Monday, April 20, 2009

The Debts of the Spenders: Lower Market Liquidity, IRA Contributions, and Higher Unemployment

Critics have long contended that the US Labor Dept's unemployment figures are . . . . questionable (to say the least). The govt's refusal to acknowledge reality in the face of mounting evidence to the contrary has elicited scores of complaints from academics, journalists, and investors. However, it turns out that these fudged unemployment figures have another hidden cost besides the government's credibility: fewer IRA contributions.

Under IRA rules, EMPLOYEES are allowed to contribute a certain amount of money each year. With real unemployment on the rise contribution figures are set to fall significantly w/in the next year (if they have not done so already). Moreover, those fortunate to still be employed are exhibiting caution by foregoing contributions or even withdrawing early even in the face of harsh tax penalties to meet the daunting needs of a deflationary spiral where debts become more expensive to service.

Instead, the ranks of under-employed are growing w/recent graduates, immigrants, and even retirees continuing to work but doing so under the grey economy of a cash or even barter based exchange system. Unlike official wage earners (W2 reporting), the under-employed prefer to keep a low profile and avoid attention from the authorities. These cloaks of anonymity preclude them from making retirement contributions.

Finally, the US is beginning to enter the formative years of the baby boomer retirement. This generational shockwave will result in higher levels of withdrawals from retirement accounts: either to meet the needs of an elderly lifestyle and/or satisfy mandatory withdrawal requirements.

The end results are clear - lower inflows of retail investor funds into stocks, bonds, and other securities in the coming years. And w/lower inflows comes greater volatility.


Blog Archive