(no subject)

[rasilio.livejournal.com]

I've posted on this subject before but it can't be stressed enough.


Lets start with this article on CNN ...



http://www.cnn.com/2011/OPINION/06/29/cain.debt.number/index.html


"Each month recently, we've been bombarded with bad numbers: Only 54,000 jobs added in May, unemployment at 9.1%, housing prices down 33.1%, and on and on. These numbers, though, are all symptoms. If we continue, every 30 days, to focus on these numbers -- well, we're like the doctor of an AIDS patient who can only see his patient's lesions, pneumonia and bronchitis. Yes, each one of those can kill the patient, but he'll never get better until you focus on the underlying disease. Debt is this economy's AIDS. And that debt is represented by the number 350.

We spend a lot of time talking about federal government debt. But the debt I'm talking about reflects -- yes, federal government debt -- but also, more importantly, business and household debt. Over the past 20 years, the U.S. private sector -- consumers and businesses -- has taken on historic levels of debt. "



You can bitch and moan all you like about need for government spending or the need for tax cuts but ultimately it is all irrelivant because all of those things are just shifting around the deck chairs on the Titanic, changing who spend the what from the same pile of wealth. The fact is that the economy will not improve until this debt level is worked off and gets down to somewhere near the long term average of 150% of GDP.



It also shows that the biggest part of the problem is not government debt but rather private sector debt, however it does seem to exclude the biggest part of government's true debt picture (unfunded liabilities) and just uses the official public debt figures. If you include the unfuinded liabilities across all levels of government the real number in that article is not 350 but rather somewhere over 1000.

That is right, For the American Public to pay off all of their debts and meet all of their future obligations would require 100% of GDP for a Decade.

This is why I get on peoples cases whenever they propose a new benefit that our society absolutely has to provide. The fact is we are aleady living well beyond our means and cannot afford what we do today. Cuts to our lifestyle are going to happen whether we want them or not and there is no money for any new stuff no matter how nice or cool it is.

Another thing this also shows is that both Democrats and Republicans are full of shit with their economic policies. This economic crash had it's roots back in the friggin Johnson and Reagan administrations, neither Bush nor Obama had anything to do with starting it but both of them have made the situation a lot worse by sticking their heads in the sand and spending like drunken sailors rather than forcing the American people to wake up and face the sobering fact that the party is over.

So, now comes the question of how do we get out of this situation? What is the solution? Who do you think should get killed (economically speaking) for this and why?

Comments

[devil-ad-vocate.livejournal.com]

Tax everybody... except me.

[kylinrouge.livejournal.com]

Skipping the semantics of tax this and cut that, there is a broader issue at hand.

For one thing, running a huge trade deficit never helps. We can either go back to being a production-based economy instead of a financial and service-based one, or we can invest in our intellectual capital to try to revive our position as technological leaders of the world.

I'm not really seeing how feasible either of those solutions are, but there is definitely no simple answer.

[rasilio.livejournal.com]

Well you know the only reason we are able to run a trade deficit is the quantity of debt we issue.

Think about it, what would China do with all of those dollars they get for building stuff if they couldn't buy T-Bills, State Bonds, Municipal Bonds, and Securitized Mortgages, and corporate bonds with them? They'd have no choice but to open up their import markets to American Products.

Ultimately trade deficits are nothing more than symptoms of a country deeply in debt, cure the debt problem and your trade partners end up having to spend the money back in your economy.

[hikarugenji.livejournal.com]

Well, sometimes they just end up spending it on things like mortgage backed securities -- one of the chief factors that drove companies to make riskier and riskier home loans was a huge amount of foreign capital that was desperately looking for investments.

[kylinrouge.livejournal.com]

No, I'm sorry, that doesn't make any sense.

[mrbogey.livejournal.com]

Trade deficits are an easy thing to gang up on, but by themselves they're not really meaningful. You have a trade deficit yourself with lots of people in your life. What you benefit out of it is what matters.

[kylinrouge.livejournal.com]

You're comparing the US trade deficit with me having a trade deficit with my mother?

Alrighty then.

[nevermind6794.livejournal.com]

We're still the technological leaders of the world, by far. We have the most patents, most STEM R&D, and if I remember correctly the highest manufacturing output.

Our trade deficit is largely a function of our oil consumption. China's currency manipulation doesn't help, either.

[stewstewstewdio.livejournal.com]

Over the past 20 years, the U.S. private sector -- consumers and businesses -- has taken on historic levels of debt. "

Unfortunately, we have discovered this way too late and previously had done too little. Right after the credit crisis, our saving rate went from some negative number to about 4%.

The bad new is that an increase in saving and reduction in credit is choking off growth. I don't have a solution of any kind to this. Also, the credit crunch has made companies risk averse and that's keeping them from investing.

This kind of recession is what is needed to adjust our habits and attitudes about short term gains vs. long term equity.

[a-new-machine.livejournal.com]

The growth we had was illusory, though. It was debt-growth, financed on the idea that we'd always grow and continue to grow at a pace that outdid interest. It's just not realistic to presume. What you're pointing out about the new savings choking off growth is really just the effect of that. It's like we've been driving along at 60 MPH, and just borrowing money to build bridges over any gaps we come to. Now we stop being able to borrow, and the gap is getting closer...

[a-new-machine.livejournal.com]

Foreign adventures should be first, because they should be the easiest to withdraw from. Libya, Yemen, Afghanistan, South Korea, Japan, Germany, Iraq... the list goes on, and none of it is anywhere near worth the cost in lives and treasure.

Then we need to - desperately - turn to entitlement reform. Medicare cannot continue as it has, nor can SocSec. We needs everything, probably at once - means testing, higher tax rates, later claims, and lowered benefits.

The rest is gravy.

[pastorlenny.livejournal.com]

It seems rather simple, doesn't it?

[pastorlenny.livejournal.com]

It is interesting to watch the turtle flailing helplessly on its back, while so many others have just caught turtle fever themselves.

[a-new-machine.livejournal.com]

Now if only everyone would simultaneously agree that I'm right...

[pastorlenny.livejournal.com]

We need a media strategy is what we need.

[nevermind6794.livejournal.com]

Social Security isn't too badly off, because it has its own account; it only hurts our deficits if we decide we should use general revenues to make up any shortfalls.

Medicare sucks because of underlying healthcare costs, which are the biggest drag on our economy right now. Overall compensation over the last few years is up, but take-home income is down - because employers' insurance costs have gone up so much.

But the real budget issue, short-term, is Congress. (http://www.washingtonpost.com/blogs/ezra-klein/post/we-have-a-congress-problem-not-a-deficit-problem-in-one-graph/2011/05/19/AGVOXgtH_blog.html)

[rasilio.livejournal.com]

"Social Security isn't too badly off, because it has its own account; it only hurts our deficits if we decide we should use general revenues to make up any shortfalls."

Um, no it doesn't, there is nothing in that account but a bunch of IOU's that have to be paid out of the general budget, so as Social Security spending starts to draw down it's account government spending will have to go up.

[nevermind6794.livejournal.com]

That is not a problem with Social Security, which has its own dedicated revenue stream; it is a problem with Congress and general revenues.

Social Security is prohibited from spending any money beyond what it has in its trust fund. This means that it cannot lawfully contribute to the federal budget deficit, since every penny that it pays out must have come from taxes raised through the program or the interest garnered from the bonds held by the trust fund. (http://www.cepr.net/index.php/blogs/cepr-blog/factcheck-gets-it-wrong-on-social-security-and-the-deficit)

[jlc20thmaine.livejournal.com]

But what about the liberal claim, repeated constantly, that the Bush tax cuts of 2001 and 2003 caused today's deficits? CBO has shown this to be demonstrably false. On May 12, the budget arm of Congress examined the changes in its baseline projections from 2001 through 2011. In 2001, it had predicted a surplus in 2011 of $889 billion. Instead, it expects a deficit of $1.4 trillion.

What explains that $2.29 trillion budget reversal? Well, the direct revenue loss from the combination of the 2001 and 2003 Bush tax cuts contributed roughly $216 billion, or only about 9.5% of the $2.29 trillion. And keep in mind that even this low figure is based on a static revenue model that assumes almost no gains from faster economic growth.

After the Bush investment tax cuts of 2003, tax revenues were $786 billion higher in 2007 ($2.568 trillion) than they were in 2003 ($1.782 trillion), the biggest four-year increase in U.S. history. So as flawed as it is, the current tax code with a top personal income tax rate of 35% is clearly capable of generating big revenue gains.

http://online.wsj.com/article/SB10001424052702304319804576389593090634256.html?mod=rss_opinion_main

[rasilio.livejournal.com]

While your comment is entirely correct (and when you look at the actual year over year tax revenues there is no evidence that the Bush Tax Cuts caused ANY reduction in government revenue) but it is largely not relevant to what I am talking about.

Ultimately the numbers being thrown around with the Bush tax cuts don't even amount to pocket change. $300 Billion a year for the whole kit and caboodle, $70 billion a year when we just consider the portion which went to "The Rich" and even that just assumes the money was thrown away when in reality it was just shifted from one sector of the economy to another. So we can argue all day about which sector will use the funds most efficiently and the Keynsian multiplier for each but in the end you are arguing over the difference of a few tens of billion a year in economic output when you are looking at a total debt load of somewhere in the $160 trillion range.

Re3ally the Bush tax cuts are nothing more than a political talking point that both parties can use to win over their bases but they are largely irrelevant to the economy as a whole.

[major-dallas.livejournal.com]

Everyone and every Business taxed at 25% on their gross income, End Free Trade and begin Levying Tariffs on all imported Goods, Federal Government Spending Cap at 75% of all revenue with the other 25% dedicated to paying down the debt. No more tax breaks on anything, until we have regained our Fiscal Solvency because at this point, we're on borrowed time and its almost up...

Also reducing Military size overseas will be necessary though many troops coming home can and should be redeployed to the Southern Border with Mexico since its becoming absolute chaos in some areas and a significant military presence at the Southern Border may help stem the tide of drugs coming in and Guns going out...

[mrbogey.livejournal.com]

'Everyone and every Business taxed at 25% on their gross income, End Free Trade and begin Levying Tariffs...'

That didn't work in the Great Depression. It actually deepened it.

[rasilio.livejournal.com]

And this will help paying off the $~50 trillion in private sector debt how?

Further do you realize that this would be a HUGE tax increase on the bottom half of households and a small tax cut for the top ~30% (the middle 20% are already right around this level)

[gunslnger.livejournal.com]

Re-education camps...

[root-fu.livejournal.com]

[gunslnger.livejournal.com]

You need to get with the times. Facebook and Like is out, Google+ and +1 is in.

[root-fu.livejournal.com]

Getting people...

[sophia-sadek.livejournal.com]

... to spend beyond their means is part of the program. It keeps them slaving away to finance fat cats at the top of the credit pyramid.

[geezer-also.livejournal.com]

Prly not the boomer's kids (generation x?) seem to figure if they don't get bailed out by mom and dad they can always declare bankruptcy. Ok large generalization, but still....

[a-new-machine.livejournal.com]

And the tariffs would have to be ridiculously massive to have the desired effect (keeping foreign goods off our shores).

[a-new-machine.livejournal.com]

This would probably destroy the economy for a generation or two. Poor households would suddenly be out 25% of their income, rich households would be getting +10%, consumers would be paying vastly more for just about any product, and we'd be injecting a huge number of unemployed into the job market when government went through the necessary labor force cuts to hit your target numbers. Then, of course, revenues would collapse, making it harder to pay down our debt, not to mention the loss of confidence this would create in investors, which would drive up the cost of our borrowing (which would still be necessary) and further devalue the dollar, again increasing the cost of consumer goods and necessities...

...yeah.

[geezer-also.livejournal.com]

Except for the flat tax of 25% most of the other stuff sounds doable to me..
Unfortunately economics is not my strong point :D

[peamasii.livejournal.com]

Bad timing and central strategy overall. Tax cuts in a period of boom? wrong strategy. Increase taxation in a recession? also wrong. Bailing out trillions after a boom cycle ended so that the fall can be softer? Wrong again.

The only thing to counter contraction is take on more debt, shift central investment towards the private sector and maintain inflation at reasonable levels. If and when the output goes in a positive cycle, only then some of the debt load can be reduced by increasing taxation. Not now IMHO.

[root-fu.livejournal.com]

Real 'change' begins not in government but with public opinion. Politics mirrors its citizenry and is a mere reflection of everyday life. The concept of it being 'cool' to spend your way into oblivion must be dispensed with by Americans if the demographics catering windsocks in office are to adopt it.

Its pointless and hypocritical for Americans with average household credit card debts of $7k - $10k to criticize their government for being reckeless and irresponsible with their finances.

Clearly, the impetus necessary to convince Americans to abandon whatever sense of entitlement allows them to justify spending themselves into financial black holes, doesn't exist. Being powerless and completely helpless to understand the necessity of fiscal responsibility or education on a personal level disqualifies the so-called moral majority from attempting to put forth inititiatives to help politicians do what they themselves are incapable of.

[rasilio.livejournal.com]

But it was largely the government who convinced the people that it was cool to spend your way to oblivion.


First, Fed policy made saving a suckers bet. Lets say that over any given 5 year period that inflation averages 3% annually, the Fed prime rate is about 6% meaning you can get high grade investments at 4% and taxes on small quantities of capital gains run 15%. You invest $10,000 at the start of the period at said 4% rate.

At the end of 5 years you have ~$12,166 in your account and you have to pay 15% on the $2166 profit leaving you $11,841, however to have the same value as the original $10,000 you need $11,592 leaving you with less than $250 in net profit after investing $10,000 for 5 years. It gets even worse if you increase the initial investment enough that you have to pay a higher tax rate on the "profit" because then you end up with an actual negative rate of return.

Second the artificially low interest rates spurred greater spending on by making credit so cheap. A new car financed with a 2.9% loan looks a lot more attractive than one financed with a 6% loan leading to more car sales than there otherwise should have been and fewer people driving cars into the ground with higher costs of ownership over time because they get fewer years without finance charges. Even those credit card debts are largely driven by having excessively low interest rates.



Next we get to the secondary effects of having a comprehensive "safety net". For the boomers and to a lesser extent the war generation there was little need to save for big ticket items like retirement or college, because there was a social safety net there to ensure they could afford it, at least that was what they believed at the time. So they never saved, and they never taught their kids to save. Now they're approaching retirement and largely broke and expecting subsequent generations to continue to pick up the tab for their expenses. The fact is that people are more reckless when there is a safety net than when there isn't one, this is not an argument against having a safety net, but it is an argument against having one so all encompassing that people are lulled into thinking they can rely on it exclusively.

[root-fu.livejournal.com]

[malakh-abaddon.livejournal.com]

I am not a fan of throwing everything at a problem, but this is one time we will have to grab the kitchen sink and toss it. We need to make wholesale changes and let the feces hit the circular rotating device, and it up, after everything has hit the ground.

We need to raise taxes, remove the cap from social security, pull out of unfair trade agreements, reimpose tariffs, allow to big to fail to fail, end all foreign aid for the near future, pull out of all countries except the US and her territories, and then we can start the rebuilding process. If we want to become the leaders in technology we need to focus our students on school, and offer cheaper college for those who excel in specific areas. We need to bring companies back into this nation, either by choice (taxes) or by force (tariffs). Or we just need another World War, fought in Europe, China, and Japan so that their infrastructure is crap, and they need us again.

[gunslnger.livejournal.com]

Or we just need another World War, fought in Europe, China, and Japan so that their infrastructure is crap, and they need us again.

This can be arranged...

[malakh-abaddon.livejournal.com]

That last bit was some sarcasm. But it was one of the reasons the US became as prominent as it did. No other country could manufacture as we did, their plants were in ruins.

[gunslnger.livejournal.com]

I know, I was just playing along. :)

[whoasksfinds.livejournal.com]

anybody who is dependent on the government for anything is either crazy or screwed. ill be watching the shit storm from the hills.

[foolsguinea.livejournal.com]

So, you're arguing for increased taxes and wages, right? That's what it sounds like.

[nevermind6794.livejournal.com]

You're confusing correlation with causation. The problem is not debt per se, it is (partly) deleveraging. The economy today is entirely different from the economy in the 1930s, and even the 1980s. What kind of debt accounts for the increase? What benefits did we get from it? Why is everyone deleveraging at the same time? Why aren't people with cash spending it? He answers none of those questions, just points at an easy-to-remember number and hopes people assume he has a point.

[rasilio.livejournal.com]

Um, yes debt is the problem. You do not seem to grasp what debt is. Every single debt that anyone owes is an asset to someone else, when debts get unsustainably high that means that the people who own that debt are carrying assets that are not worth what they believe they are because they can never be paid off.

"What kind of debt accounts for the increase?"

Doesn't matter, for these purposes all debts are the same because they are all assets owned by someone else which will have to be written down, in some cases to 0.

"What benefits did we get from it?"

Doesn't matter, all of those debts either have to be paid off or wealth is destroyed, no matter how you cut it society will be poorer going forward. If the debts are paid down then it means decades of reduced economic activity, if they are defaulted on it means the destruction of wealth on a massive scale as asset values are written down to reflect the fact that the debt underlying the assets value is shown to be worthless. Either way it means a long period of reduced economic activity.

"Why is everyone deleveraging at the same time?"

Because of several reasons, primarily we reached a tipping point with the housing crash where individuals and organizations were made to realize in a very real way that as a society we had become horribly overextended and no one is in any way certain what assets will turn out to be worth holding and which have only illusory value.

"Why aren't people with cash spending it?"

See above. First off, consumer spending is not down all that much if at all...

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=65&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2000&LastYear=2010&3Place=N&Update=Update&JavaBox=no#Mid

Before the crash Consumer spending peaked at a seasonally adjusted annual rate of 10.2 trillion in the 3rd quarter of 2008, it fell to a low of 9.9 trillion for the next 4 quarters and as of the 4th quarter of 2010 was back up to 10.5 trillion and is 10.6 trillion for Q1 2011 (the latest numbers which exist). So at the worst period it fell by a mere 3% for 1 year then slowly climbed back up and is now sitting at roughly 3% above where it was when the crash started.


"He answers none of those questions, just points at an easy-to-remember number and hopes people assume he has a point."

That is because none of those questions is relevant, they only appear to be so if you ignore the fact that all debts are assets to someone else, once you realize that you realize that deleveraging is a necessity and he has a very important point.

[nevermind6794.livejournal.com]

Every single debt that anyone owes is an asset to someone else, when debts get unsustainably high that means that the people who own that debt are carrying assets that are not worth what they believe they are because they can never be paid off.

That is true in some cases, but the crux of the question is what is "unsustainably high." Throwing a big number out there with no context does not prove your case.

Doesn't matter, for these purposes all debts are the same because they are all assets owned by someone else which will have to be written down, in some cases to 0.

Of course it matters, since the debt was presumably used or invested for something. There's a vast difference between household debt and business debt, mortgages and credit cards, borrowing from the Fed and borrowing from the Mafia.

If the debts are paid down then it means decades of reduced economic activity, if they are defaulted on it means the destruction of wealth on a massive scale as asset values are written down to reflect the fact that the debt underlying the assets value is shown to be worthless.

Or they will be paid off, since you have no idea what the nature of the debt is and it might actually be fine.

Because of several reasons, primarily we reached a tipping point with the housing crash where individuals and organizations were made to realize in a very real way that as a society we had become horribly overextended and no one is in any way certain what assets will turn out to be worth holding and which have only illusory value.

That seems to be a totally separate post. I think it's because of low demand and no good place to put money except toward debt. In any case, no evidence was put forward.

First off, consumer spending...

Most of that rise is explained by healthcare costs skyrocketing. But I wasn't clear; I meant to include businesses in that, and commented lazily.

That is because none of those questions is relevant, they only appear to be so if you ignore the fact that all debts are assets to someone else, once you realize that you realize that deleveraging is a necessity and he has a very important point.

You're inventing a causative link that the author never provided, and on top of that your argument is entirely unsupported, and circular: debt is too high because deleveraging is necessary because debt is too high.

[anfalicious.livejournal.com]

I like the analogy of comparing the US economy to an incurable, fatal disease :P Sure, antiretrovirals may let you live for a while longer, but no more fucking other people OK, cos that's a crime now.