More on mathematics, what we in the UK refer to as ‘maths’, and the economy.

Have you ever wondered when you bought a pension how they arrived at rather large sums to be paid out with relatively little input on your part?  Yes, of course, these companies have set calculations, but, surely, why couldn’t I arrive at the same numbers projected over 30 – 40 years? ‘Is it just me?’ I used to wonder.

No, it’s not just me — or you — who can’t figure this out.  Karl Denninger at Market Ticker has used primary school — ‘third grade’ (i.e. a class of 8 and 9 year old pupils) — mathematics to prove these projections wrong.  You can see what calculations he uses in the first part of ‘Proving Up The Fraud Using 3rd Grade Math’.  Denninger addresses pension funds, health care and housing values for an American audience, but anyone contemplating the future will find what he says of interest.

I don’t agree with everything Denninger says, particularly on Obama and on the OWS movement, but he does give me pause for thought when discussing the economy. Emphases below are his in the original.

Pension funds

Now let’s take the claimed 8% annual return that pension funds like to use in their public statements.  The average working stiff labors from age 20 to 65, or 45 years.  At 8% if we wish to determine how many years it takes to double by divide into 72 and get 9.  The average working stiff’s employment lasts for five of these periods (9 x 5 = 45 years.)

We therefore look at the above table [see his post] and determine that the fund alleges that it can turn $1 into $32 in the same 45 years.  This is what you were sold in your “pension fund.”

But is this reasonable

Well, let’s think this through.  To make 32 times someone has to have 32 times, right?  That is, a pension fund must get the money it presumes to pay your pension with from somewhere.  Since you do not pay in 32 times what you draw out of the fund during your working life (you intend, for example, to work for 45 years and then retire at 65 and live for 20 more; that is, you will work for only about twice as long as you are retired) you would have to put one half of your salary into the fund in order to actually pay for your retirement.   Yet the common “contribution” to a pension fund is about 1/10th that much money!

So where’s the rest come from?  Well, from “earnings” we are told.  But what are “earnings” to a corporation?  Earnings are simply the amount of money the company has left after it pays all its costs in delivering goods and/or services to consumers.

In other words, “earnings” are economic surplus.

Now certainly productivity has improved over time.  Indeed, it is the growth in productivity that has improved the standard of living through the ages.  But this belies the question: If 1/32nd of the alleged “growth” in that fund is your contributions to it, can you reasonably expect that the funds will grow by a factor of 31 over a 45 year time period?

In a word: No.

Health care

Health care costs are growing about 9% annually … Republicans claim that nobody over 50 will lose their Medicare as it is today.  That’s a promise to keep the cost escalator going, since that’s “what medical care today” is.

Ok, how reasonable is this?

Well, 9% doubles in 8 years.  A person who is 50 expects to live to approximately 85, or 35 years.  That’s 4.37 doublings.

From the table above [see his post] we see that this is somewhere between 16 and 32 times today’s value.  Again, confining our math to that learned in 3rd grade and estimating between the numbers, we’ll call it 20 times.

Today, a single person health insurance policy for a person of about 50 years without any serious chronic conditions in good health is likely to cost $1,000 a month or more.  We’ll use that figure, even though many people will cost much more (especially if you’re obese, have Type II diabetes or indications of heart disease.)  That’s $12,000 a year.

What you’re being sold is that by the time you’re 85 the government will be able to provide you with a $240,000 a year health benefit. 

One quarter of a million dollars!

Do you believe that?  I hope not, because you’re not going to get it.  Note that for you to get that $240,000 in health benefits someone has to pay $240,000 in taxes – one-for-one – and this assumes no waste inside the government itself!

Housing industry

Now let’s look at the “10% a year price appreciation” claim of the housing industry in the 2000s.  Again, the rule of 72 says that this results in a double in about 7 years.  The 30 year mortgage, of course, is for 30 years, which is 4 doublings (and a bit.)

This means your $150,000 house would have been “worth” $2.4 million in 30 years.

Do you really believe that?  More to the point, did the person who sold you that dream believe it or did they know it was a lie – that there was no possible way there would be enough money in the economy in 30 years for anyone to pay you $2.4 million?

He proves that these projections are ‘pyramid schemes’ — his words — and that they are ‘mathematically impossible’.

The government is lying

In another post, ‘OWS (And Everyone Else): Pay Attention to Greece’, he explains:

In the case at hand in the United States we have a government on both sides of the aisle that has made promises that are mathematically impossible to keep.  That same government conspired with The Fed and with Wall Street to blow a series of bubbles that led you to believe, over the space of 30 years, that you could have more than you can actually pay for with your work output.  This claim was a lie and it infested virtually every area of our nation.  Housing, education, medical care – all were used as a means to blow up the bubble to larger and larger dimension[s] whenever it threatened to collapse and expose the frauds.

These claims were active frauds as anyone who examined them with any sort of critical eye toward the mathematical realities of the claims knew they … could never happen. 

As just one example of dozens the claim that “house prices are expected to increase 10% a year for the foreseeable future” was interpreted by many as “it’s safe to finance the purchase of a house and then withdraw the claimed increase in value as this will go on forever” (see the foreseeable future words for justification in the common man’s reliance.) 

The lie is the mathematical impossibility of this.  A $150,000 house that appreciated at that rate for 10 years would be worth $389,000.  But over 30 years that same $150,000 house would be “worth” $2,617,410.  Nobody ever asked the obvious question: Exactly how was a “middle class” person going to afford to buy a $389,000 house, say much less a $2,617,410 one?

They couldn’t, of course, but this was the lie that was run.

I’ve often contemplated this and wondered how it could be so.

University tuition

Denninger adds that another ongoing bubble surrounds university tuition costs, which have increased tenfold from what they were when I graduated at the end of the 1970s.  They are so astronomical as to be scary.  My fellow Britons, unless something is done, we could experience the same, thanks to Tony Blair who made our universities fee-paying institutions. He took the lid off what was a sensible system in which the taxpayer invested in our nation’s future.

Denninger writes of the current American situation:

In College education land the same lie was run.  It led to an outrageous increase in college costs that dramatically outstripped earnings for degree-holding graduates.  This in turn made college a bad deal nearly across-the-board and as it occurred colleges and lenders lobbied Congress to change the law so that when your kid got rooked by this scam they couldn’t file bankruptcy and force those who blew the bubble to eat the loss.

More on Medicare

In the same post, Denninger has more to say on health care costs:

We did the same thing with Medical Care.  By providing “free” (or nearly so) care to Seniors and illegal immigrants, with the former being told “they paid for it” through Medicare taxes (a bald lie as on average they only put in 1/3rd in inflation-adjusted dollars as to what is spent on them) and the latter being simply told “you deserve it” the increase in medical insurance costs has run approximately 9% annually and will continue until and unless policies are changed.  This means that the $700 a month insurance policy for the reasonably-healthy 50 year old ($8,400 a year) who has been promised “no reduction in his Medicare” will cost $171,477 a year by the time he’s 85 with no adjustment for the higher expense that comes with age.  That is, today’s 15 year old will be forced to pay $171,477 a year for his medical insurance when he reaches 50.  Obviously, he won’t as that amount is more than three times today’s median family income and even if we allow a 3% inflation rate (which we should not) it will be more than 100% of the median family income in inflated dollars!  Since you can’t pay more for something than you earn in total, what the politicians are telling you they will do cannot happen.

This is just astounding, and you, too, might have come to the same conclusion, whilst scratching your head, thinking, ‘How will we and future generations manage to live? And why isn’t anyone in power putting a stop to it?’

Denninger on bankruptcy

Unfortunately, the notion of bankruptcy might loom large for many.  For some, it is already a sad reality. Certainly, anyone contemplating it is well advised to discuss his circumstances with a financial advisor and/or an attorney before doing anything.

Denninger (under his pseudonym ‘Genesis’) warns Americans about using part of their retirement funds in a potential bankruptcy scenario:



It’s EXEMPT from being seized in bankruptcy. You invade it, you lose that protection.


So, try to get some reasonably-priced, eminently sensible advice to map out a way forward.

These are roller-coaster times. We have little reason to feel complacent. Salaries in many fields have not appreciated that much since I finished university. Furthermore, jobs are hard to find, especially for graduates and those over the age of 45. (Only 10 years ago, my mother retired when she was 80, overshadowing those 60+ years younger than she in an office job!)

Not to mention offshoring jobs, which wasn’t even a consideration 30-odd years ago.

Back then, it really was true in most Western countries that you made your own future: if you worked hard, you would succeed.  I had a conversation with an Englishman who told me that in the 1980s he and a couple of his schoolmates would clean offices on weekends at age 14.  He made a number of useful contacts that way, enabling him to become self-employed full time when he finished secondary school.

He said, ‘The problem today is that kids don’t want to work.’

I replied, ‘That’s not the problem.  Think of all the regulations in place — some good, some petty — which have been written into law since you were 14 years old.  A child that age couldn’t now clean offices or do any of the enterprising work you and your friends did 30 years ago. Plus, we have immigrants who do that now at knock-down salaries, as provided by an agency. So, there’s no market for an English person these days, teen or adult.’

‘Oh, yeah …  I never thought of it that way.’

So, to me, it would be untruthful for us to insist that everyone will have a chance — or the individual freedom — to achieve his career dreams in the world today.  We hope they will. However, I would first point out the many obstacles and the stiff competition our youth will have to face.

But, then, that’s a topic for another day.