June 15, 2006
From the desk of Jane Galt:If wishes were horses then beggars could ride
It is common, and silly, for people worrying about America's current account deficit to make statements like this:
If the US were a developing nation, it would have been IMFed by now.
And if I were Anna Nicole Smith, I would have absolutely ENORMOUS . . . vacation homes. This is not very relevant to my current summer plans.
Developing nations have to pay extra money to borrow because lenders think that there is a better-than-average chance that they will not pay the money back. Developing economies are more prone to sudden shocks than rich world ones; their tax collecting systems are primitive; their governments tend to have a less-than-sterling committment to international fiscal rectitude; and they are often prone to coups by people who start off their new reign by repudiating all former debts. Moreover, their central bankers tend to be political cronies who will inflate the currency whenever it is politically convenient for those in power, which is why such countries are often required to borrow in a more stable currency, to remove the temptation for heads of state to inflate their way out of inconvenient debts.
Investors are pretty confident that the United States is not going to suddenly shed 25% of its GDP because of a boll weevil infestation, or get a president who nationalises all the farmland, expels half the skilled workers in the country and kills the rest, and runs the Treasury's printing presses day and night as a way to temporarily cover up the ensuing problems. They are reasonably sure that our economy will grow at a steady, if unspectacular pace, and that we will be able to meet their debts (as they should be; both our national debt and our fiscal imbalances are relatively modest by international standards, and look especially good if you compare our long term fiscal position--where the primary driver of imbalances is social security and Medicare--to those of Europe and Japan.) Thus, they lend to us in dollars, and they lend to us at very attractive rates.
One of the reasons that the panickers neglect to mention that all these foreigners are lending us dollars is that in their judgement, the United States is the most likely economy in the world to deliver an attractive combination of growth and low risk.
That is not to say that our fiscal imbalances are not a problem: they are. Getting our fiscal house in order, on both the government and the household level, is not going to be pleasant. But it is ludicrous to talk as if we were the next Argentina.
Posted by Jane Galt at June 15, 2006 1:08 PM | TrackBack | Technorati inbound linksJane,
I largely agree with you. Yes, US Savings Bonds are the safest bet of pretty much any government bond in the world, which is why we get away with paying just (what is it?) 2% (or even less) interest on the debt. That rate is almost (but not quite) painless.
The problem I have with all this debt that we have been building up, is that the debt will become very expensive for our children. Right now (with the Baby Boomers working and paying Federal Income taxes) we are still just slightly ahead of the curve. But our population growth has been flat at best (and just slightly negative at worst) and people are living much longer than they ever have at anytime in history (and that is with nasty crap that didn't exist in such abundance even 30 years ago like AIDS, Obesity, and Heart Disease.)
We didn't have enough kids and we live too long (to put it bluntly.) In 30-40 years, pretty much everyone posting on this blog will be retired. And when our "few" kids (and their even "fewer" kids) are paying the taxes to foot the interest payments on the debt that we have taken on today, it is going to sting them a hell of a lot worse than it stings any of us right now. The fact that we as a society choose to live in denial of that, isn't doing anybody any good.
I have children. I don't want to leave them ANY of our debt.
I agree, I don't want any of your debt either. More importantly, I don't want your deferred taxes. That's why we should cut entitlement program benefits for you and your elders stat.
"That's why we should cut entitlement program benefits for you and your elders stat."
Why is it that liberals call them entitlement programs, except when they want to dis-entitle some group?
That's why we should cut entitlement program benefits for you and your elders stat.
I don't have a problem with this. That is because I don't take any entitlements. But I'm just one person. You have an entire generation of really old people who haven't saved a penny for their health and/or welfare who fully expected that government would provide for them in their golden years.
Their golden years are here. They were unprepared financially. To take away their "entitlements" now is a little too late. Basically, the retiries who do not have children who have houses where they could "move in" and be taken care of (children that could give them a room and free presription drugs), those are the ones who would wind up starving and dying.
They vote. They will not vote for any politicians that will allow them to starve and die. They will vote for whomever gives them the most entitlements. So they will vote Democrat. More importantly, they do NOT want to know where that money for their entitlements comes from, they just want the bennies and they want to remain in DENIAL that they are screwing their kids and grandkids financially. For them, their "ignorance" is truly bliss. Afterall, that was the way it was their parents. They had to pay to take care of them. So today's retiries want their turn at the free buffet table.
Probably just my own personal bias, but I don't buy the "we didn't have enough kids" theory. Most people I see in my day to day life, especially at the work, are just wastes of space. I think more babies would just mean lower productivity growth.
More babies isn't going to spur innovation. We don't need more laborers.
While the US hasn't told debtors to take a hike, local govts have. Two incidents involved canals and plank roads, the monorails of the 1880s. I expect pensions to cause some in the future.
Does anyone else see a coming blow-out between the "Boomer" (de-)generation and Gen[X,Y] over these "entitlement" programs that are grossly under-funded?
Does anyone else see a coming blow-out between the "Boomer" (de-)generation and Gen[X,Y] over these "entitlement" programs that are grossly under-funded?
Yes.
That will be the HOT political issue. Younger politicians running on a NO-ENTITLEMENT platform vs Older politicians running on a FULL-ENTITLEMENT platform. I'd say by the end of President Romney's Administration (January 20th, 2017) those two generations will CLASH over entitlements. It will be as volitile then as opinions are on the War vs Terrorism, today.
While the US hasn't told debtors to take a hike, local govts have. Two incidents involved canals and plank roads, the monorails of the 1880s. I expect pensions to cause some in the future.
I expect that younger people will invest all that they can (and will continue to invest) in either debt (for the crappy interest), undeveloped land (because they ain't making any more of it) or precious metals such as gold. It is going to be harder and harder to find these commodities to invest in, and younger people today are much too smart to pay anyone a sales comission on these items. If they can find it, they will buy it directly from the seller.
Yes but...
From April 2005:
"...Stuart Butler, head of domestic policy at the conservative Heritage Foundation, and Isabel Sawhill, director of the left-leaning Brookings Institution's economic studies program, sat down with Comptroller General David M. Walker to bemoan what they jointly called the budget 'nightmare'." Link: http://www.washingtonpost.com/wp-dyn/content/article/2005/05/17/AR2005051701238.html
They were talking about over 40 Trillion bucks -- a figure which was also mentioned in Asymmetrical Info's recent link to a USA Today article on accounting changes for state & local governments. Link: http://www.usatoday.com/news/health/2006-05-18-retiree-health_x.htm
So, for once, I'm not entirely sure "Jane" made the point.
Though the U.S. is not a developing country it is governed by Banana Republicans who think deficits don't matter and who propose budgets that leave out minor items like the cost of the Iraq war. One day the bond market vigilantes will wake up and higher borrowing costs for U.S. debt will be the result.
Though the U.S. is not a developing country it is governed by Banana Republicans who think deficits don't matter and who propose budgets that leave out minor items like the cost of the Iraq war.
Hmmmmm no. I'll dismiss the anti-Republican sentiment for just one moment and state that the Iraq War isn't the main reason why we are running deficits. Before the way started, the United States was at historical lows in military spending, near just 4% of GDP. Our President has been able to fight two wars with minimal US Dead (just two GI coffins per day) and an increase of just 1% GDP spending.
The war vs Islamic Terroism has been very efficient.
One day the bond market vigilantes will wake up and higher borrowing costs for U.S. debt will be the result.
Let me clue you in on something, the US Government (a preferred borrower) sets the rates of return on US Savings Bonds, not the "market." When a preferred borrower borrows money from someone, the borrower agrees to pay back the money (plus interest) but ONLY at an interest rate agreeable to the borrower. If the lender refuses to lend the money at that rate, the borrower simply finds another lender. Remember, our government is the MOST preferred borrower Nation in the world. Uncle Sam can pick and choose from whom he borrows money. And currently, he is borrowing about 80% of his money, from himself (US Citizens.)
With the stock market still much too volitile (and real estate prices peaking and in some remote cases, declining) there aren't that many "safe bets" for people to park their money if they want a decent return. Yeah interest rates on deposits suck right now, but that is if you want no risk. Gold pays NO dividends, (so that is a true craps shoot.) That leaves Bonds. So if you have money, and Uncle Sam has some Bonds for you to buy, Uncle Sam sets the rate of return, and if you don't like it (or if you want to cash out "early") you can, but don't expect Uncle Sam to be too angry about it. There are LOTS of buyers for those Bonds.
Now, now. Even small vacation homes can be very nice..
Dang it! And I'd promised myself that I'd be good. Tsk!
I agree that getting our governmental fiscal house in order must be a high priority. Unfortunately, I don't see many pols in DC who concur. "Pork now, pain later" seems to be the universal motto of our ruling class.
Why not leave the children the debt? We are leaving them the house, the stocks, the bonds, etc. Since the assets will just about cover the liabilities, we aren't really leaving them either one.
Unless you really think that your house is worth that much money, in which case we are leaving them twice the assets as compared to liabilities. The national debt/mortgage is then only half the value of your house, stocks, bonds, etc.
Not that I think that way, but you may be more optimistic about real estate values than I am, or more pessimistic might be a better way to put it since you don't have a house?
We did repudiate our national debt in the seventies, and we more than paid for it with extremely high real interest rates all through the eighties.
Some people had children. My parents had ten. They never remotely paid as much in all local, state, and federal taxes as they cost the Poughkeepsie school district for our education. The people that didn't have children paid taxes to meet my parent's responsibilities. They are the ones that deserve social security and medicare. Perhaps they will get it.
wkwillis,
It may be that you underrate yourself.
You said,
"Some people had children. My parents had ten. They never remotely
paid as much in all local, state, and federal taxes as they cost
the Poughkeepsie school district for our education. The people
that didn't have children paid taxes to meet my parent's responsibilities.
They are the ones that deserve social security and medicare.
Perhaps they will get it."
But the childless people of your parents generation stopped
contributing some time ago while hopefully and your nine siblings
still are. It's you and your siblings that are likely your parents
biggest contribution to society, not the taxes they paid when you
were growing up. It's also likely the case that you've seriously
overestimating the true cost to society of your schooling. (A lot
of the money spent in schools isn't really about educating kids;
it's entitlement payments to the political machines.)
Some will argue that if we take the taxes your parent's generation
paid and credit them with a decent rate of interest then the
current value would exceed the value of the contributions of the
current generation.
There are several problems with this way of thinking. For one
if we actually did this for everyone and actually treated taxes like
investments then the rate of return, aka interest, would be very low.
But there's a more basic problem than that. Money on the large
scale doesn't obey the rules that seem reasonable for individual
investments. Instead we should view a person's accumulated savings
not as some dollar amount but instead as a percentage claim on the
overall economy.
If you see an individual's assets as a percentage ownership of
the economy then it becomes clear that in no sense is it automatic
that these assets will grow. If the overall economy shrinks then
the individual's real assets shrink even if the percentage remains
the same. As people retire the foundation of their wealth isn't
their money, but the people who are currently active. Retirement
savings are just a bookkeeping device to claim a share of current
economic activity.
Likely from a bookkeeping perspective your parent's childless
friends own a larger share of current activity than your parents.
But I suspect the economic value of your parents childrearing has
been seriously underestimated.
Why not leave the children the debt?
Because children aren't old enough to vote. They didn't vote for the entitlments that we are forcing them to pay to keep us alive (because we weren't willing to save.)
You said your parents had 10 children. I'm guessing after raising all those children they have next to nothing saved. But that is okay, since they have 10 kids. Those kids are their savings. Have the parents move in with one of the kids. That is much better than social security (plus you get instant grandparents that can do baby sitting duties.) That was the way it used to be, before we were so willing to sadle our children with needless debt.
We are leaving them the house, the stocks, the bonds, etc. Since the assets will just about cover the liabilities, we aren't really leaving them either one.
But not in your family's case. Your folks have 10 kids. Which one gets the house? If you split ti 10 ways, I hope older houses in Poughkeepsie are worth over $800,000 because I think every man, woman, and child, is born with $80,000 of government debt.
Unless you really think that your house is worth that much money, in which case we are leaving them twice the assets as compared to liabilities. The national debt/mortgage is then only half the value of your house, stocks, bonds, etc.
Not that I think that way, but you may be more optimistic about real estate values than I am, or more pessimistic might be a better way to put it since you don't have a house?
But this is just rhetoric. Save for your retirement. Don't leave your kids debt. Leave them nothing but wealth. We should all want the same thing, "To make sure our children have a higher standard of living than our parents."
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