The Coming Run on Banks And Pensions

The comments above & below is an edited and abridged synopsis of an article by Dave Kranzler

Public awareness about underfunded State pension funds is growing. It’s a problem that’s easy to hide as long as the economy and State tax receipts grow. It’s a catastrophe when economic conditions deteriorate and tax revenue flattens or declines, as is occurring now.

Pensions are run like Ponzi schemes; as long as the cash coming in to the fund is equal to or exceeds beneficiary payouts, the scheme can continue. But for years, due to poor investment decisions and Fed monetary policies, beneficiary payouts have been swamping investment returns and fund contributions.

Pension funds have over-marked their risky investments and understated their projected returns to hide how much they are over-funded. Most funds currently assume 7% to 8% future rates of return. Unfortunately, the ability to generate returns like that has been impossible with interest rates near zero.

To compensate, pension funds have bought stocks, private equity funds and illiquid and risky investments. Some pension funds have as much as 20% of their assets in private equity. When the stock market inevitably cracks, it will wipe pensions out.

At some point, current pension fund beneficiaries are going to seek an upfront cash-out. That could trigger a run on pensions and drastic measures will be implemented to prevent this.

Similarly, the ECB is seeking to implement a moratorium on cash withdrawals from banks at its discretion, and US banks are no better. If Europe is moving toward enabling the ECB to close the bank windows ahead of an impending financial crisis, the Fed is likely already working on a similar proposal.

Like every other attempt to control the laws of economics and perpetuate Ponzi schemes, the current attempt by central banks globally will end in collapse. Keep as little of your wealth as possible tied up in banks. The financial system is one giant Roach Motel—you check your money in, but you’ll never get it out.