In the Big Rock Candy Mountains the jails are made of tin and you can walk right out again as soon as you are in. There ain’t no short handled shovels, no axes saws or picks. I’m a goin to stay where you sleep all day, where they hung the jerk that invented work, in the Big Rock Candy Mountains. This classic is a wishful ballad by a hobo. Written in 1895 by Harry McClintock the song reminds me of my grandfather taking to the rails when the coal mines in Kansas closed during the depression. While today’s economic doldrums are in no way as bad as what my grandfather and his generation experienced, it seems as if Depression Ben and the Federal Reserve are going to do all they can to try to stop the economy from growing, all while promising us the cigarette trees, the lemonade springs and the little streams of alcohol tricklin’ down the rocks.
One of Chairman Ben’s rock candy mountain headed ideas has been lauded by the press as QE or Quantitative Easing. This is a euphemism for printing currency. The Federal Reserve has done this in an attempt to devalue long-term bonds and push down yields. Recently, The Economist magazine ran a feature on one of the unintended consequences of this policy. According to The Economist, this policy has resulted in even larger shortfalls in already underfunded private and public pension plans which are already in the hold by about $512 billion and $3.1 trillion respectively.Pension funds invest in both corporate and government bonds in order to ensure a revenue stream for future beneficiaries. Generally, fund managers try to ensure that contributions and interest on accumulated assets equals expected future liabilities. When bond yields are artificially forced down, these assumed rates of return cannot be met and the funds face additional shortfalls and liabilities. So in order to keep their pension funds solvent, managers must either invest in riskier asset classes or sock away more of employees current earnings leading lower current spending, the very thing that Quantitative Easing was supposed to prevent.
The Federal Reserve is doing everything it can to undercut the value of savings in the economy and to subsidize borrowers, but as The Economist points out this leads to significant collateral damage, including underfunded pensions.