SPOTTING TRENDS
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international investment trends

Spotting Trends in Social Security

international investment trends

By
Gary Scott

Spotting trends can help us invest and live better and yesterday’s message looked at the trend of business pensions fading fast. This message shows how this huge problem is compounded by Social security concerns.

USA Today’s November, 2005 article. "SOCIAL SECURITY COULD BE big chill for 50- somethings" highlights these concerns. The article begins by telling a story of how a couple-husband 57, wife 48, plan on 20% of their retirement income to come from Social security. They feel safe because they think they will be grandfathered to receive current Social Security benefits before any changes take place.

The story suggests that this may not be the case despite President Bush’s assurances that changes in the system will not affect anyone 55 or older. "But Bush’s plan has gone nowhere and actuaries and demographics and simple arithmetic will make it difficult to repeat that commitment in the future."  The article points out that"Americans who are 50-something could be in for some unwelcome surprises down the road."

The demographics and the math always create the real bottom line. Unless there is some huge new technology that creates yet another economic boom, we should not count just on corporate pensions and Social Security for all our future income.


Learn more about Baby Boomer behavior at
http://www.boomerproject.com/

Even having a lot of money in the bank is not enough because of the risks of inflation.

Money like pensions are social agreements. Money is an important part of modern society but make no mistake, most money is not real. 

Money makes it easier for us to buy and sell without bartering. Money gives us a "medium of exchange," which allows our complex economic system to function.

Money acts as a way to put tangible, universal value on commodities and services. It helps us compare the value of one thing with another. This gives us a "unit of value," which allows us to make decisions about purchases and investments.

Money also functions as a way to store wealth -- to preserve purchasing power for spending at a later date.

Money must be real to carry out these functions. Only money created by real production can be real money. There are other qualities money must have to work properly. Money must:

Real Money Quality #1: To be absolutely universal in value, money must be acceptable to everyone.

Real Money Quality #2: Money must be portable. This makes paper and plastic money more popular than gold. Paper currencies, checkbooks and credit cards are easier to carry than lumps of gold and silver.

Real Money Quality #3: Money must be rare and require effort (real production or work) to attain. This is why gold makes good money. Gravel has many money qualities of gold, but not rarity. Gravel is as common as dirt and if gravel were used as money instead of gold, the temptation to just pick it up on the road, rather then work for it, would be too great. Money must offer an incentive to work and apply discipline. Rarity creates this incentive.

Real Money Quality #4: Money must be divisible and uniform in quality.

Real Money Quality #5: Money must have some intrinsic value, or be useful in itself or be backed by some intrinsic value.

Real Money Quality #6: Money must be naturally durable and reusable. There have been many times when goods or commodities such as chocolate, coffee, cigarettes or silk stockings, etc. have been used as money. Yet they fail to last as a money because they are too fragile and once consumed cannot be used as money again.

Gold and silver fit the categories above. Early goldsmiths, took gold on account and offered receipts stating how much gold was being warehoused. Eventually people realized that the receipts were as good as gold and more convenient. This became money backed by gold.

Then governments took over the role of issuing money and realized it was possible to issue more receipts than could actually be converted into gold -- if not everyone claimed their gold at the same time. This created commodity money which, if disciplined, helps cerate economic expansion.

However governments lose discipline and create fiat money, which has no rarity or precious metals backing.

"Fiat money" is coin or currency that is not convertible to precious metal. Issued by governments, it has value only because it provides all the necessities of money as described above -- and because it is declared to be money by government decree. In fact, Webster's defines the word fiat as "A decree, order, or sanction." It comes from the Latin, "Let it be done."

If a government issues too much fiat money, the value falls and inflation results. Thus, the value of fiat money ultimately depends on the confidence people have in the government issuing the money.

Almost all currencies in the world today are fiat money not backed by silver or gold. As the confidence in the U.S. dollar erodes, the value of the dollar will fall. As the dollar is still the reserve currency of the world, other currencies that are backed by the dollar will lose confidence as well. Until confidence in the dollar is restored or until a new reserve system is created, there will be global currency turmoil.

This places those who plan to retire on fixed income at triple risk. First, their pensions may not pay what they hope. Second, Social security may not pay either. Third, what pensions and Social Security do pay may not have as much purchasing power as hoped.

Only those who are involved in and offering some value in the current economy are protected. Those on a fixed income suffer the most as the social agreement is destroyed by the realities of math.

Until next message, good business and investing!

Gary

international investment trends
international investment trends

 

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