Slowing Economy Complicates Debt Talks

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Slowing Economy Complicates Debt Talks

Post by doodle » Tue Jun 14, 2011 8:19 am

Again, another article that lends creedence to my gut feeling that buying bonds from our government could be akin to financial suicide.

http://www.cnbc.com/id/43351444

Other than a few hundred years of precedence what other reassurance do we have that our money tied up in govt bonds are safe?

There has to be a better way to play this situation that maybe sacrifices some gain but provides more protection against loss...
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Re: Slowing Economy Complicates Debt Talks

Post by AdamA » Tue Jun 14, 2011 8:37 am

What in that article makes you feel like buying long term US treasuries is suicide?
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Re: Slowing Economy Complicates Debt Talks

Post by doodle » Tue Jun 14, 2011 9:12 am

"Republicans have said that any debt-limit increase must include spending cuts of at least equal size, which would point to a package of at least $2 trillion in order to cover the country's borrowing needs through the November 2012 elections.

Obama and Republican negotiators have said those cuts could be spread out over 10 years, which would minimize their impact in the short term."


So they spend 2 trillion more and finance this over ten years....how is this cutting the debt at all? This is more of the same spend today...pay tommorow. Absolutely nothing has changed. NOTHING.

Short of a fiscal crisis I don't think that leaders will have the political will to tackle this issue.

People on this board keep using the argument that there are no alternatives to Treasuries. That is the only argument that I keep hearing over and over again. Frankly, it is getting a little long in the tooth
Last edited by doodle on Tue Jun 14, 2011 9:15 am, edited 1 time in total.
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Re: Slowing Economy Complicates Debt Talks

Post by SteveGo » Tue Jun 14, 2011 9:21 am

I recall HB said in a couple of his radio shows that if you are unwilling (for idealogical reasons) to buy LTT's, then buy LT Corporates, but monitor them carefully. He believed they would behave similarly in the portfolio, but subject to greater credit risk.

IMO the only way for a individual, who is not bond savvy, to participate in Long Term Corporates is via a low cost fund like VWESX. I am sure PIMCO has something, but at a much higher cost. If you look at PP performance from
2002 forward using VWESX instead of LTT's, you get about the same gain, at higher variance. Corporates took a scary dive in 2008 (but bounced back), while the flight to treasuries dropped yields and boosted prices, making the HB PP look pretty good during that time.

The corporate bond market dwarfs the stock market, and there be some mighty big sharks in there.

But remember an actual default will hurt everything but gold in the PP. Corporate bonds would be hurt too if the debtors market cap drops to zero.

Go visit your gold holdings and tell them how much you love them :)
Last edited by SteveGo on Tue Jun 14, 2011 9:24 am, edited 1 time in total.
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Re: Slowing Economy Complicates Debt Talks

Post by MediumTex » Tue Jun 14, 2011 9:23 am

What if all of this political talk was nothing but a sideshow and the bond market was completely ignoring it?

That seems to be what is happening.

If long term treasury rates were rising, I would understand that the argument about the world having nowhere else to park dollars would be wearing thin, but rates are not rising.

Until rates actually start rising in a significant way, why not just tune out all the market noise?  People have been saying rates have nowhere to go but up for 20 years and they have been wrong for 20 years.  One day they will be right, but who knows when that will be.
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Re: Slowing Economy Complicates Debt Talks

Post by Gumby » Tue Jun 14, 2011 9:30 am

doodle wrote: So they spend 2 trillion more and finance this over ten years....how is this cutting the debt at all? This is more of the same spend today...pay tommorow. Absolutely nothing has changed. NOTHING.
Doodle, just curious, but do you think the US would be better off if it had no debt? or just less debt? I'm just trying to understand what level of debt would make you comfortable with Treasuries.
Last edited by Gumby on Tue Jun 14, 2011 9:37 am, edited 1 time in total.
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Re: Slowing Economy Complicates Debt Talks

Post by doodle » Tue Jun 14, 2011 9:34 am

I almost feel like buying Treasuries is sending a signal to the govt that I condone their antics.

Not buying treasuries is at least a vote that has some impact no matter how miniscule. I have a feeling when the tide turns it will be fast.

By buying treasury bonds I feel like I am giving crack to an addict when what he really needs is a cold shower and detox.

Regarding Gumbys question...

I wouldn't have so much of a problem if the govt were racking up debt in a productive way like working on hydrogen fuel cells to achieve energy independence or funding research and development initiatives to improve our competitive edge. Our debt however is primarily being used to fuel a wasteful profligate lifestyle that Americans now view as their god given birthright. In other words we want everything but we just dont want to pay for it, so we will just send our children and grandchildren the tab.
Last edited by doodle on Tue Jun 14, 2011 10:00 am, edited 1 time in total.
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Re: Slowing Economy Complicates Debt Talks

Post by Gumby » Tue Jun 14, 2011 10:05 am

I completely understand. However, maybe you should consider the paradox of a fiscally responsible Congress.

It goes something like this:

The only reason why deficits exist is because there is confidence that Congress will be fiscally responsible to minimize and cut its spending. But, in reality, the confidence it was forces the deficit in the first place.

As people become more confident, they want to accumulate more dollars, which forces the government to make more dollars, which only adds to the deficit (i.e. the government has to spend more money than it collects in taxes). This is inflationary, and avoiding the desire to accumulate dollars would cause deflation.

However, if people became convinced that Congress were fiscally irresponsible, it would force a budget surplus since that would accommodate the desire to de-accumulate dollars. This would be deflationary as the money supply is shrinking. Attempting to fight the desire to de-accumulate dollars would cause inflation.

So the paradox is, chronic deficits are caused by fiscal responsibility. Chronic surpluses are caused by fiscal irresponsibility.

If you like surpluses, then, you should be in favor of fiscal irresponsibility because that is the path that leads to surpluses!  ;D

As distasteful as the debt situation is, it sometimes helps to remember that the political theater you're worrying about is nothing more than a charade to make it look like Congress is trying to be fiscally responsible. If Congress can pretend to act fiscally responsible, that charade allows the government to borrow even more money and go deeper into debt.

As long as the government pretends to seem fiscally responsible, the outlandish deficits can (and will) continue.
Last edited by Gumby on Tue Jun 14, 2011 10:24 am, edited 1 time in total.
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Re: Slowing Economy Complicates Debt Talks

Post by doodle » Tue Jun 14, 2011 10:23 am

Why do you have to print more money to satisfy demand for more dollars? Can't you just let the value of the dollar appreciate?

The more I think about what money really means and how complicated and politicized a fiat system has become, the more I think that it is maybe in the worlds best interest to go back to a gold standard.

Many argue that this would be deflationary but what is the difference between buying a treasury bond at 5% interest or just holding onto cash and getting 5% interest from the natural appreciation of your money?
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Re: Slowing Economy Complicates Debt Talks

Post by MediumTex » Tue Jun 14, 2011 10:33 am

doodle wrote: Why do you have to print more money to satisfy demand for more dollars? Can't you just let the value of the dollar appreciate?

The more I think about what money really means and how complicated and politicized a fiat system has become, the more I think that it is maybe in the worlds best interest to go back to a gold standard.

Many argue that this would be deflationary but what is the difference between buying a treasury bond at 5% interest or just holding onto cash and getting 5% interest from the natural appreciation of your money?
The economic growth that modern capitalism has provided is by its nature deflationary in a fixed or near fixed quantity monetary system such as under a gold standard, since economic growth will most always outpace world gold production. 

I think that modern economists also believe that without some small but positive inflation figure (and future inflationary expectation), the economy would not function well because there would be too much incentive to delay purchases.

I think that there is also the obvious political issue of politicans and central bankers hating gold because it represents a significant reduction in their power to tinker with the economy.

As far as what the right answer is (I'm not sure that a gold standard would solve all of the problems we think it would), I have no idea.  What we are left with is simply having to accept the world as it is and make our way through it as best we can.  Given that we have no mechanism for reliably predicting what will happen next, I think that something like the PP is about the best we can do without assuming a lot of extra risk.
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Re: Slowing Economy Complicates Debt Talks

Post by doodle » Tue Jun 14, 2011 10:38 am

I don't know if I buy this argument about delaying purchases. People continue to buy computers, televisions, etc. even though they know that next year they will probably be cheaper and better.

People have to continue to buy food, clothes, cars, etc. no matter what.
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Re: Slowing Economy Complicates Debt Talks

Post by Gumby » Tue Jun 14, 2011 10:39 am

doodle wrote: Why do you have to print more money to satisfy demand for more dollars? Can't you just let the value of the dollar appreciate?
Well, you could let the dollar appreciate it. But, it would set off a deflation and an economic slump. The trade deficit would be even worse, and the Fed would have to react by printing money.
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 10:39 am

doodle,

The problem with deflation (or perceived problem in terms of economic prosperity and unemployment) is that on a macro-level, when simply holding cash becomes a decent form of investment, it is very self-fulfilling and extremely damaging to economic activity.

Notice I'm not saying it's fair or right to print money and devalue currency, but simply that devaluing currency slightly (1-3% every year) will encourage people to spend, loan to businesses, or even buy stock in businesses.  This all is conducive to job-creation, at least in the short-term.

When money under your matress starts to look like a good investment, it can pull even more money out of productive uses and into matresses, thereby reinforcing that phenominon.... thus the "deflationary spiral."

The problem I have with allowing a currency to appreciate is that it usually hurts the soverign country's population... think about it... assume all US government spending is within the U.S., but then when consumers get it, the do a number of things with it: Save, invest in a machine, buy a car, or loan money to another business, etc.  Some of that money (in our case, a lot of it) ends up going overseas.  When foreign countries receive our dollars, they have to invest them somehow.  

Now imagine our world, where much of the debt held by the private-sector (due to net spending out of our internal U.S. economy) has been used to purchase trillions of U.S. government debt by China, etc.  If we let our currency depreciate, we are, in some ways, giving a big middle finger to our population, and handing China a vastly appreciating asset with no principal risk.  How that, in the end, will be good for the U.S. is beyond me.  I tend to follow the modern-monetarist thinking (in some ways) that the math just doesn't add up... if you're country is populated by balance-sheet restrained players, and have a sovereign currency, you can hurt foreign debt-holders and reward your population by devaluing the currency and getting money into their hands through defecit spending, thereby improving their balance sheets, which all simultaneously improves our balance of trade.  This is a narrative I'm not 100% convinced of, but I can't help but respect the logic of it.

Understand I'm far from decided on this issue... these are just some of my thoughts.
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Re: Slowing Economy Complicates Debt Talks

Post by MediumTex » Tue Jun 14, 2011 10:43 am

doodle wrote: I don't know if I buy this argument about delaying purchases. People continue to buy computers, televisions, etc. even though they know that next year they will probably be cheaper and better.

People have to continue to buy food, clothes, cars, etc. no matter what.
...and making purchase decisions essentially neutral (i.e., inflation expectations simply don't enter into the equation) might also make for a more efficient allocation of capital across the whole economy as people perhaps began to make more rational purchasing decisions.

I remember reading last year (I think) in Venezuela people scrambling to spend all their cash as soon as they could because of a pending devaluation.  People were lined up to buy flat screen TVs because they wanted to find something, anything, to buy that might hold its value.  That's a pretty dumb thing to be encouraging if you ask me.
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 10:54 am

I think of letting a currency appreciate not so much in terms of consumer consumption (which is driven so much by emotion that even if a currency appreciating does have an affect, as MT points out, it's often a very irrational one).

I think of it in terms of my own investment... thinking of a slight deflation doesn't really have the cognitive impacts as a strong one, so let's think of a 5% appreciation of the dollar every year.  Especially in a society of debt-ridden players (sound familiar?) where anything short of inflation is going to make paying down debt of all kinds extremely appealing, you're going to see a massive movement of investment and savings from corporate debt, stocks, commodities, and even treasuries right into cash.  At 5% real return on simply holding a currency changes the world we live in drastically.

Not only that, the self-fulfilling nature of deflation is a bit scary.  If everyone knew, tomorrow that they could get 5% real-return on pure cash, then you'd see a massive deleveraging and reinvestment, thereby making the dollar appreciate even more.

This is great for near-retired heavy net-savers, but awful for businesses, employees and young people, and debt-ridden players.  Even though their gas might be cheap, they're paying 5% on a student loan (real 10% interest) and can't find a job.  I find it coincidental that many of the Tea Party protestors appear to be close to retirement age, not to be opposed to medicare and social security, but hate the fact that the dollar's being devalued.  If you think about it, once one can finance their lifestyle and don't have to rely on employment, they have a significantly different set of interests than those that are trying to work to pay even a modest mortgage, even if they are good savers along the way and responsible about debt-avoidance.
Last edited by moda0306 on Tue Jun 14, 2011 11:12 am, edited 1 time in total.
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 11:23 am

One more way to think of it is to envision two worlds: One is where the dollar appreciates, a man can sit in a cabin in the middle of nowhere, hold some coin under his bed, and go to town after 5-years and have significantly increased his purchasing power.

The other world is where the dollar depreciates... people are having to constantly chase some kind of yield... maybe they buy a home to fix the cost of some of their budget, maybe they loan it to an otherwise less-than-perfectly creditworthy business, maybe they buy equipment to bring in a cash flow that could help supplument any loss of value...

It's obvious a world where a currency depreciates is one that encourages more economic activity, more interdependence, and more leveraging.  It forces people who've already made their fortune to re-enter the economic community through investment if they want to maintain their purchasing power.  They can't just crawl into a hole and ignore the outside world... they have to chase yield or somehow.

Some people (mainly, economists) view a world with more economic activity as intrinsicly better than one with less.  Also, since economic activity provides jobs to constituants, and an interconnected world fits the narrative of those who believe in government activism, political rhetoric and decisions are often made with that world in mind.
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Re: Slowing Economy Complicates Debt Talks

Post by doodle » Tue Jun 14, 2011 11:38 am

One more way to think of it is to envision two worlds: One is where the dollar appreciates, a man can sit in a cabin in the middle of nowhere, hold some coin under his bed, and go to town after 5-years and have significantly increased his purchasing power.
What is the difference if he just goes and buys treasury bonds and leaves them under his bed?

Maybe 5% is an extreme appreciation but flat or 1% a year in my mind would not affect economic investment or spending at all. 

In fact, it might create a more stable environment for investment.
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Re: Slowing Economy Complicates Debt Talks

Post by SteveGo » Tue Jun 14, 2011 12:43 pm

Wow,

I thought the OP was asking if there was an alternative to LTT's in the permanent portfolio. If so, this thread sure moved into different territory fast. If not, I apologize for posting off topic.
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 12:52 pm

I definitely think a un-devaluatable (is that a word?) currency has appeal... I more than sympathize with the theory that the market should find its own equilibrium of debt, savings, spending and investment, and not have the government keep trying to put money back on the fractional-reserve treadmill by manipulating currency.

Unfortunately, I tend to see things differently when I look at the international macroeconomics of printing money and running defecits in the situation we're in now.  I would love to run an "experimental world" where we sent out $20,000 checks to every individual out there 18 and up.  If, on average, they use $15k to pay down debt and $5k to buy something (thereby improving other players' balance sheets) I think it could be argued that we just might be in a much better spot with improved balance sheets and some more use of our current unused production capacity that's causing unemployment.

The big question is, does this redistribution of wealth (above and beyond the fairness doing so) create malinvestment that will hamper us in the future.

Somehow I doubt it really would.  The U.S. went into absolutely massive and near instantaneous debt to fight WWII, unemployment dropped like a prom dress, and when it was all over, after all that "malinvestment" of making bombs, bullets and boats, and hiring people to learn how to fight, forge and fill out paper work, the U.S. economy went on to 25 years of prosperity and 35 years of balanced budjets after that point.

Of course, we started out with relatively low debt/gdp before WWII (as opposed to the 90% we're at now), we were the only large economy at that point without a country in shambles (though our net-exports changed very little after WWII, so I have my doubts as to the effect this really had on our economy), and the effects of misallocation of resources within an economy (housing & other credit-driven luxuries) seem to be pretty devastating this go-around.  I'd hardly want any massive stimulus to be kicking the can down the road.

I'm a conflicted pontificator, to be sure.
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Re: Slowing Economy Complicates Debt Talks

Post by Lone Wolf » Tue Jun 14, 2011 3:01 pm

moda0306 wrote: Somehow I doubt it really would.  The U.S. went into absolutely massive and near instantaneous debt to fight WWII, unemployment dropped like a prom dress, and when it was all over, after all that "malinvestment" of making bombs, bullets and boats, and hiring people to learn how to fight, forge and fill out paper work, the U.S. economy went on to 25 years of prosperity and 35 years of balanced budjets after that point.
I don't see it this way.  Let's set aside the issues of justice or necessity and frame war only in economic terms.  How could it possibly be an economic good?  Remember that an economy is simply how we allocate our scarce resources.  Are these resources used to fulfill human needs and desires?  Or are they used to kill people and destroy property?

If war brought prosperity, why shouldn't we engage in periodic Aztec Flower wars with Canada in order to stimulate the economy?  Or pick a city at random, evacuate everyone and carpet bomb it to the stone age.  Then we could "stimulate ourselves" by rebuilding it.

During World War II, the malinvestment was real and manifested in incredible wartime sacrifice.  The ration book was a concretization of that scarcity and sacrifice.  The Andrews Sisters didn't sing about the ration book in "Victory Polka" because they so fondly remembered gas and rubber shortages.  The entry of women into the workforce and the end of the war was what freed the United States up for prosperity.  Perhaps most importantly, the United States was no longer subject to FDR's inexhaustible wealth of terrible ideas on how to centrally plan and generally screw up the economy.

Remember that the Depression dragged on and on and on for years.  If this was successful handling of an economic downturn, I'd hate to see a failure.  Unfortunately, it has framed a narrative where we're supposed to be terrified of ever falling off of the inflation treadmill.  As the Minneapolis Fed found, however, there's really no significant link between deflation and Depression.
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 3:58 pm

LW,

A couple things:

1) I completely agree that war was the destruction of wealth (and life, liberty, prosperity, etc) on a horrible scale... it's not preferred as a form of stimulus, nor is it remotely acceptable as anything but a last-resort, IMO.

I was looking simply at the effect of massive defecit spending... taking on debt in a bad economy to put millions of people back to work.  It really could have been a jobs program and stimulus checks.  I know we can think of much better ideas of what to do with the money than digging ditches, but I'll just fold on the issue of how much we misallocate resources when we create a temporary government job and we can consider any jobs program as the equivalent of one guy digging a ditch and another filling it back in.

2) I would argue that given the slump we were in, that maybe the meager defecit spending (not to mention all the STUPID, and utterly immoral things FDR did IMO that didn't fall into Keynesian spending and jobs programs) wasn't really enough to get us out of the slump at all...

I think we've been through this before, but the debt/GDP ratio didn't even go up that much at the outset of the depression... unemployment bobbed from awful to horrible until boom, when we enacted a massive stimulus spending program (FAR in excess of what had been already attempted, and what before would have been called "a fiscal disaster" by most Austrians at the time) putting millions to work doing less-than fully market-desired tasks (for the sake of argument (and my apparent morality) let's just consider this a decision to defecit spend, by stimulus check and government jobs program having people dig ditches... not go to war... cuz that's not what I'm arguing).

After this "stimulus" the likes of which SHOULD have bankrupted us according to what I'm sure were conservative arguments at the time, we went from double-digit unemployment to negative unemployment in a blink of an eye... This "stimulus" lasted for 4 years, and when it quit, we had balanced budgets, low unemployment, and prosperity for about 25 years (even longer if you consider part of the 70's "prosperity.")

I'm not saying that this all proves that Keynesian spending (a LOT of it, not just a little) works beautifully with no lasting effect from the misallocation of resources used to dig ditches, but to me it would seem to indicate that it does.  If anything, the fact that it was war, and not building schools, roads, trains, and simply mailing checks out to the populace, would indicate to me that we could have had MUCH more quick, pleasant results if it had been those more favorable things, but we'd done the massive defecit spending in 1931 instead of 1941.  I think maybe we just simply lacked the political will until Japan unleashed our national anger and unity and focus.

I guess here's what I see as a possible form of logic to acquire from that period:

1) The U.S can take on debt in excess of 100% of GDP to fund its activities, at least temporarily (this could be very fact-specific).
2) Partial defecit spending and price controls appears to result in or not improve deep job losses and a depressed economy.
3) Deep defecit spending through stimulus and jobs programs can result in very low unemployment very quickly (this didn't take tax-cuts to the wealthy).
4) The arguable misallocation of resources to stimulate the economy and get people back to work won't drag the economy back into recession after the defecit spending ceases, evidenced by 25 years of post-stimulus prosperity in the U.S.

If you look at the level of defecit spending pre-war to WWII, it's easy to see that the stimulus of the WPA and the like was NOTHING in comparison to the spending to fund WWII... the spending to fund WWII (could just have well been more WPA programs or debit cards mailed to everyone) very quickly reduced unemployment to nil, and that misallocation of resources didn't have a lasting negative effect once the stimulus was ceased.  Further, the taxes on the wealthy were extremely high during and after WWII, so I'm not seeing a supply-side asterisk in there.  I just don't see any other way to spin it.  Yes, there was defecit spending (among other much-more unsavory things) during the 1932-1940 period that didn't seem to help the economy (who knows if they simply made things worse)... but you have to admit when you look at the facts as a whole it certainly does make one wonder if we'd just spend like the dickens on debit cards and ditch-diggers (or even better stuff) until unemployment is super low and private-sector balance sheets are better again and then simply stop, we might be much better off.

I also wonder if, with our increased reliance on monetary policy instead of significant fiscal policy to fix our economic problems is expanding private-sector credit in such ways that much-more encourages misallocation of resources... ie, if the federal government gave me money to stimulate the economy, I'd pay off debt, invest, save, or maybe buy a car, but if the federal government lowered interest rates to .9%, I'd actually be less inclined to save, maybe more likely to invest, but that car would really look attractive.  Further, with direct stimulus, the benefit is most likely to be realized by the populace, not mostly soaked up by wall-street before we see some of the benefit.
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Re: Slowing Economy Complicates Debt Talks

Post by Lone Wolf » Tue Jun 14, 2011 4:35 pm

moda0306 wrote: I'm not saying that this all proves that Keynesian spending (a LOT of it, not just a little) works beautifully with no lasting effect from the misallocation of resources used to dig ditches, but to me it would seem to indicate that it does.
This conclusion only follows if you set aside the fact that now you've got no FDR, a much more productive workforce that is swollen with new female workers, and you're the last industrialized man standing in a world that's been torched by global war.

If this is the path to riches, any poor country could drag itself out of its poverty by simply building lots and lots of roads and bridges.  I think we agree that this won't work.  Why, then, should we assume that it will work for us?

We blew a trillion dollars on stimulus in the United States while fighting so many wars that I've lost count.  I've never been so stimulated.  And yet... and yet here we are.  I'm aware that certain New York Times columnists think it Just Wasn't Big Enough but at some point you've got to actually service the debt you take on.  That always means saddling future generations with debt or inflation.  If it's debt that they can easily service, this will work out.  If not, you make yourself poorer down the line.
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 4:42 pm

LW,

To tighten up my previous post...

I think if we'd have dispensed with rations and price-controls and that war money would have been spent on digging ditches at worst.... roads, trains and schools at best... we'd have realized MUCH more prosperity than we did during that 1941-1945 time of much-lowered unemployment. War is a horrible form of stimulus, but you have to admit that as horrible as it is, it still put people to work... the lack of TRUE prosperity during that time was probably more of a function of the stimulus being the worst kind (war, and all the rations that came with it) and not the stimulus itself.

Also, the entry of women into the workforce was a direct result of massive (if completely inappropriate in form) stimulus.  This wasn't some outside event... it was because the government defecit-spent like absolute-mad and put women to work.

They just as easily could have been digging ditches, or better-yet, laying some infrastructure.

I'm not trying to justify all actions taken from 1932 to 1945... simply saying that if we switched the massive defecit spending to WPA & stimulus, dispose with price-controls, war, rationing, social engineering, etc, and move it back to 1930 instead of 1941, we could have had an extremely fast bounce out of the crash of 1929.  We would have had the low unemployment without the war and decade-long government activism.

I'm just trying to not throw the baby (deficit stimulus spending and jobs programs (big enough to get unemployment down)) out with the bathwater (war, price controls, rations, gold confiscation, etc).

I'm not saying that low unemployment IS prosperity, but it's at least one factor of it, and if defecit spending can be ceased as soon as you've lowered unemployment and fixed private-sector balance sheets, and have little-to-no lasting negative effect of the arguable misallocation, then it can at least be argued that Keynesian stimulus, when used in hefty enough doses (and free off FDR's tomfoolery) will result in quick, prosperous (we won't need rations or price controls in peace-time ditch-digging) recovery that can lead to decades of low unemployment, prosperity, solid private-sector balance sheets, and federal balanced budgets... all while having high taxes on the rich (not that I'm arguing for it... I'm simply trying to poke holes in the conservative/libertarian drumbeat).
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 4:52 pm

LW,

I totally agree that my narrative falls a little flat in light of more recent defecit spending... I haven't fully digsted that yet.  I just don't think Keynes has necessarily been proven wrong... I think there's more to our current problems complicating the whole defecit scenario that involves globilization, and $$'s leaving our country and giving us less fuel for internal economic growth but more fuel for defecit spending.

Regarding FDR, yes, it'd be preferred not to have him around.

Regarding women working it took something to get the pump primed at 15% unemployment and little private demand to employ the consumers.... so maybe that's the thing... we're trying to prime (stimulate) a pump that's dry.  But still, if more available consumers (I don't think more available workers can be a solution to unemployment... moreso their ability to consume) are the solution, the developing world should be our oister of demand.

Regarding the rest of the world being torched leading us out of the depression... I don't have the source, but I read that it really couldn't have been that big of a factor to our prosperity, as our balance of trade didn't change much.... aka, we weren't supplying any more to Europe or demanding any less from them.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
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Re: Slowing Economy Complicates Debt Talks

Post by moda0306 » Tue Jun 14, 2011 5:00 pm

LW,

I guess here's how I see defecits:

In a world where the U.S. is a fully functional independent economy... meaning little-to-no trade with other countries... There would have to be a lot of focus on budget-balancing.  

In a world where we have a huge trade defecit... meaning that we consume more than we produce... this implies two things.  1) The private sector is going into net-debt to finance their consumption, and 2) the foreign countries we purchase from are obtaining dollars that they need to do something with (they can't net spend...as we've already established the U.S. is running a trade defecit).  In this world, there is going to not only be more demand for U.S. treasury bonds, but in the face of dwindling private-sector balance sheets, you'll have a need to defecit-spend to replenish those balance sheets.

So my theory is that as your country runs more and more trade defecits, fiscal defecits become both more flexible due to outside funding, and more necessary due to dwindling domestic private sector balance sheets.

That's as close as I can get to properly pontificating about our situation now vs 1950 without getting in over my head.

I know you're probably shaking your head while pulling your hair out, but for what it's worth, you're one of the best political/economic conversationalists I've had the liberty to debate with... truly engaging.
Last edited by moda0306 on Tue Jun 14, 2011 5:08 pm, edited 1 time in total.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

- Thomas Paine
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