those elderly did not buy into a giant ponzi scheme for decades, expect huge payouts, and then expect their children to keep paying for it while never collecting themselves.  Nor did they probably shower money left and right on boats and large houses while their children borrowed 120% of their tuition to go to college.

People are generally going to keep leaving their parents to their own devices.

Tue, 09/14/2010 - 11:19 | 580692 tony bonn
tony bonn's picture

yes babycakes, zirp is a two edged sword (same for currency debasement)

Tue, 09/14/2010 - 11:21 | 580697 HarryWanger
HarryWanger's picture

"Expect to hear much, much more about this worst side effect of the Fed's flawed Keynesian solution to all of life's problems."

Huh? From who? Pretty much won't hear a word about this anywhere other than here.


Tue, 09/14/2010 - 11:31 | 580733 taraxias
taraxias's picture

Well said, Harry.

Where have you been?

Tue, 09/14/2010 - 11:38 | 580760 HarryWanger
HarryWanger's picture

Busy, busy summer. Haven't been able to "gamble" much. A few dips in and out of AAPL and holding tight to my precious metals. Hope to get back to some real trading soon. 

Tue, 09/14/2010 - 12:00 | 580815 AccreditedEYE
AccreditedEYE's picture

"Harry... you don't know the POWER of the short side!! Join me against AAPL and we will destroy Steve Jobs and rule the market as father and son."  

Tue, 09/14/2010 - 11:21 | 580699 mikla
mikla's picture

There must be some mistake here.  I remember *specifically* that my politicians promised me free stuff with *no* consequences.

I'm not worried, though.  I'm sure they will think of something.  </sarcasm>

Tue, 09/14/2010 - 11:26 | 580711 BobPaulson
BobPaulson's picture

Yeah, cuz, like, there's no way they could have seen this coming, otherwise they wouldn't have done this to the public they faithfully serve.

Tue, 09/14/2010 - 11:24 | 580703 MarketFox
MarketFox's picture

Destroy the SAVERS....

Destroy the COUNTRY .....

The Princeton Harvard Yale Club has F..d...the USA.....

Tue, 09/14/2010 - 11:24 | 580704 frankTHE COIN
frankTHE COIN's picture

Damn,I thought sipping my food thru a straw was gonna suck. Now i find out i wont be able to afford any food.

Tue, 09/14/2010 - 11:24 | 580707 LMAO
LMAO's picture


And poof, it's gone



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