Ms. Thau is looking at munis from the top down in “The Muni Market Turmoil Continues: What’s Going on and How to Respond” [January 2009 AAII Journal]. I live in California and would not touch any California bonds. I owned Orange County Water district bonds right through the bankruptcy and since they were insured I kept getting the interest payments. If insurance is no guarantee against default, why risk any money at all for munis? Real estate prices are collapsing and people are walking away from property. How will local governments collect revenue? Apparently one way is to issue more traffic tickets, but I doubt that will replace all the lost real estate taxes!
The Madoff Ponzi scheme article by Karen Altfest in the April 2009 AAII Journal was very informative [“Due Diligence: 10 Steps to Avoiding Ponzi Schemes and Financial Fraud”]. However, I believe there was a major step omitted in the list.
As a CPA, the first thing that caught my eye when the Madoff scandal came to light was the fact that the financial statements of this mega-billion dollar investment fund were audited by a small, obscure accounting firm unknown to few inside or outside of the local area. As it now turns out, the principal auditor of that firm has been charged with complicity in the scheme. Many small accounting firms provide valuable services to the public but a large investment fund relying on public trust will spare no expense in engaging major well-known accounting firms to audit its financial statements. A red flag should immediately pop up to prospective investors when the auditor of their fund is a small, unknown accounting firm.
The government won’t talk about it nor will most financial journalists, but there are two secrets that will eventually come out in our tax bills.
(1) I have often written about the deplorable state of our national savings rate and the fact that people would have to save over 20% of their disposable income for the next 20 years to overcome the lack of savings from the last 20 years. Apparently, that damning statistic is just too horrible for the public to accept. The average 401(k) for those between 55 and 65 now has only about $50,000 in savings. That’s only an amount that would be prudent to have in reserves for emergencies and known large retirement expenses like replacement of a roof or buying new automobiles—not everyday retirement expenses. These are statistics that have unavoidable consequences as almost 70 million baby boomers start thinking ahead to retirement.
(2) The second secret may have even bigger consequences. It’s the annual tax obligation politicians have been adding to our future tax payments. The major contributors are the national debt and entitlements such as Social Security, Medicare and numerous civil-servant benefits. The new stimulus bills likely will add many more to the rolls of entitlement beneficiaries, and entitlements increase with inflation.
If we assume that a competitive federal interest rate will be 1.5% plus inflation and a term of 30 years for bonds, we can calculate the amount of the annual payments that our taxpayers will be saddled with for 30 years. I estimate future taxes will have to be about four times today’s level of personal income taxes. Taxes this high would eventually use all personal income and leave nothing for consumption or savings. The only remaining employers would be federal and state governments.
These numbers do not add in the entitlements of the stimulus packages, and dollar values are in “today’s” values, so understand that the tax payments will go up with inflation and the stimulus. Because of the aging of our population, there will be fewer people paying income tax at the end of 30 years. Further, the numbers don’t include provisions pledged to bail out the financial sector which are about equal to the current national debt. Nor do the numbers include state and local debts, mortgage debts, credit card debts, automobile loans, and other personal debts, which total several times the current national debt.
Either the savings shortfall or the deepening of the federal obligation crisis would force people to save more, not spend more as both the government and the business segment would like. But we are not facing an either/or situation. We’re facing the confluence of both factors. This will take decades to resolve itself, not years.
Henry K. Hebeler