Going To Be Raided

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					Is Your IRA Going To Be Raided?

The notion of government raiding personal retirement accounts for funds may seem extreme.
Perhaps it shouldn’t. Other governments have done it. Argentina did in 2008. Ireland has
indicated it might. The worsening financial crisis may eventually move other countries in that

Surely the US would never do so. Actually, there is little basis for assuming they would not and
factual evidence they would. Here are three good reasons to believe they would:

   1. Financial Ratios The US financial ratios are arguably as bad as the weakest countries in
      Europe. Unlike Europe the US government has shown no willingness to meaningfully cut
      government spending and/or balance the budget. Europe has signaled austerity programs,
      although time will determine whether they adhere to such programs.
   2. Rule of Law All modern governments believe they are above the law. They justify
      violation of the law on the grounds it is necessary for the “good of the nation.” The US
      government has frequently demonstrated that property rights should not stand in the way
      of public policy. Abuses of eminent domain are numerous. The automotive bailout was a
      flagrant example. Not only was the bailout without legal precedent, US bankruptcy law
      was violated in order to reward unions at the expense of bondholders.
   3. Behavior Pattern The US government has a despicable record with regard to honoring
      retirement obligations. The government raided the Social Security trust fund so that
      politicians could spend at higher levels. That continuing raid put Social Security in a
      liquidity crisis that should not have occurred for another couple of decades. President
      Clinton and Congress reneged on the promise that Social Security benefits would never
      be taxed. Now Treasury Secretary Geithner routinely raids public pension plans in order
      to allow government to continue spending.

Most politicians in the US believe (or behave as if they believe) they can continue to kick the
spending can further down the road. Apparently many believe the spending/debt problem will
somehow magically go away or at least metastasize after they have left government.
Unfortunately, the problem is not going away and will get much worse unless political courage
and will is found to enact substantial spending cuts. These cuts must be larger than numbers
discussed in current political discussions.

What About The Debt Ceiling?
                                                The debt ceiling problem will eventually be
resolved with an increase in the ceiling. Unfortunately, that solves nothing as previously
discussed. The problem is not debt, it is spending.

Raising the ceiling does not mean that markets will provide funds at interest rates acceptable to
the government or its financial condition. In my opinion, QE2 was never expected to stimulate
the economy. It was a holding action to protect government from the bond vigilantes who might
have refused to purchase government debt at current interest rates.

Some politicians might have naively believed that the economy would begin to grow during the
six-month QE2 period. Instead, the economy deteriorated. QE3 or QE10 will not solve
underlying economic problems. Reductions in spending and regulatory uncertainty are necessary.
Companies will not hire or invest when they cannot determine future costs and taxes.

When the ceiling is increased, government will be able to lawfully issue new debt. Depending
upon the market’s reception, three outcomes are possible:

   1. There will be enough buyers in traditional credit markets to absorb the debt at
      “reasonable” interest rates.
   2. The Fed will institute QE3.
   3. A combination of 1 and 2 will be necessary.

My guess is that number 3 will be required. There will be demand at reasonable interest rates,
but probably not enough to meet government requirements. The amounts required are truly
enormous. For example, in August the financing required is about $600 billion — about $130
billion of new debt and almost $500 billion of debt rollovers. Subsequent months are
comparable. Credit markets are unlikely to be confident or deep enough to provide the this level
of funding for long.

Why Raid IRAs?
                                                                     The simple answer was
provided by famed bank robber Willie Sutton: “that is where the money is.”

Total market capitalization of the US stock market is about $16 trillion and 40% of that is
estimated to reside in IRAs and 401Ks. They are big, visible, vulnerable and mostly immobile

This $6 trillion, if it were grabbed in some fashion, would satisfy the next 4 – 6 years of
government deficits. Whatever can be used from IRAs lessens the amounts needed from sources
1 and 2 above.

Before proceeding, it should be noted that the term “IRA” as generally used in this article
generally refers to Individual Retirement Accounts and self-directed retirement accounts such as
401Ks. Many of the comments pertain to both even though the IRA abbreviation is used.

How Might Government Go After This Money?

There are innumerable ways. Here is some speculation regarding what might happen.

It is unlikely that government confiscates IRA funds, at least directly. That is likely too big a
step, at least as a first move. More likely government mandates that a percentage of IRA funds
be invested in Treasury securities. The percentage would start out small and then likely increase
as government insolvency worsened.

Let’s imagine a scenario. After proper citizen conditioning, the government would require that
all IRAs must be at least 20% invested in Treasuries. The rationale would be that we must all do
our share in assisting the country out of its economic hardship. Those with IRAs certainly are
better off than those without. Therefore it is only fair that they invest in the future of their

The reason to enact such legislation is that markets are driving up the costs of borrowing for the
government. By forcing investments from existing IRA funds, the government achieves two

   1. It reduces the amounts necessary to raise in capital markets and/or
   2. It reduces the amount of new quantitative easing necessary.
Although unnecessary, a special series of Treasury bonds called “Patriot Bonds” could be
created. These bonds would be the only ones that counted for IRAs and could have lower interest
rates than traditional Treasuries. If so, you would be coerced into funding the government by
purchasing bonds for more than the market values them. But, after all, you are a patriot and one
of the” winners in life’s lottery.” So it is the least you can do.

Over time the required percentage would be raised to, say 40 or 60 or even 100% as financial
conditions worsen. Finally the government defaults, making whatever portion of your IRA
represented by government securities worthless.

In effect, that part of your IRA has been confiscated by government.

Is This Possible?

Those who believe our government is too honorable to raid private retirement accounts better
wake up! The seriously dangerous and wounded animal we know as government is fighting for
its survival. It will do anything short of dying, reducing spending or revealing itself as the Ponzi
scheme it truly is.

Your notions of integrity, law and morality do not apply to this animal. The biggest, meanest
man in town is trying to escape death and will use whatever means possible. Rightly or wrongly,
he believes you are his antidote and he is going after whatever he can get.

One hurdle to preventing government from taking such action might be the stock market. The
shift in asset allocations required in retirement accounts would presumably be detrimental to the
stock market. Whether it would crash or not is moot. Any such action would certainly reduce its
value, which might be the best protection retirees have.

Unless government spending is reduced to the point that new debt grows slower than GDP, most
retirement accounts will diminish dramatically. This conclusion is independent of whether
government raids your IRA account. Hyperinflation will eventually result from continued
quantitative easing (printing of money). That will destroy most savings and all fixed income
obligations like bonds and pensions whether these funds are in or out of IRA accounts.

Things are going to get ugly. Prepare for the worst and hope for the best.

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