Mitchell Langbert
The Well-Funded Retirement Plan

How the influence of fluctuations in the quantity of money and in its inverse, the value of the dollar are crucial to understanding why financial markets are volatile and how employees need to invest.

June 18, 2009
by Mitchell Langbert, PhD

The May 2009 issue of HR Magazine, published by the Society for Human Resource Management (SHRM), has two articles about the financial stress that afflicts American employees due to the past year’s market fluctuations. The first is about declines in 401(k) accounts. In 2008, roughly 40  percent of participants aged 56 to 65 had more than 70  percent of their 401(k) assets invested in equities. Since the S&P 500 fell from 1475 on January 4, 2008 to 887 on May 22, 2009, or 40 percent, these participants lost more than 28 percent. Many participants’ response to the steep market declines has been to shift their contributions to money market funds. The second article notes that phone calls to Employee Assistance Plans (EAPs) are on the rise because of employees’ psychological stress due to market volatility. Although EAPs are an important resource, neither they nor money market funds will reduce the risks that face American employees.

Banking Effects on HR

Money and banking are far-removed from human resource management but they are important influences on employees and human resource managers. Both HR managers and employees should contemplate monetary policy when planning for retirement. This issue is not remote. The influence of fluctuations in the quantity of money and in its inverse, the value of the dollar, although infrequently discussed in HR departmental meetings, are crucial to understanding why financial markets are volatile and how employees need to invest.

Money market funds are denominated in dollars, and so are subject to the same market risk to which the dollar is subjected. In the past five years the dollar, whether compared to the Euro, the Yen or an ounce of gold, has been risky, and there is reason to believe that its risk will increase. Selling stocks and investing in dollar-denominated money market funds at this juncture may be a case of selling at the bottom and buying at the top — at the same time. On December 31, 2002 a dollar was worth 1.12 Euros but on May 25, 2009 a dollar was worth .71 Euros, a decline of over 35  percent, not much less than the decline in the stock market. But while the forces that caused the stock market to fall have been reversed, the steps taken to reverse it will cause sharper declines in the dollar (despite the dollar’s run up since last fall).

Conventional Wisdom About Retirement Planning

The conventional wisdom concerning retirement planning is that investments in equities, bonds and money market funds will over the long term adequately fund retirement. But according to the Bureau of Labor Statistics the average annual inflation rate from 2002 to 2008 was 2.75  percent while iMoneynet.com reports that as of May 26, 2009 taxable money market rates are running at 0.19  percent. In other words, money market yields are zero or negative despite deflation fears.

The conventional wisdom has turned out to be wrong. In the 1990s baby boomers were told to invest in stocks because markets go up. But on May 22, 1998 the S&P 500 closed at 1,110 while on May 22, 2009, 11 years later, it closed at 887, a decline of 20  percent over 11 years.

This may explain the severe stress among boomer-aged employees noted in the HR Magazine article. Psychologists define perceptual distortion as a lack of correspondence between the way a phenomenon is commonly perceived and the way the individual perceives it. In other words, there is dissonance between what a person thinks ought to be happening and what they are experiencing. As the psychologist Leon Festinger has pointed out, cognitive dissonance leads to stress. I suspect that after boomer-aged employees have heard for two decades that they should invest for the long term and they now experience sharp declines just as they reach retirement, they are entitled to experience stress.

The widespread fluctuations and concomitant employee stress are due to federal monetary policy. The reason financial markets key off the money supply is that stocks and bonds represent future revenue flows. High-interest rates cause the discounting of future earnings to increase, reducing stock and bond values. When the money supply increases, interest rates fall and stock market values increase. When the money supply increases less quickly (it hasn’t fallen in most of our lifetimes) the stock market falls because interest rates rise.

The side effect of interest rates’ effects on financial markets is of course inflation. In inflationary periods, such as since 1970, real wages tend to fall while stock markets tend to rise. Although 887 sounds low, on December 31, 1969, about 40 years ago, the S&P 500 closed at 104.36. The increase over 40 years has been 850 percent despite the recent market dip. Over the same period, the money supply increased from 63.2 billion dollars to about 1.8 trillion dollars, or 28-fold.

When Lord Keynes conceived the current approach to monetary management in the early 1930s, the average life expectancy was 52. Following Keynes’s precedent, since then economists have focused on unemployment statistics without considering the impact of their policies on retirement planning. In contrast, according to the U.S. Census, there are currently 78.2 million boomers, about one quarter of the nation’s population, and by 2030 there will still be 57.8 million living boomers. The measures taken to reduce unemployment will have effects on retirement plans in the coming years.

The St. Louis Federal Reserve Bank keeps track of money supply statistics. In December 1969 the adjusted monetary base was 63.2 billion dollars. In December 2007 it was 859.22 billion dollars, almost a fourteen-fold increase. In April 2009 it was 1.8 trillion dollars. The absolute increase in the monetary base from December 2007 to April 2008 equaled the increase from December 1969 to December 2007.


The effect of such a large increase, if not reversed, will be to stimulate the stock market and increase employment levels. Over the long term it will cause inflation. One effect of rapid monetary expansion is mal-investment, such as was recently seen with respect to the sub-prime crisis. But the monetary expansion that led to the sub-prime crisis was much smaller than the current expansion. Asset bubbles are likely to ensue from current policy.

The effects of rapid monetary expansion are both increases in the stock market and in commodity prices. There would also be a decrease in the value of the dollar and subsequent inflation. Assuming that the Fed’s current policies are not reversed, employees who invest in stocks and to a greater degree in commodity-related funds such as agricultural, metals, energy and gold can look forward to a retirement that is not risk free but likely well funded. However, commodity price increases will reverse (and stock prices will collapse) when the Federal Reserve Bank again raises interest rates due to an inflationary spiral.

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Mitchell Langbert, PhD, is an Associate Professor, Brooklyn College. Widely published on the subject of human resource management, Langbert has consulted and served as an expert witness.