US Economy 2nd Qtr Growth: 3.3%/yr

[ray245]

Wong...that does not elimate the problem in an ageing society...

Moron ... there is no way to "eliminate" the problem of an aging society.

Ok, what I am trying to put across was, if there is welfare towards the eldery, as Canada becomes a ageing society, there will be less young and working adults left to support the eldery.

Policy which provide welfare to the eldery only helps when there is a big enough young and working class to support it.

If Canada becomes Japan...where they have a negative birth rate, how are you able to cope with the cost to provide for the eldery?

And Wong, you said that elimate the problem of a aging society is impossible, which means, it will become hard or impossible for a social welfare program towards the eldery.

[Sikon]

Ok, what I am trying to put across was, if there is welfare towards the eldery, as Canada becomes a ageing society, there will be less young and working adults left to support the eldery.

Although there's no perfect or complete solution to the effect of demographic changes, part of the idea of a partially privatized social security program with investment of the private savings account is that economic output can be increased to some degree.

For example, if $1 billion is invested in building a nuclear reactor now, all else being equal future society will tend to have a bit better power production and economic situation years later than if that $1 billion had just been spent on immediate consumer expenses alone without as much being saved and invested.

Since the average American doesn't voluntarily save more than 1% to 2% of their annual income, the amount of investment for the future may be increased if some of the involuntary 13% withholdings from their paycheck get used for such.

[Sikon]

Historical returns for an America which is very different from what it is now. The US no longer has a rich resource base and a lot of its manufacturing base is also gone. Barring some kind of wholesale policy shift such as building nuke plants by the hundreds or someone discovering the key to nuclear fusion, there isn't anything left in the US to support long term market gains.

Wouldn't you have said the same about the U.S. 10 or 20 years ago? Before, then, and afterwards it has remained the case that investments on average provide payoff. If a company gets money to invest, often it can produce more than its startup cost in output over subsequent years of operation, whether one's talking about a factory being built in 1985, 2005, or 2025.

The Dow Jones dropped by 7% on Monday, attracting a lot of media attention about the perceived crisis because of a 780 point change, but it's already risen back up another 4.5% yesterday. Short-term variation matters less than the overall trend over decades as prior graphs illustrate.

A much more accurate historical situation would be Japan in the late 80's and 90's. Like the US at present, they're highly reliant on energy imports, and they'd gotten into a big bubble economy. The Nikkei index was well over 30,000 during this time, after the big kaboom it never saw those heights again. 20 years after the crash and the index is sitting around 12,000. It's still down over 60% after 20 fucking years. That's what the US has ahead of it unless its government shapes up and stops the bullshit that's going on right now.

The Nikkei index has been as follows, closing values end of year:

1965: 1417.83
1975: 4358.43
1985: 13113.32
1995: 19868.20
2005: 16111.43
Source.

Such is relatively low performance. Relative to the world stock market, the Nikkei index has been like an individual poorly performing company compared to a larger stock index. Someone putting all their assets in such a market alone rather than more broadly distributed would be suboptimal.

Overall, world average equity market returns over 1900 to 2006 have averaged about 5.8% annually, like about +76% per decade.

However, your comparison of perceiving the current U.S. stock market as comparable to Japan's decades ago is inappropriate. Among other differences, the current overall profit to earnings ratio of U.S. stocks is on the order of 17, while, in contrast, Japan's Nikkei had a P/E ratio of 102 at one point.

One can not and should not think that stocks with a profit/earnings ratio on the order of 17 are inflated remotely as much as ones which once had a 102 ratio.

Besides, for the precise figures of Japan's history, it should be noted that index figures such as the above can be misleading for long-term changes. Does a Nikkei index of 13113 in 1985 versus 16111 in 2005 mean $1 invested in 1985 just became $1.23 in 2005? A lot of people would probably incorrectly assume that with the frequency of places like yahoo having graphs just of the index.

Actually, it's more complicated. It's okay to look at the index for some idea of short-term fluctuations, but one really shouldn't base long-term calculations on it alone.

Let's illustrate what's greatly wrong with looking at index alone by doing an example with the U.S. S&P 500. The S&P 500 index reached 20 in around 1951-1952 then reached 1000 for the first time in around 1998. So can one look at that change in the index and conclude that $1 invested at the former time became $50 fifty years later? No! Actually it became more than that. One has to consider the effect of the dividend component too.

An article here gives a good description and provides some illustrative graphs.

The following chart illustrates the effect considering dividends and assuming they were reinvested (orange) compared to without considering such, as a difference averaging a few percent per year exponentially adds up over the fifty-some years to be 8 times the return:



Naturally, the huge difference also occurs adjusting for inflation:



------------

What a program modeled after the Thrift Savings Plan does is give choices. Although as previously illustrated I disagree with your description of the U.S. stock market, if one actually did think that, one could put money into the I fund, which is an international stock index not dependent on the performance of U.S. stocks alone.

There's also the F fund for a bond index, the G fund for government securities, and so on among others. One is able to switch money between them as judged appropriate at a time, like the lifecycle program pulls the money out of stocks during the final few years and puts it into funds without their short-term fluctuation when one's retirement date gets close.

[Sikon]

Wall Street is not magic; just as MoO earlier ignored the macroeconomic effect of taking a billion man-years of productivity out of the economy, it seems to me that any projected earnings assume that if you pour all of this money into the market, there will be no negative consequences. However, that does not seem to be the case; when you have a lot of investment dollars chasing assets, you get a bubble. As money pours into the sector, they start inventing ways to spend it. And it would be even worse if the permissible asset list is narrowly restricted as you suggest.

It's narrow in terms of the number of choices, to prevent risky foolishness like someone investing their money into just a single company, but each of those five choices corresponds to very broad and diverse investments.

Meanwhile, as the example plan illustrates:

— Contributions will be phased in. Officials would like to permit individuals to put 4 percent of their payroll taxes into a personal retirement account. Annual contributions will be capped at $1,000 per year in 2009. The cap will gradually rise over time, growing by $100 per year after that. The contribution grows with growth of wages.

From here

That corresponds to starting with $1000/year for likely up to around 100 million workers choosing to participate (out of the ~ 160 million workforce). Such is on the order of $0.1 trillion / year initially and gradually growing over time. That gets spread out. It wouldn't tend to have too much of a sudden surprise.

For example, the C fund spreads the money throughout the U.S. stock index S&P 500. The I fund spreads it out through an international stock index. The latter would even make it diluted throughout much of the $700+ trillion / decade global economy if desired (world GDP =~ $66 trillion/year).

[Sikon]

Like the article describes, it would be entirely voluntary. A minority would choose to continue with the current social security program alone, while an initial two-thirds of the population is anticipated to see the benefit in joining.

Ah, so you maintain the basic safety net for everyone? In that case, what is the issue?

I would describe it as maintaining the basic safety net for everyone, yes. While a perceived concern has been that it would permit people to lose much of their money from making mistakes, my point is that a plan like the TSP is carefully designed and regulated to prohibit such, and there isn't really a problem with the way it gives individuals more choices than now with their withholdings.

I support for everyone the options that I would like for myself.

[Sikon]

Minor edit:

There was a typo where I referred to the P/E ratio as profit to earnings instead of price to (annual) earnings.