Tax-advantaged retirement accounts have long been a key to building wealth for the professional class and building careers for legions of financial advisers. The start of a new year brings broker calls from advisers urging their clients to make the maximum contribution to their IRAs for the new tax year. That would be $5000 for 2012, which hasn't changed since last year. A traditionalist approach to accumulating wealth emphasizes regular investments in a balanced portfolio of asset classes that are risk-weighted according to an investor's tolerance for volatility.
The problem with this traditionalist thesis is that it breaks down in times of extreme economic upheaval. U.S. government and household debt-to-income ratios are abnormally high and neither politicians or consumers show any desire to take responsibility for paying debt down. The capital held in custody for tax-advantaged retirement accounts - IRAs (be they traditional, Roth, SEP/SIMPLE, etc.) and 401(k)s - is a tempting morsel for a debt-addicted governing class. There is no plan at the current time to confiscate IRA assets or force custodians to offer only government debt as an acceptable investment. That will be of little importance in a hyperinflationary environment. There is precedence for sustained financial repression. Central banks in the developed world held interest rates below inflation for decades after World War II to help their governments accelerate war bond repayment.
I don't need any financial adviser to tell me what to do. I made the maximum allowable contribution to my own IRA today, knowing full well that the account exists at the suffrage of a governing class unfamiliar with financial restraint. IRAs can still help a portfolio survive hyperinflation if government leaves the asset mix alone and the portfolio mix includes hard assets (stocks and funds in mining, energy, commercial real estate, and related sectors). The good news is that our governing class is subject to Wall Street's constraint thanks to the financial sector's campaign contributions. Asset management firms and investment banks don't want to lose fee revenue from products in retirement accounts. Limiting IRA and 401(k) financial choices is a political football that would make Wall Street howl. Plutocracy isn't all bad. Mandarins need financial product choices too.
The problem with this traditionalist thesis is that it breaks down in times of extreme economic upheaval. U.S. government and household debt-to-income ratios are abnormally high and neither politicians or consumers show any desire to take responsibility for paying debt down. The capital held in custody for tax-advantaged retirement accounts - IRAs (be they traditional, Roth, SEP/SIMPLE, etc.) and 401(k)s - is a tempting morsel for a debt-addicted governing class. There is no plan at the current time to confiscate IRA assets or force custodians to offer only government debt as an acceptable investment. That will be of little importance in a hyperinflationary environment. There is precedence for sustained financial repression. Central banks in the developed world held interest rates below inflation for decades after World War II to help their governments accelerate war bond repayment.
I don't need any financial adviser to tell me what to do. I made the maximum allowable contribution to my own IRA today, knowing full well that the account exists at the suffrage of a governing class unfamiliar with financial restraint. IRAs can still help a portfolio survive hyperinflation if government leaves the asset mix alone and the portfolio mix includes hard assets (stocks and funds in mining, energy, commercial real estate, and related sectors). The good news is that our governing class is subject to Wall Street's constraint thanks to the financial sector's campaign contributions. Asset management firms and investment banks don't want to lose fee revenue from products in retirement accounts. Limiting IRA and 401(k) financial choices is a political football that would make Wall Street howl. Plutocracy isn't all bad. Mandarins need financial product choices too.
