Broken Covenant

January 8, 2009

Thursday’s Wall Street Journal carries a lengthy front-page story on the damaged retirement savings of the baby boomer generation, which invested in 401(k)s and IRAs. Participants in these programs at least tried to save the old-fashioned way, diverting part of current income away from current consumption to wealth that would be drawn down in the distant future to fund post-working career spending. Boomers now range from 48 to 62 in age.  For many, too little time remains to rectify the devastating destruction of wealth last year. The solution for some will be working to a later age or death, and even that remedy will be complicated by the deep current recession and a reduction of potential growth for the next ten years or so. Unemployment will not reach the stratospheric levels sustained in the 1930’s, but like then it is likely to stay elevated well into the next business expansion cycle.

The broken covenant with the baby boomers could be etched into American culture well into the 21st century, maybe even beyond. Hyper-inflations in Europe in the early twentieth century were blamed for seeding totalitarian governments and the Second World War, and a central banking ideology that seeks low inflation above all other economic goals remains a legacy of those economic traumas from long ago. The initial collective response to depleted real estate and financial assets will be an increase of the U.S. savings rate, a development that was going to happen inevitably by design, or as in this case, the force of market circumstances. Beyond the near term, however, the history lesson of a generation in which many responsible savers saw their retirement plans go up in smoke could provide an incentive to live and spend for today, not tomorrow.

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