(The video below takes about two minutes to view, the transcript can be read in about a minute.)
Some investors are afraid the Dow may go to 5,000. That would be bad but what really scares me is the Dow going to 50,000. Let me explain.
The United States is roughly $100 trillion short of being able to pay for Social Security, Medicare and pension promises. When we divide by the roughly 80 million households above the poverty line and below retirement age over the coming decades, that works out to $1.25 million dollars per household.
Now, you're good for your share, right? No way that works! Unless inflation knocks the value of each dollar down to a nickel and then it works.
If a dollar's worth a nickel and the Dow is 50,000, then the purchasing power of the Dow is 2,500 in inflation adjusted terms.
Call it too many boomers selling their investments side by side even as the real economic power has moved to Asia, and even as US government spending consumes an ever greater share of what economy remains.
So your stock investments will buy 25% of what they do today. Until you pay the taxes on the profits in going from Dow 10,000 to Dow 50,000. Because the government's broke, the tax rates have gone up to 50% on long-term capital gains. The government takes half of the 40,000 point rise and you're left with Dow 30,000.
Which is worth Dow 1,500 in today's dollars, and you've lost 85% of your net worth.
What I've just described is an example of monetary inflation, with simultaneous asset deflation in purchasing power terms, and inflation taxes, and I believe that preparing to survive these three cornerstone dangers should be the very heart of retirement planning.
Do you know how to Turn Inflation Into Wealth? To position yourself so that inflation will redistribute real wealth to you, and the higher the rate of inflation - the more your after-inflation net worth grows? Do you know how to achieve these gains on a long-term and tax-advantaged basis? Do you know how to potentially triple your after-tax and after-inflation returns through Reversing The Inflation Tax? So that instead of paying real taxes on illusionary income, you are paying illusionary taxes on real increases in net worth? These are among the many topics covered in the free "Turning Inflation Into Wealth" Mini-Course. Starting simple, this course delivers a series of 10-15 minute readings, with each reading building on the knowledge and information contained in previous readings. More information on the course is available at DanielAmerman.com or InflationIntoWealth.com.