Civil War, Part II

[kandrathe]

Carter impresses me. Go figure.

I like the post presidential, pre-adle patted Carter best.

Obama hasn't put too many feet wrong yet... ...a careful centrist with a Reaganesque gift for inspiration.

I'd disagree. I oppose the Central government approach of "taking over" private industry, and imposing, and strong arming the owners of industries to the governments solutions. And, if by "Reaganesque gift for inspiration", you mean "hasn't left campaign mode", then I agree.

Not necessarily saying you are, but he is the big public prophet of the fiscal disaster you're warning about.

Probably because we are both literate in Ludwig Von Mises, and the Austrian school of economics. As we saw in 2000, a bubble cannot be deflated by diverting the over inflated value of a thing elsewhere. But, rather than deflating the bubble by allowing those who invested, or acted poorly to accept their risk and suffer their loss, instead the US government again has stepped in to intervene. Now, it is the tax payers, and their children, and their children's children who will suffer the loss. Fundamentally, nothing has changed within the economic structures that allowed things to get cock-eyed in the first place. So far, all that has happened is some amount of damage control at the expense of an economic system we call "Capitalism", but the fire is still burning out of control and the cause for the ignition has not been addressed.

But, don't believe me. Check out what other market analysts and economists are saying, like "Jason Hamlin, Ten Economic Predictions for 2009".<blockquote>"Many Americans will be facing severe financial hardship for the first time in their lives. The silver lining is that these conditions are necessary to shake our apathy, demand better from our government, our community and ourselves. It is tough medicine, but is a necessary prescription that will force the change that is needed in this country and the world. We have to hit rock bottom, feel hardship, liquidate excesses and rampant corruption from the system, restructure our government, economy and entire social system. It is not going to be a pleasant undertaking but I am optimistic that we will emerge with a much better world and way of life.</blockquote>

[Jester]

I'd disagree. I oppose the Central government approach of "taking over" private industry, and imposing, and strong arming the owners of industries to the governments solutions.

They have not "taken over" anything, in the sense of outright nationalization. They've been bailing out companies; the companies are free to accept or decline the money. Some have declined, and have not been "strong armed" into anything. Others have accepted, and once you're taking billions in taxpayer money, you no longer get unfettered rights to fritter it away however you wish. Can't have your independence and sell it to the government at the same time.

Frankly, he should have nationalized the troubled banks right at the start of this mess, ripped the bandage off, and gotten on with things. But alas. The government is allergic to nationalization, so it will only come too late, if at all.

And, if by "Reaganesque gift for inspiration", you mean "hasn't left campaign mode", then I agree.

Plenty of politicians never leave campaign mode. Few actually succeed in building or maintaining the kind of popularity Obama has. This is a matter of talent, not strategy.

Probably because we are both literate in Ludwig Von Mises, and the Austrian school of economics. As we saw in 2000, a bubble cannot be deflated by diverting the over inflated value of a thing elsewhere. But, rather than deflating the bubble by allowing those who invested, or acted poorly to accept their risk and suffer their loss, instead the US government again has stepped in to intervene. Now, it is the tax payers, and their children, and their children's children who will suffer the loss. Fundamentally, nothing has changed within the economic structures that allowed things to get cock-eyed in the first place. So far, all that has happened is some amount of damage control at the expense of an economic system we call "Capitalism", but the fire is still burning out of control and the cause for the ignition has not been addressed.

The problem is that the economy is not a series of discrete investors, each in their own little boxes, reaping rewards and suffering consequences all by their lonesomes. Once substantial parts of the economy start to collapse, other parts, which were previously secure, start to fail as well. Then, people lose their jobs, and stop spending money, and can't get credit. The velocity of money drops, and the whole economy goes into depression. With nominal interest rates bottomed out, the only effective way left for the government to mitigate the problem is through spending. The idea that this risk can be borne by those who made bad investments is simply unrealistic. The modern economy simply does not work that way, and making it work that way would require a total retooling of the whole system, which is hardly feasible in the present crisis.

Now, maybe you're willing to bite the bullet, and run the US economy into a major depression while the market slowly sorts itself out. Certainly that would be the Austrian medicine.

-Jester

Edit, for the link: "Don't take my word for it, this guy over here is predicting the future! With Mayans thrown in for good measure!"

I don't think hyperinflation is very likely, and neither does, say, Paul Krugman, or Brad DeLong. The increase in gold prices and civil unrest are all based on the same fear. The Fed is simply not interested in generating massive inflation. Moderate-to-high at most, but nothing that will cause a gigantic flight to gold or, gods forbid, rioting and a police state. Could be wrong. Don't think I am. Income tax levels are so low they make Ronald Reagan look like Lenin; that's a lot of potential revenue, no inflation needed. I predict modest inflation, some tax raises, an increased debt load, and a new look at medical care. The economy will do badly, but not end-of-the-world badly.

[Occhidiangela]

For Sale: Pan Global Military Industrial Complex, many orbiting satellites of various uses, large expanses of unsettled land, 200 million workers with medium to high skills, and the Ark of the Covenant. Asking 12 trillion or BO.

K, that "Ark of the Covenant" is in fact a case of Miller High Life beer.

Occhi

[Occhidiangela]

Tom Paine was consistent enough. You're just reading him through the filter of your own beliefs about what constitutes vassalage.

To him, that meant being ruled by a Monarch, in whose government you had no voice. To you, it apparently means taxes.

(Edit: Perhaps you misunderstood. I don't mean Tom Paine believed in these things early in his life. Quite the contrary, what I linked you was published when he was sixty. I mean he believed in these things before belief in them was widespread.)

-Jester

Thomas Paine was quite the writer and propagandist.

Now, for the fun part of his career: how much time did he spend trying to put into practice his words and ideals?

As any number of folks, Jefferson not the least of them, find out it is in the implementation of these grand ideas and thougths that the truth gets revealed. And a little thing called friction.

Occhi

[Occhidiangela]

Hi,
Indeed. Reminds me of the old Soviet joke; "As long as they keep pretending to pay us, we'll keep pretending to work."

--Pete

Are you sure you aren't confusing the USSR with the UAW? :lol:

Occhi

[kandrathe]

I don't think hyperinflation is very likely, and neither does, say, Paul Krugman, or Brad DeLong. The increase in gold prices and civil unrest are all based on the same fear. The Fed is simply not interested in generating massive inflation. Moderate-to-high at most, but nothing that will cause a gigantic flight to gold or, gods forbid, rioting and a police state. Could be wrong. Don't think I am. Income tax levels are so low they make Ronald Reagan look like Lenin; that's a lot of potential revenue, no inflation needed. I predict modest inflation, some tax raises, an increased debt load, and a new look at medical care. The economy will do badly, but not end-of-the-world badly.

What you need to look at is how the US government will cover the 4 trillion they spent this year, and the additional 50 to 60 trillion they will spend over the next 10 years. How many bonds can the US government sell? How much money can the Treasury print? If it doesn't come from taxes, if has to come from either selling bonds, or printing money, right?

[Jester]

What you need to look at is how the US government will cover the 4 trillion they spent this year, and the additional 50 to 60 trillion they will spend over the next 10 years. How many bonds can the US government sell? How much money can the Treasury print? If it doesn't come from taxes, if has to come from either selling bonds, or printing money, right?

Wikipedia has federal spending at 3 trillion this year (Assuming you mean the last full fiscal year, 2008). Where does the extra trillion come from? Or is that projected 2009? Or last 12 months?

Taxes would be the obvious first port of call, if the government were to face serious future shortfalls. Unless the Fed is staffed with gibbering baboons or California voters, I can't see them picking hyperinflation over a moderate tax increase.

Plus, for whatever reason, people still trust US bonds, and seem happy to buy them. That's not something that can continue indefinitely, but so long as the US government still has taxation powers over an enormous, relatively lightly taxed economy, I think we can count on that remaining true, at least in the medium term of a decade or so.

I wouldn't say there aren't tough times and hard choices ahead. There are, especially the short-run issue of fixing the banking system and restoring employment, and the long-run issue of how to reverse deficits while dealing with an aging population. (Hint: cheaper health care system.) But my bet is that the US economy isn't going to implode from hyperinflation unless the government makes some exceedingly strange decisions. The Austrian argument seems to be that they'll "just have to" print money, but I think taxes and increased will be enough, at least for now.

At the broadest level, this is the situation in historical context:



You're not even pulling in as much, relative to GDP, as you did during Reagan's years. There's slack in the system yet, and until that slack is used up, firing up the printing press to pay debts simply doesn't make sense. Moderate inflation? Yes, eventually. Hyperinflation? No.

-Jester

[--Pete]

Hi,

Are you sure you aren't confusing the USSR with the UAW? :lol:

Yeah, no confusion. There was no 'pretend' in the pay that the UAW got. Part of the reason 'The Big Three' is becoming 'The Little One'.

Hope you had a good Memorial day,

--Pete

[kandrathe]

Wikipedia has federal spending at 3 trillion this year (Assuming you mean the last full fiscal year, 2008). Where does the extra trillion come from? Or is that projected 2009? Or last 12 months?

No, I mean 2009. It is a 3 trillion dollar budget, with about a trillion of unbudgeted emergency expenditures for bailouts, supplemental war spending, etc. (Table S-1 shows 3,998 Billion, so I hope you will forgive me rounding to 4 trillion) So for 2009 the US government will spend 4 trillion dollars, up from the 2.9 trillion in 2008. The budget documents I've seen show expenses for FY ending 2010 to 2019 being about 42 trillion, and about 35 trillion of that being covered. This is also known in accounting as "smoke and mirrors", since the GDP is in steep decline and there is no telling how far into decline we will go, nor how quickly we can turn that asymptote around and then how fast it will climb back up. But, I can be very certain about how much SSI, Medicare will cost, and then again, with the poverty programs I'm again pretty uncertain as to how many people will be driven onto the welfare and social service programs due to the nose dive in our economy. So, when the government says they are going to spend about 40 trillion over the next 10 years, I will assume they really meant about 60 or 75 trillion, and when they predict they can garner 35 million in revenue, I will assume they will get slightly less than that for the next 4 to five years. So, when they project a 7 to 8 trillion dollar deficit by 2019, I will assume they really mean 20 to 30 trillion. GDP will contract about 3.2 to 4 percent this year, and foreclosures will continue at the current rate at least for the next 8 to 10 months. Commodity prices and labor prices are falling which is actually causing deflation at this time. In my industry, many firms have cut their billing rates by 25 to 40 percent -- also large firms are demanding rate cuts. Unemployment may not hit its peak until mid 2011, and will hit 12 percent by December 2009, with some areas of the nation (Detroit) seeing 20% or higher. Raises will be pretty much non-existent, and I wouldn't be surprised to hear sometime in the next 10 months that firms are asking people to cut salaries.

Check out http://www.shadowstats.com/ as well. John Williams is a very respected economist, who dispenses with the voodoo statistics used by Congress to make things seem better than they really are.

Here is his analysis of the 2008 US budget -- http://www.shadowstats.com/article/gaap-ba...federal-deficit <blockquote>"An actual U.S. deficit of $5.1 trillion is uncontainable, and it is about to get a great deal worse. The shortfall cannot be covered by taxes, and the needed spending cuts tied to Social Security and Medicare cannot be worked politically. The rapidly deteriorating economic conditions promise reduced tax revenues, while the incoming Obama Administration has promised significantly increased spending. "</blockquote>

My other concern is that as recession spreads throughout the world, more and more the Federal Reserve will become the "last resort" buyer of US Treasury Bonds. Check out http://www.forbes.com/2009/03/18/federal-r...ington-fed.html

<blockquote>Printing new money for this purpose is known as monetizing the debt--"A strategy that appears in the encyclopedia under the heading, 'how to trigger inflation,'" says a note from Guy LeBas, a fixed-income strategist at Janney Montgomery Scott, "In any other environment, this monetization would be deeply troubling. The Fed clearly believes this is not a standard environment. "In light of increasing economic slack here and abroad, the committee expects that inflation will remain subdued," says the Fed statement."</blockquote>I would say that until the that GDP growth returns, inflation is not going to be a worry. Without income or growth in incomes, you cannot have growth in consumption. Without growth in consumption, you cannot have growth in the demand for commodities, or labor. Deflation is likely over the next two years, so monetizing the debt will only reduce the value of the dollar against foreign currencies. If I were a foreign investor in US Treasury bills, then I would be pretty concerned. Not only will you have a 4% annualized ROI for your 10 year bond, but also that profit will be in devalued dollars.

[kandrathe]

K, that "Ark of the Covenant" is in fact a case of Miller High Life beer.

Bottled thunder, and wrath of God stuff. :) "Close your eyes Marion!"

[Jester]

I've seen show expenses for FY ending 2010 to 2019 being about 42 trillion, and about 35 trillion of that being covered. This is also known in accounting as "smoke and mirrors", since the GDP is in steep decline and there is no telling how far into decline we will go, nor how quickly we can turn that asymptote around and then how fast it will climb back up.

You're right, there is no telling...

So, when the government says they are going to spend about 40 trillion over the next 10 years, I will assume they really meant about 60 or 75 trillion, and when they predict they can garner 35 million in revenue, I will assume they will get slightly less than that for the next 4 to five years. So, when they project a 7 to 8 trillion dollar deficit by 2019, I will assume they really mean 20 to 30 trillion.

... but you feel secure assuming that estimates of long-run deficits will be off by a multiple of two or three? I'm not sure I understand your reasoning behind multiplying predicted government expenditures by over 150%. They might spend more than they say they will, but that would be a huge jump.

GDP will contract about 3.2 to 4 percent this year, and foreclosures will continue at the current rate at least for the next 8 to 10 months. Commodity prices and labor prices are falling which is actually causing deflation at this time.

No argument there. The housing market is still fubar. Aside from fixing the banking system, Deflation is the urgent issue, which is why I'm with Krugman in wondering why people are getting worked up about hyperinflation when you currently have the opposite problem. The Fed can rein things in if inflation gets high, but they can't do anything if nominal interest rates are flatlined, yet prices are falling. Nobody should be hoping for another great depression, but that's what long-run deflation would mean.

I agree wholeheartedly with you that things are not rosy. Hard times are here, for quite some time to come. Where I disagree with you is in whether it will necessarily force the US government into massive inflation. The taxation powers of the US government are far from exhausted, and while nobody likes tax increases, a moderate tax hike combined with moderate inflation would be a much better solution to covering shortfalls than keeping taxes low, and printing tons of money. There is a political argument about whether a tax hike is popular enough to pass, but Obama will (in all likelihood) have a filibuster-proof Senate, so the government will have its options open.

-Jester

As for the link, I'm afraid my expertise and patience both run out long before the point where I'd be able to parse the importance of the differences between his measurements and the official ones. I'm not sure John Williams is exactly mainstream. He might be right, but he certainly has an idiosyncratic take on things.

[kandrathe]

... but you feel secure assuming that estimates of long-run deficits will be off by a multiple of two or three? I'm not sure I understand your reasoning behind multiplying predicted government expenditures by over 150%. They might spend more than they say they will, but that would be a huge jump.

I was assuming that demands for government services would rise in proportion to the unemployment rate and the foreclosure rates. Remember that in order for the government to hand out a dollar, they need to spend something like $1.50. Also, SSI is deducted from payrolls. With dropping payrolls, the government loses not only tax income, but also the receipts shoring up Social Security (which are used on the budget anyway). So Social Security and Medicare will become insolvent faster here as well.

Aside from fixing the banking system, Deflation is the urgent issue, which is why I'm with Krugman in wondering why people are getting worked up about hyperinflation when you currently have the opposite problem. The Fed can rein things in if inflation gets high, but they can't do anything if nominal interest rates are flatlined, yet prices are falling. Nobody should be hoping for another great depression, but that's what long-run deflation would mean.

I agree wholeheartedly with you that things are not rosy. Hard times are here, for quite some time to come. Where I disagree with you is in whether it will necessarily force the US government into massive inflation.

The risk of hyperinflation would occur after the Treasury has monetized a significant amount of debt, and then if we get a recovery. Once demand for commodities and labor rebounds, dollars being worth less, would cause prices to climb in relation to the new value of the dollar.

The taxation powers of the US government are far from exhausted, and while nobody likes tax increases, a moderate tax hike combined with moderate inflation would be a much better solution to covering shortfalls than keeping taxes low, and printing tons of money. There is a political argument about whether a tax hike is popular enough to pass, but Obama will (in all likelihood) have a filibuster-proof Senate, so the government will have its options open.

Well, in my way of thinking (Austrian), you would just be sucking air from a deflating bag. The more you suck, the more the bag deflates. Less income, less growth, begetting even less income. You can prop up the government temporarily by sapping the wealth of the nation, but if you rob the people of the means by which they can recover, the recovery will not happen. Eventually, the props will fail, and we suffer economic collapse (depression). Consider also the churn is some States, where government is the largest employer. Dwindling economy results in lower tax receipts, which results in government trimming jobs, which results in lower tax receipts and more demand on services.

[Jester]

I was assuming that demands for government services would rise in proportion to the unemployment rate and the foreclosure rates.

If you're expecting the unemployment rate and the forclosure rate to increase from here until 2019, then you've got be beat hands down on pessimism.

Remember that in order for the government to hand out a dollar, they need to spend something like $1.50. Also, SSI is deducted from payrolls. With dropping payrolls, the government loses not only tax income, but also the receipts shoring up Social Security (which are used on the budget anyway). So Social Security and Medicare will become insolvent faster here as well.

Maybe. I don't think unemployment is going to be so awful for so long that government revenues are going to drop through the floor. At most, that's going to be a relatively small loss. The big differences in your model come from underestimating spending, and from the inability to raise more revenue. I don't think either of those things is fixed. If push comes to shove, entitlements will be scaled back, probably as part of some kind of nationalized health care system, and taxes will be raised to compensate. Revenue goes up, deficit goes down.

The risk of hyperinflation would occur after the Treasury has monetized a significant amount of debt, and then if we get a recovery. Once demand for commodities and labor rebounds, dollars being worth less, would cause prices to climb in relation to the new value of the dollar.

Perhaps. But then the Fed can step in and curb inflation with monetary policy. Very little about this process would be pleasant, but it would certainly be better than hyperinflation.

Well, in my way of thinking (Austrian), you would just be sucking air from a deflating bag. The more you suck, the more the bag deflates. Less income, less growth, begetting even less income.

This analysis only makes strong sense if you think you're already on the wrong side of the laffer curve, or at least very close to it. Growth slows down with tax increases, but not even close to enough to negate the revenue increase. You don't get a free lunch, but slower growth is an acceptable price to pay for keeping the government solvent.

You can prop up the government temporarily by sapping the wealth of the nation, but if you rob the people of the means by which they can recover, the recovery will not happen. Eventually, the props will fail, and we suffer economic collapse (depression).

"Temporarily" and "eventually" are rather large terms when it comes to government finances. If the government is going to become insolvent next year, you need to print money, pronto. If the government will become insolvent in twenty years, if you assume revenue-to-GDP stays constant, but expenditures grow at fixed rates compounding interest, then that's a problem, but it's a rather different type of problem. Specifically, it's a type of problem that doesn't imply a Mad Max scenario where you buy gold, fuel and ammo and hide in your concrete bunker, as some Austrians are suggesting.

Consider also the churn is some States, where government is the largest employer. Dwindling economy results in lower tax receipts, which results in government trimming jobs, which results in lower tax receipts and more demand on services.

It is precisely to counter these kinds of effects that the stimulus package was introduced. By spending today, you minimize the crisis, and position the country to better face the long-term problems. Without spending today, deflation and depression become self-sustaining, and Keynes' ghost will haunt the halls of Washington forevermore.

-Jester

[Occhidiangela]

Hi,
Yeah, no confusion. There was no 'pretend' in the pay that the UAW got. Part of the reason 'The Big Three' is becoming 'The Little One'.

Hope you had a good Memorial day,

--Pete

We did, thanks. Hope yours was as good as ours.

[kandrathe]

Well, neither of us is named Timothy Geithner, so we will be in the position of watching it unfold. But, if you run out of fuel, or overrun with crazed hungry mobs, you are welcome to come hole up in my thunder dome complex, with my fuel, gold, and stored food.

[Jester]

Well, neither of us is named Timothy Geithner, so we will be in the position of watching it unfold. But, if you run out of fuel, or overrun with crazed hungry mobs, you are welcome to come hole up in my thunder dome complex, with my fuel, gold, and stored food.

Okay, but the moment I hear Tina Turner, I'm turning the guns on you. B)

-Jester