Next In Line For Implosion: Pension Plans

Pension plans are based on 8% annual growth forever. What happens to these plans in a zero-interest rate world as the global economy and stock markets contract?

I'm afraid it's time for an intervention. I don't enjoy being the bearer of difficult news, but now that Europe has stumbled drunkenly into the pool and been "rescued," it's once again tearfully blubbering that this time it's all going to change, and a new prime minister in each dysfunctional, insolvent EU nation is going to make the pain and the addiction all go away.

It's time we face the reality that Europe and the U.S. are full-blown financial alcoholics, addicted to illusion and debt. And what do they turn to as "solutions"? The very sources of their pain: illusory "fixes" and more debt. Have you ever seen a global market as dependent on rumors of "magical fixes" for its "resilience" as this one?

What's truly remarkable is the psychotic distance between the facts--Europe's debts are impossible to service, its economy is free-falling into recession, the U.S. is already in recession, China's real estate bubble has popped and cannot be reinflated-- and the heady leap of global markets on every trivial rumor of a magic fix.

Since it runs in our family, I do not use the word "alcoholic" lightly. Those of you who have to deal with alcoholics know the drill: the liquor stashed behind the fridge, as if everyone doesn't know it's there; the stumbling into the pool, the humiliating rescue, the tearful promise of change which goes nowhere, and all the rest.

I seriously suspect the entire global economy is alcoholic--not about liquor, but about debt and the impossibility of paying entitlements which expand by 8% a year in an economy which grows by 2% a year at best. In all the millions of words printed about the subprime meltdown, the gutting of the U.S. financial and housing markets and now about Europe's impossible burden of debt, how often have we seen anyone in the MSM or mainstream financial press confess that "borrowing our way of out of trouble" is not just financially bankrupt but morally bankrupt as well?

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from debt source to debt source, weaving drunkenly between "stashes" of new debt in the Fed, Treasury and private sector markets. Despite the abject failure of the magical-thinking "fix" of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low.

While everyone is focused on the drunk being pulled from the pool--Europe's sovereign debt--another drunk is teetering on the edge: public and private pension plans. Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever.

Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to "spark growth." Unfortunately the only thing being goosed is the future cost of servicing the additional debt.

How do you earn 8% on money which yields at best 3%? You can't. How do you reap a gain on bonds when interest rates have already hit bottom and can't fall any lower? You can't.

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