$1.00. February 21, 2005

That is what we are talking about—one measly dollar.

How much can one dollar tell you about the economy and what it means?

A lot more than you might realize.

So, let’s get started.....

The issues are the stock market, retirement, investments, and that $1.00.

The objective is to compare the cost of buying one share of stock that earns a profit of $1.00 each year. This means the business earns a profit of $1.00 per share (this does not mean $1.00 in dividends).

Because we are always comparing the same thing (the cost to buy one share of stock earning $1.00 profit), this comparison automatically eliminates inflation-based factors in the economy.

1. From the 1950’s to the 1960’s, companies generally earned between 7% and 14% per year. The average return was about 10%, so a share earning $1.00 cost about $10.

2. Today, stocks earn between 2.5% and 5%. The cost to buy a share earning $1 today is about $30.

Comparing 1 and 2, today’s cost of buying a share of stock earning $1 is three times the cost it used to be ($30 versus $10). This is the definition of inflation (paying more today to get the exact same thing in the past).

How does this affect you?

There are 76-million Baby Boomers ready to start retiring in the next decade. Their investment requirements total between $50-$75 trillion dollars. Some of this money is already invested in real estate (houses, condos, etc). However, that is only a part of the solution to the problem we face.

The stock market today is worth less than $20 trillion (even after Enron, Worldcom, the dot.com bust, etc).

The stock market can not earn enough profit to issue the number of shares needed to meet market requirements if the privatized system is created. Nor does this number include the longer-term investment needs of the following generations—who will be required to have comparable long-term investments for their retirements.

When the shortfall happens, there will be inflation in the stock market (as demonstrated with 1 and 2 above—only on a much greater scale). The return on the shares that do get bought will be extremely low—well below 1%--for many years. And there will be no growth due to more profits, only to more inflation (i.e., it might take a $200 investment, or more, to buy one share earning a $1.00 profit).

This scenario leads to the destruction of the privatized personal retirement account system.

The problem is real. It has been shown to be a real problem that exists today, and will continue into the future.

The government is fully aware of the problem. There is nothing in place to prevent this happening, yet the government wants to create these accounts anyway.

What will be done to fix this problem?