The world is drowning in debt, warns Goldman Sachs

[Ad Orientem]

The world is sinking under too much debt and an ageing global population means countries' debt piles are in danger of growing out of control, the European chief executive of Goldman Sachs Asset Management has warned.

Andrew Wilson, head of Europe, Middle East and Africa (EMEA), said growing debt piles around the world posed one of the biggest threats to the global economy.

"There is too much debt and this represents a risk to economies. Consequently, there is a clear need to generate growth to work that debt off but, as demographics change, new ways of thinking at a policy level are required to do this," he said.

Read the rest here...
http://www.telegraph.co.uk/finance/econ ... Sachs.html

[Stewardship]

Maybe this will silence some of the people who go around saying there is nothing wrong with public debt.

[Mountaineer]

The world is sinking under too much debt and an ageing global population means countries' debt piles are in danger of growing out of control, the European chief executive of Goldman Sachs Asset Management has warned.

Andrew Wilson, head of Europe, Middle East and Africa (EMEA), said growing debt piles around the world posed one of the biggest threats to the global economy.

"There is too much debt and this represents a risk to economies. Consequently, there is a clear need to generate growth to work that debt off but, as demographics change, new ways of thinking at a policy level are required to do this," he said.

Read the rest here...
http://www.telegraph.co.uk/finance/econ ... Sachs.html

This will sound harsh, but is this an unintended consequence of modern medical technology, the discovery of antibiotics, and perhaps even effective birth control methods?

... Mountaineer

[ochotona]

This will sound harsh, but is this an unintended consequence of modern medical technology, the discovery of antibiotics, and perhaps even effective birth control methods?
... Mountaineer

I don't think so, because at some point the population has to stop growing anyway. We can argue over that number and that date, but the point is the earth is of a fixed size, and has a limited amount of everything, so population has to stop by artificial means (birth control) or by natural means (disease, pestilence, war, famine).

[Xan]

The demographics in most major economies – including the US, in Europe and Japan - are a major issue – and present us with the question of how we are going to pay down the huge debt burden. With life expectancy increasing rapidly, we no longer have the young, working populations required to sustain a debt-driven economic model in the same way as we've managed to do in the past.

The problem they're really describing is one of productivity: how do we deal with the needs of an increasing population of non-workers.  The money side of it is not really relevant at all, so the debt connection is a canard, as is the urgency (or even need) to "pay it off".  Growth in order to keep feeding everyone, okay.  Paying off sovereign debts denominated in a county's own fiat currency?  Not so important.

[Libertarian666]

Maybe this will silence some of the people who go around saying there is nothing wrong with public debt.

Hardly. They are obviously immune to logic.

[moda0306]

Maybe this will silence some of the people who go around saying there is nothing wrong with public debt.

Hardly. They are obviously immune to logic.

Not just cold logic, but the vastly mounting evidence that high deficits destroy economies and currencies...

Oh wait...


Look.. there might be a long-term problem with debt... I'm sure there are some unintended consequences that nobody's thought of or some have but those problems aren't getting enough attention by the media or non-fiscal hawks on this board like me... but the fiscal hawks are so obviously mis-guided in their analysis, most of the time.  I have yet to see one successfuly counter the extremely well-researched points of the MR heads working.

More people in need of care, and fewer folks to produce said care, obviously has its problems, but it should be obvious to folks who seem to value the productive nature and machinations of the REAL economy vs the paper BS that money represents that the real problem, if there is going to be one, is a production problem... not a "can we make the spreadsheets work" problem.  And if inflation is what will ensue, or if care for the elderly will suffer under the weight of such constraints, then that is something we'll have to suffer through.  But it's not going to be aided by austerity policies but for those policies ability to increase future production.  And the arguers of that eventuality if we "just let it all burn down and let the chips fall where they may" have a lot of convincing to do that this is somehow going to put us on a track of being able to better-provide that production.

Further, those same hawks would first help us and themselves by explaining why they've been wrong about almost everything during the majority of the last decade (with a few exceptions in different wings of the hawkery), or at least explain why they haven't really been wrong but it just looks like they have.  But they don't do that... they just provide this chart, mention Weimar, ignore a ton of sound math & logic and empirical evidence, and ask for our vote of confidence...

[img width=500]http://justinandrewjohnson.com/sites/de ... 11_6_0.jpg[/img]

[Libertarian666]

Maybe this will silence some of the people who go around saying there is nothing wrong with public debt.

Hardly. They are obviously immune to logic.

Not just cold logic, but the vastly mounting evidence that high deficits destroy economies and currencies...

Oh wait...


Look.. there might be a long-term problem with debt... I'm sure there are some unintended consequences that nobody's thought of or some have but those problems aren't getting enough attention by the media or non-fiscal hawks on this board like me... but the fiscal hawks are so obviously mis-guided in their analysis, most of the time.  I have yet to see one successfuly counter the extremely well-researched points of the MR heads working.

More people in need of care, and fewer folks to produce said care, obviously has its problems, but it should be obvious to folks who seem to value the productive nature and machinations of the REAL economy vs the paper BS that money represents that the real problem, if there is going to be one, is a production problem... not a "can we make the spreadsheets work" problem.  And if inflation is what will ensue, or if care for the elderly will suffer under the weight of such constraints, then that is something we'll have to suffer through.  But it's not going to be aided by austerity policies but for those policies ability to increase future production.  And the arguers of that eventuality if we "just let it all burn down and let the chips fall where they may" have a lot of convincing to do that this is somehow going to put us on a track of being able to better-provide that production.

Further, those same hawks would first help us and themselves by explaining why they've been wrong about almost everything during the majority of the last decade (with a few exceptions in different wings of the hawkery), or at least explain why they haven't really been wrong but it just looks like they have.  But they don't do that... they just provide this chart, mention Weimar, ignore a ton of sound math & logic and empirical evidence, and ask for our vote of confidence...

[img width=500]http://justinandrewjohnson.com/sites/de ... 11_6_0.jpg[/img]

I think it is painfully obvious that printing money harms the "little guy", who can no longer save money that will have any reasonably known value in the future.

But I know there are many apologists for money printing, including here on this forum where you would think people would know better. Or am I misunderstanding why the PP has a big slice of gold in it?

[Pointedstick]

I think it is painfully obvious that printing money harms the "little guy", who can no longer save money that will have any reasonably known value in the future.

As long as that "little guy" saved it in a bank account or in CDs or short-term government bonds, he was probably fine, because those are assets that have historically kept pace with inflation in the USA, for the most part. The only little guys who get hurt in the face of inflation are those with large reserves of physical cash, who are probably mostly drug dealers nowadays.

Obviously this is not true today, as the aforementioned assets are now yielding -1 to -2% real. But the ZIRP world is a pretty recent phenomenon and inflation is lower than it's been in a long time.

But I know there are many apologists for money printing, including here on this forum where you would think people would know better. Or am I misunderstanding why the PP has a big slice of gold in it?

Money printing can indeed cause high inflation when the conditions are right. That's why the PP prescribes 25% gold. But the conditions have to be right, and they aren't always so. That's why it's 25% gold, not 100%. We've had rampant money printing for the last decade and a half with historically very low inflation, including a brush with outright deflation. HB understood that this kind of thing only sometimes causes very high inflation.

[moda0306]

Hardly. They are obviously immune to logic.

Not just cold logic, but the vastly mounting evidence that high deficits destroy economies and currencies...

Oh wait...


Look.. there might be a long-term problem with debt... I'm sure there are some unintended consequences that nobody's thought of or some have but those problems aren't getting enough attention by the media or non-fiscal hawks on this board like me... but the fiscal hawks are so obviously mis-guided in their analysis, most of the time.  I have yet to see one successfuly counter the extremely well-researched points of the MR heads working.

More people in need of care, and fewer folks to produce said care, obviously has its problems, but it should be obvious to folks who seem to value the productive nature and machinations of the REAL economy vs the paper BS that money represents that the real problem, if there is going to be one, is a production problem... not a "can we make the spreadsheets work" problem.  And if inflation is what will ensue, or if care for the elderly will suffer under the weight of such constraints, then that is something we'll have to suffer through.  But it's not going to be aided by austerity policies but for those policies ability to increase future production.  And the arguers of that eventuality if we "just let it all burn down and let the chips fall where they may" have a lot of convincing to do that this is somehow going to put us on a track of being able to better-provide that production.

Further, those same hawks would first help us and themselves by explaining why they've been wrong about almost everything during the majority of the last decade (with a few exceptions in different wings of the hawkery), or at least explain why they haven't really been wrong but it just looks like they have.  But they don't do that... they just provide this chart, mention Weimar, ignore a ton of sound math & logic and empirical evidence, and ask for our vote of confidence...

[img width=500]http://justinandrewjohnson.com/sites/de ... 11_6_0.jpg[/img]

I think it is painfully obvious that printing money harms the "little guy", who can no longer save money that will have any reasonably known value in the future.

But I know there are many apologists for money printing, including here on this forum where you would think people would know better. Or am I misunderstanding why the PP has a big slice of gold in it?

tech,

I can't disagree that there are aspects of fed operations that enrich the banksters and frauds while hurting the "little guy."  I'd argue that a lot of this arrangement existed well-before money printing, but for now we can ignore that debate and stick to things a bit more factual, if you don't mind entertaining my questions.

1) With the exception of an eventual possible hyperinflation, the balance the fed is going to seek with my money is actually quite clearly laid out.  A 2% inflation target, plus the idea that price stability around this target is to be balanced around full employment, lays out a relatively clear context in which we should view our money.  And yes the fed perhaps behaves shadily, but they also adhere to these considerations pretty well... including our current scenario, which one could argue they were TOO adherent to price-stability considerations (considering the massive unemployment that existed with low inflation since 2008).

Personally, I pretty much feel like I know what to expect from the fed from an interest-rate standpoint. They've been quite consistent on their dual mandate, and I am far more confident with what the value of my dollar is going to do going forward than I would have been back when we had far less (or non-existent) fed involvement.

2) People may receive dollars for income, but as soon as it hits their balance-sheet, they have a right to trade it for any asset they wish to hold instead.  There is not some natural right to get a risk-free 3% real rate of return on an uber-liquid asset like money.  Anyone who doesn't like the terms being offered by the fed has the right to hold an asset that will retain real value in a better way.

3) We all hold gold not because we THINK there's going to be a massive monetary crisis, but to manage the risk of negative real interest-rates on our cash & bonds, including the off-chance of hyperinflation.  I could just as easily point out that the PP holds 50% of its money in U.S. treasury bonds, all under the premise that 1) we can experience deflation and dis-inflation (lower-than-expected inflation), and 2) the fed's relationship with the treasury is such that these assets do not contain default risk (a remarkable, IMO, observation by HB... which it took me and other folks here a LONG time of reading MR descriptions of our monetary system a long-ass time to confirm (as both Keynesian and Austrian literature on the topic was practically devoid of operational details).

4) A lot of "Austrian" logic is fundamentally flawed, as it's one based upon the premise that by logical necessity government can NOT bring about utilitarian well-being for society as a whole because people in free markets seek their own individual best interests, and that results in society as a whole being at its most happy via free markets.  This is the fallacy of composition (as I've mentioned)... as what is true of the individual is not necessarily true of the system.

[MachineGhost]

But I know there are many apologists for money printing, including here on this forum where you would think people would know better. Or am I misunderstanding why the PP has a big slice of gold in it?

Yes.  The gold is for when people lose confidence in their government and its trappings, not inflation.  It only works so long as there is an escape valve (to another government).  If a global extraterrestrial invasion were occur tomorrow in the style of Independence Day, gold would be rendered useless overnight.

And BTW, there's only inflation if the government spends the money it creates in an unproductive manner (this should be logically obvious).  AFAIK, transfer payments make up the vast majority of what the government creates money for, not direct purchases of products and services.  So by that logic and your ideology, shouldn't inflation rates be double digit or hyperinflationary?  Or maybe its that people in the government actually do real productive work in the real economy and transfer payment recipients reward those actors that are being productive in the real economy?

Money monetizes productivity.  It's when it doesn't or can't that it becomes a problem.  But we've all got to live with basic sustenance needs, so only outright destruction of a nation's productive capacity will result in hyperinflation.  That is what happened in Communist Weimar.

[screwtape]

So what is the motive of Goldman Sachs in issuing this warning?

Is there any evidence that they issue such warnings for anything  but their own benefit?

I'm betting evidence to the contrary can be found.

[Stewardship]

4) A lot of "Austrian" logic is fundamentally flawed, as it's one based upon the premise that by logical necessity government can NOT bring about utilitarian well-being for society as a whole because people in free markets seek their own individual best interests, and that results in society as a whole being at its most happy via free markets.  This is the fallacy of composition (as I've mentioned)... as what is true of the individual is not necessarily true of the system.

Please give an example of an Austrian economist arguing this.  I can't find any.

[Stewardship]

Any production problem is an incentive problem and a government-created problem.  Its an obvious logical inconsistency to hold that incurring debt is beneficial while incurred debt is immaterial.  Either debt has value or it doesn't; you can't have it both ways.

The "fiscal hawks" were right about the housing bubble, so their track record is still pretty good compared to most.  Most were in denial that we were even in a recession and kept insisting that we would bounce right back... until we didn't.  This just goes to show that truth is not dependent on our believing or being convinced.

[moda0306]

4) A lot of "Austrian" logic is fundamentally flawed, as it's one based upon the premise that by logical necessity government can NOT bring about utilitarian well-being for society as a whole because people in free markets seek their own individual best interests, and that results in society as a whole being at its most happy via free markets.  This is the fallacy of composition (as I've mentioned)... as what is true of the individual is not necessarily true of the system.

Please give an example of an Austrian economist arguing this.  I can't find any.

I'd be glad to hunt down actual quotes and analysis. But I'm surprised you don't agree with this. It's the underlying premise of the utilitarian benefits of market economics.

For one, I've read more than one piece by Harry Browne where he makes that point. I believe Hayek went on about "price is all we have" to determine people's preferences, so it must give us the highest utilitarian results. I'll do some more hunting... But I'm curious, if pure free markets give us the best utilitarian benefits, if that market pricing argument taken to the macro isn't valid, what leads you to believe that free markets result in the best outcomes for society as a whole (or do you not accept that premise?)?

[moda0306]

Any production problem is an incentive problem and a government-created problem.  Its an obvious logical inconsistency to hold that incurring debt is beneficial while incurred debt is immaterial.  Either debt has value or it doesn't; you can't have it both ways.

The "fiscal hawks" were right about the housing bubble, so their track record is still pretty good compared to most.  Most were in denial that we were even in a recession and kept insisting that we would bounce right back... until we didn't.  This just goes to show that truth is not dependent on our believing or being convinced.

A few things:

1) Not many fiscal hawks called the housing bubble.  Specifically, I can think of Peter Schiff but I know there are others.  The majority of inflationist/fiscal-hawks thought real-estate was a great way to protect yourself from rising rates and inflation.  At least in my observations.  And Schiff completely bobbled every other asset class than housing before and since the crisis, so I consider that some smarts with some luck... not sound economic analysis.

2) Any production problem is not necessarily an incentive problem (if aliens bombed half the factories in the U.S., this is a REAL problem, not an "incentive" problem... if we run out of oil, this is a REAL problem, not an incentive problem)... but I think I see what you mean, and I agree that most production problems are incentive problems.  But the idea that they're caused necessarily by government not only not true, but it appears government can actually solve the problem in a way the private sector cannot... at least in the case of the most recent recession.

Businesses weren't firing people and holding off adding on to their factories because of regulation and taxes... they were doing so because they had inadequate aggregate demand! 

That-being-said, I'll fully admit that perhaps without government we would operate on barter and short-term contracts much more frequently than we do, and therefore have a lot more flexibility in our economic lives to reduce expenses when aggregate demand is hit, thereby avoiding a liquidating event, but this is a world you may want to advertise more abundantly to the business owners that Austrians so reliably seem interested in serving.  They advertise their world as "a quick yet harsh negative downturn followed by huge growth due to the government being absent."  That is either a lie or a hugely inconsistent analysis of purely free-market economics.  Economic metropolis' like Manhattan and Hong Kong don't just happen out of capitalist purity.  They happen out of a balance between state planning and private activity.  If we're all to go back to the purity of a barter system and no big cities, fine, but Austrians might want to advertise that future more honestly.  Our rich use of debt has definitely caused some problems, but it's caused huge advances in technology as well... the very kinds capitalists point to as wonders of the free-market.  You don't get there without lots of risk-taking and debt and infrastructure and efficient capital markets. 


I challenged Kshartle on this point, but we live in a world with what seems to be ZERO anarcho-capitalist societies, in the midst of TONS of political units, islands, etc.  One could logically conclude that this is due to one of a few things:

1) They don't work to maximize production and happiness, or

2) They would work to maximize production and happiness, but for all the other governments and nefarious economic interests around the world that would take advantage of the weak nature of such an overwhelmingly decentralized authority system... which brings us back to #1.

If they were so robust to outside influence, and so obviously the key to all that is desired, would we not see more of them?  To the degree you might want to answer, "but governments move in one way or the other," I would say, "if that is an inevitability, is it advisable to build what could be called 'your own' government so at least it has citizens to answer-to in some sense than a foreign economic/citizen base?"

If the answer to that question is no, then anarcho-capitalism is bankrupt from a utilitarian mindset... utterly useless as a workable theory.

If the answer to that question is yes, then government has value, and isn't necessarily the cause of "bad incentives," neither short NOR long-term.  In fact, if the federal government were to abolish itself tomorrow, and I knew it, I wouldn't start a new business today, or buy shares of some company, or give my money to Warren Buffet to invest in our new-found anarcho-capitalist economy... I'd put all my money in gold and survivalist "stuffs."

EDIT:


Here's a quote summing up the analysis of the price mechanism derived from individual players in the market:

The problem referred to is that of how to distribute resources rationally in an economy. The free market solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows, on the basis of individual consensual decisions, corrections that prevent shortages and surpluses; Mises and Hayek argued that this is the only possible solution, and without the information provided by market prices socialism lacks a method to rationally allocate resources.

Ludwig von Mises argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned or controlled the means of production, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[1] This led him to declare "...that rational economic activity is impossible in a socialist commonwealth."[1] Mises developed his critique of socialism more completely in his 1922 book Socialism, an Economic and Sociological Analysis.

So if individuals come up with the prices for goods and services with their own best interests at heart, this will lead to the highest gross "economic utility" for society as a whole.

This is the fallacy of composition at work.  If a bunch of bees were to each pursue their own individual best interest, vs the interests of the hive as a whole, Mises would say, is the best economic utility based on preferences and the "pricing mechanism" on their individual efforts and benefits.  It's easy to see why this isn't true.  Does this mean we have to all behave as hive-minded insects?  Of course not, but it does invalidate the Austrian argument, as what is true of the whole system, is not necessarily true of its individual parts, and vice versa.

This doesn't even begin to discuss that Austrian economic analysis assumes as a given the natural link between a human and their preferred capitalist-norm measure of private property, which hasn't been proven to have a fundamental link.  So the price mechanism might not even be efficient due to falsities built into the property-allocation aspect of that argument.  I'm not saying communist property norms are correct (though there are different versions around that).  I'm simply saying that  Austrians haven't proven what they assume as axioms within their arguments.

[MachineGhost]

FWIW, there is 3x to 4x more private sector debt than public sector debt.

If you include the unfunded liabilities, then its more like 5.7x more federal debt than private debt (not excluding federal debt held by the public as savings which is only around $675 billion).

[moda0306]

The term "unfunded liabilities" gets thrown around a lot, but I've actually had a bit of trouble deciphering, accounting-wise, exactly what it means.

Which isn't good for an accountant...

As I understand, it's a measure of future obligations, less our current funding to pay for it.  I see huge problems with honing this measure:

1) To what degree are future obligations being discounted to a present-value? An how many years into the future do you go?

2) To what degree are program tax-inflows being worked into the number?

3) Are these really liabilities, or just what the government is offering as a benefit as of X date?

Anytime I read about "unfunded liabilities," the source seems to want to white-wash over how its reaching its numbers.



But in the spirit of measuring "unfunded liabilities," what if we assumed that our military was something that we simply WILL NOT reduce below the rate of inflation.  One could reasonably take ALL future defense spending based on that number, and call that an "unfunded liability."  But wait, some tax money will "fund" it, so perhaps we should take our average deficit over the last 20 years and apply that ratio over total government spending to our military number, and do a present-value on that??

To me, the term needs a ton of clarification.  If someone has a source that accurately describes the term in the context of the U.S. government rather than some pension, I'd love to hear it.

[MachineGhost]

The term "unfunded liabilities" gets thrown around a lot, but I've actually had a bit of trouble deciphering, accounting-wise, exactly what it means.

Dude, its the off balance sheet liabilities of SS/Medicare/Medicaid, etc..  The reason its off balance sheet is because the liability got swapped with Treasury securities which are stored in West Virginia.  I don't know if they have the balls to count that as an asset also, but it's definitely a negation.  It's not GAAP.

But yes, fiscal hawks do conveniently exclude all future revenues that would go along with those future liabilities.  If they did include it, then they couldn't do their scarce tactics and re-affirm and touch their false ideology.  Kumbaya!

Besides, its bloody retarted to compare a cash flow item with a balance sheet item which is what Debt to GDP is.  Whatever works to get the message across.

[Stewardship]

4) A lot of "Austrian" logic is fundamentally flawed, as it's one based upon the premise that by logical necessity government can NOT bring about utilitarian well-being for society as a whole because people in free markets seek their own individual best interests, and that results in society as a whole being at its most happy via free markets.  This is the fallacy of composition (as I've mentioned)... as what is true of the individual is not necessarily true of the system.

Please give an example of an Austrian economist arguing this.  I can't find any.

I'd be glad to hunt down actual quotes and analysis. But I'm surprised you don't agree with this. It's the underlying premise of the utilitarian benefits of market economics.

For one, I've read more than one piece by Harry Browne where he makes that point. I believe Hayek went on about "price is all we have" to determine people's preferences, so it must give us the highest utilitarian results. I'll do some more hunting... But I'm curious, if pure free markets give us the best utilitarian benefits, if that market pricing argument taken to the macro isn't valid, what leads you to believe that free markets result in the best outcomes for society as a whole (or do you not accept that premise?)?

I actually don't need actual quotes.  I don't agree that Austrian economists make fallacious arguments, such as the composition fallacy.  That was just me trying to avoid saying "except they don't" only to be countered with a "except they do."

I think its actually possible that you could find examples of HB making that error.  However, that could be explained as the result of him trying to simplify a new concept for the average reader.  He knew there was much more depth to Austrian thinking than that.

[Stewardship]

2) Any production problem is not necessarily an incentive problem (if aliens bombed half the factories in the U.S., this is a REAL problem, not an "incentive" problem... if we run out of oil, this is a REAL problem, not an incentive problem)... but I think I see what you mean, and I agree that most production problems are incentive problems.  But the idea that they're caused necessarily by government not only not true, but it appears government can actually solve the problem in a way the private sector cannot... at least in the case of the most recent recession.

I guess it would depend on how you define "production." If it encompasses production of "care," as expounded in your earlier post, then I expect that production would skyrocket during that alien attack.

I challenged Kshartle on this point, but we live in a world with what seems to be ZERO anarcho-capitalist societies.

Using this standard, you would prematurely discount potentially good theories.

Here's a quote summing up the analysis of the price mechanism derived from individual players in the market:

The problem referred to is that of how to distribute resources rationally in an economy. The free market solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability which in turn allows, on the basis of individual consensual decisions, corrections that prevent shortages and surpluses; Mises and Hayek argued that this is the only possible solution, and without the information provided by market prices socialism lacks a method to rationally allocate resources.

Ludwig von Mises argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned or controlled the means of production, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently.[1] This led him to declare "...that rational economic activity is impossible in a socialist commonwealth."[1] Mises developed his critique of socialism more completely in his 1922 book Socialism, an Economic and Sociological Analysis.

So if individuals come up with the prices for goods and services with their own best interests at heart, this will lead to the highest gross "economic utility" for society as a whole.

This is the fallacy of composition at work.

It isn't.  Fallacy of composition would be "this is true for the part, therefore its true for the whole."  Claiming "this is true for the part, and for the whole" even if demonstrably incorrect, is not composition fallacy.

[moda0306]

The term "unfunded liabilities" gets thrown around a lot, but I've actually had a bit of trouble deciphering, accounting-wise, exactly what it means.

Dude, its the off balance sheet liabilities of SS/Medicare/Medicaid, etc..  The reason its off balance sheet is because the liability got swapped with Treasury securities which are stored in West Virginia.  I don't know if they have the balls to count that as an asset also, but it's definitely a negation.  It's not GAAP.

But yes, fiscal hawks do conveniently exclude all future revenues that would go along with those future liabilities.  If they did include it, then they couldn't do their scarce tactics and re-affirm and touch their false ideology.  Kumbaya!

Besides, its bloody retarted to compare a cash flow item with a balance sheet item which is what Debt to GDP is.  Whatever works to get the message across.

Dude,

I know what they SAY unfunded liabilities are, but I want to know, from an accounting standpoint, what they measure.

And the reason they're "off-balance sheet" isn't a treasury swap... it's because they are funded by specific taxes... FICA, Payroll, Self-Employment and Medicare Tax.  So they are essentially "funded" by the productivity of the working class.

So in that context, if they're not counting future inflows from taxes as a "funding" mechanism, Social Security had HUGE unfunded liabilities at its inception, since there was NO SS trust fund.... it was a "pay-as-you-go" program funded by the middle class.

I'd have to disagree with your "comparing cash-flow items to balance sheet" being useless.  First off, technically, cash-flows and "income" or "production" are very different, but I think I know what you mean (sorry I'm an accountant at heart so someone else's "semantics" is crucial in my mind). For instance, you can create cash-flow by liquidating investments... but that's not "income"... it's just turning an asset into cash.  It's a balance-sheet change, not an income-statement item.

But assuming you meant income, and not cash flow, or something to that affect, it's hugely important in various measures.  To me, P/E ratios (or my preference... to inverse it into an earnings yield), is probably the most important fundamental of the stock market.  That is essentially comparing an income item (earnings) to a balance-sheet item (price).  The way income streams interact with stocks of assets (and liabilities) is perhaps the most important interplay in investing AND household economics to understand the nuances of, IMO.

And if a country's debt/GDP ratio is too high, and they don't control said currency, they could end up in an interest-rate/default-risk spiral.  Now I think our debt/income ratio is WAY overplayed by fiscal hawks, but that doesn't take away from its importance, as long as it's taken in context. 


But this still leaves us where we were at... where the hell are they getting these MASSIVE unfunded liabilities numbers?  How are they discounting them?  What tax-revenues are being used to offset them?  I don't know what is scarier, the fact that an accountant like me that loves macro still doesn't know what they mean when they use those numbers (I'm sure I'm about 15 minutes of research away from an answer, though), that nobody here really knows, or that the media is throwing around the term without having any idea what they're even saying.  For the last 6 years, MR'ists and Keynesians have been lamenting about how we don't have enough demand to grow investment and production (and they're right, at least in the short-term), and Austrians and hawks have been lamenting that we won't have enough productive capacity to meet future demand needs (but they argue this not by examining our productive base, but odd calculations of "debt clocks" and "unfunded liabilities."  What an interesting disagreement.  What's the problem?  Too much need for what we can produce?  Or not enough to drive add'l investment?

What's interesting to me, is that (to me) our current constraint on economic growth is mainly (yet decreasingly as we reach full capacity) lack of aggregate demand driving investment, and potential eventual natural resource constraints.  Considering those two main constraints, the Austrian/conservative idea that we quit exploring subsidized alternative energy, and enact fiscal policies that will significantly reduce the economic growth (IMO, of course) that will be the foundation of our ability to keep the elderly above poverty while we enter that nasty demographic bubble, is kind of an interesting irony.

[Pointedstick]

As far as I can tell, "unfunded liability" is a synonym for "pay-as-you-go" which is government-speak for "pyramid scheme." The pyramid scheme-like characteristics of these systems come into particularly sharp relief as the population ages and fewer workers must support more retirees, at the cost of continuously higher regressive FICA taxes. The only reason why this works is because, unlike private pyramid schemes, the government is able to 1) force people to participate and 2) force non-beneficiary participants to pay even more over time to support the growing number of beneficiaries.

[MachineGhost]

And the reason they're "off-balance sheet" isn't a treasury swap... it's because they are funded by specific taxes... FICA, Payroll, Self-Employment and Medicare Tax.  So they are essentially "funded" by the productivity of the working class.

That doesn't make any sense.  You can't have unmatched unfunded liabilities in double entry accounting.  The tax revenues directed to the trust accounts are swapped into Treasury securities to match the future unfunded liabilities.  Does it make sense to call the government's own asset-debt swap a "savings account" for the public sector???  If they don't count the Treasury securities as assets then they don't get to call the unfunded liabilities as liabilities either.

But assuming you meant income, and not cash flow, or something to that affect, it's hugely important in various measures.  To me, P/E ratios (or my preference... to inverse it into an earnings yield), is probably the most important fundamental of the stock market.  That is essentially comparing an income item (earnings) to a balance-sheet item (price).  The way income streams interact with stocks of assets (and liabilities) is perhaps the most important interplay in investing AND household economics to understand the nuances of, IMO.

Yeah, I meant an income flow.  But P/E has the same logical inconsistency which is why it's not a very reliable valuation metric.  The "Fed Model" of comparing earnings yields to bond yields is complete bullshit.  It doesn't hold up any time in history except as an artifact from 1980 to the late 1990's.  Does that give you an indication of how ignorant those at the top really are (i.e. Yellen)?  Or are they all just pandering whores to Congress and the public?  Inquiring minds want to know!

Anyway, "unfunded liabilities" really just means the liabilities that are not included in the yearly Federal budget.  I don't know the legal reason as to why or how they exclude it (not all countries do this).  But you can certainly read the actuarial reports on the trust funds to get the full picture.

[moda0306]

PS,

Well any government action, put into private terms, is going to look odd, if not downright evil, which we've discussed ad nauseum.  Best to simply be honest about the fundamentals of it all, whether we call it "theft" or "taxation" or "funding."  I just don't like when shady math is used to drive a policy preference derived from some moral preference.

If you want to make a MORAL argument for SS and Medicare being slashed, or what-have-you, do it, but don't go try to put together fuzzy math & economic numbers and analysis to back your point.

... and when I say "you" I mean the deficit-hawk or conservative wing of the media/financial-media that harps on this stuff.

But all-in-all, building on what MG hit on with regards to lamenting against the "welfare state," I don't really think ANY act of government of the past could be justified economically without a growing economic tax-base (aka, economy) to grow around it later-on.  Revolutionary war... Panama canal... interstate freeway system... all these things depend on future tax revenues and general economic growth to enact.  And as our economy matures, it appears that demand for production is becoming more and more of a constraint, which would lead me to believe that providing social safety nets is more and more a value add to the country than it would have been in 1202 Europe.

But regardless of all that, the starting-point of any discussion, IMO, should be accumulation of pertinent facts and figures, not moralizing about theft or pyramid schemes.  We all know that the financial security of the elderly, and kids, is largely funded by the 18-65-year-old crowd working to build stuff, teach, take care of folks, etc, and pay enough taxes to make the "payment system" work to bring those resources into the hands of the young and old.  Call it whatever you want, if the argument is "fiscal disaster," I'm a lot more interested in facts and figures than moralizing arguments.

I realize part of your argument is an economic one, not just moral, with regards to growing needs with shrinking providers (eg, our demographic bubble x growing welfare state (mostly the former)).  This is fair, but this is more about general productive capacity, not some imaginary trust fund number of confetti currency/bonds.  If we're going to have a problem with taking care of folks that need it, it won't be because we don't have enough pieces of confetti with dead presidents on them to go around... it will be because of peak oil... or not enough care-takers... or not enough room for 1-level nursing homes... or something else that eats away at our productive capacity surrounding that topic and in context of the macro-economy.  This is something we cannot likely solve by slashing benefits today, or massively cutting spending today, or even (for all you libs out there) raising taxes today.  Seniors (gasp) might just have to take something of a hit at some point... but we don't really benefit by inducing it early when we have 1% inflation and 6% unemployment.