Fiscal Cliff

@reasoning logic,

You didn't answer my question

1 Reply

@H2O MAN,

Quote:

You didn't answer my question

Did I fail to see one of your question marks or did you forget to use one?

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@JPB,

JPB wrote:

I only heard parts of Obama's press conference but it sounds like he's proposed a small bargain that kicks the can down the road. Did I catch that right?

Yeah, no grand bargain, just a mini-bargain. Actually, the mini-bargain would be a pretty good solution. Tax increases on the wealthy, extension of unemployment benefits, and a delay on the implementation of the sequester in order to give both sides a chance to come up with tax and spending reforms (which will likely never happen).

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@joefromchicago,

And a debt limit fight in February.

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@JPB,

I hope that by the time of the next debt-ceiling standoff, Obama has sent a clear signal that he won't be pushed over next time. Dumping Geithner and hiring a principled liberal would be a good first step. (And while I'm dreaming --- might Christie Romer still be interested?)

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@Thomas,

RTA--

On Sky News last night the presenter suggested we visit their website where a chap (he was shown in a corner of the screen grinning) would explain the Fiscal Cliff for us in sixty seconds.

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@joefromchicago,

joefromchicago wrote:

But the bigger picture is this: the fact that everyone is talking about a deficit deal is a huge concession to the GOP. Realistically, nobody should be concerned about the deficit at all -- not when creditors are effectively paying the US to lend it money. That we have even gotten to the point of talking seriously about deficit reduction in the midst of a very tentative recovery from a worldwide recession is a Republican victory, and the fact that Obama and the Democrats don't seem to realize that certainly does them no credit.

Do you really believe this stuff??? Our annual deficits can change rapidly as the current president has amply demonstrated - he increased them several fold in his first term. However the (fast) accumulating cumulative debt that results from them is a burden that lasts much longer - and that will be paid for at whatever interest rate our lenders may demand in a distant and unknown futurei - something we will surely be unable to control.

I believe that most economists believe we will (soon enough} see high inflation and the accompanying rising interest rates required to stave off yet another bubble. Moreover the very fact of a large debt burden gives government the perverse incentive to resist the very rising interest rates needed to tame runaway inflation, if that occurs (worse still is the resulting incentiveof the government to welcome debasement of the currency precisely to reduce the real effect of debt denominated in it).

The willingness of the world to tolerate a reference currency subject to such debasement is just as limited as was the willingness of potential buyers of Greek bonds to finance the continued irresponsibility and deceptions of Greek governments in mismanaging their own financial affairs. The U.S. may have a bit more slack in this area, but it is surely limited, and we are fast approaching that limit.

Your statement to whit

Quote:

Realistically, nobody should be concerned about the deficit at all -- not when creditors are effectively paying the US to lend it money

is cute, contrived, and entirely nonsensical.

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@georgeob1,

You say Obama "increased them several fold during his first term." He also had to provide tax cuts to the middle class and extend unemployment benefits for those who lost jobs and/or hours were cut - caused by GW Bush's Great Recession. He also saved the banks and the auto industry in this country. Those are good reasons to have spent the money over any wars our country has been involved in during the past decade.

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@georgeob1,

Quote:

Do you really believe this stuff??? Our annual deficits can change rapidly as the current president has amply demonstrated - he increased them several fold in his first term.

Do you really believe that stuff?

Bush's last budget year - deficit of $1.4 Trillion
Obama's largest deficit - 2012 - 1.32 Trillion

Can the deficits change rapidly? Yes when recessions occur. Does that mean Obama increased the deficit several fold?

http://www.cato.org/blog/dont-blame-obama-bushs-2009-deficit

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@parados,

As the Cato article shows, Obama needs to accept "some" of the responsibility for the debt; he needs to work on social security, MediCare, and Obamacare - but more importantly, he needs to decrease defense spending - which he has failed to do. Cutting defense spending, increasing funding for our children's education, and upkeep of our infrastructure are more important than spending billions on defense and wars. This, he failed to do.

Social security and Medicare should be top priorities, because as the baby-boomers retire, they will increase the cost of those benefits while the work force remains somewhat stagnant, and tax revenues decrease. The trust fund will shrink faster as more baby-boomers retire. You can't have it all!~

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@georgeob1,

georgeob1 wrote:

Do you really believe this stuff???

I don't see why not, because joefromchicago is absolutely right. It gives me no pleasure to say this because I'm having much more fun arguing with Joe than agreeing with him. But what am I supposed to do? He's right. So why wouldn't he be believing "this stuff"?

georgeob1 wrote:

However the (fast) accumulating cumulative debt that results from them is a burden that lasts much longer - and that will be paid for at whatever interest rate our lenders may demand in a distant and unknown futurei - something we will surely be unable to control.

It's not as if we're totally in the dark though. While the bond market isn't infallible, it's a much better predictor of the future than, say, Fox News or the Wall Street Journal opinion page. As it happens, 30-year inflation-indexed treasuries are yielding 0.3 percent, with regular 30-year treasuries yielding 2.9 percent. In other words, if you ask the people who put the most money where their mouths are, their actions tell you they're expecting average rates of 2.6 percent inflation and 0.3 percent real interest 30 years out. Do you think they have it wrong? Then you can make a fortune by betting against them and being right. I hope you have invested a large percentage of your wealth into shorting the bond market. (Well, actually, I don't, because I'm a nice person and don't want to see you lose your money. But you get my point.)

georgeob1 wrote:

I believe that most economists believe we will (soon enough} see high inflation and the accompanying rising interest rates required to stave off yet another bubble.

You believe wrongly. Evidently you're not reading any sources who believe in macroeconomics-101 textbook models. If your sources did that, they would be reaching more or less the same conclusions as the average bond investor did.

georgeob1 wrote:

Your statement to whit [...] is cute, contrived, and entirely nonsensical.

To the contrary, it's entirely correct. Just look at these treasury-bond yields again, if you haven't already. They predict inflation to remain contained 30 years out, real interest rates negative at least 10 years out and barely positive 30 years out. Whichever people told you that we're headed towards soaring rates of inflation and interest aren't putting much money where their mouths are. That should tell you something about those people. How do they say in Texas? All hat, no cattle.

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@Thomas,

I agree; I've been selling off my bond funds, because long-term interest rates tells me that the feds and our government expect low inflation for the foreseeable future. By doing so, my funds are up by 12.6% YTD (as of last Friday).

The standard investment ratios for people my age should be the opposite of what my fund holdings are - to "protect" their retirement funds.

I've been selling off my bond funds for over a year, and feel very comfortable with the results. My funds balance is above what it was on 12/31/2011, and I've taken out quite a bit from my funds this year.

1 Reply

@Thomas,

I wrote:

It's not as if we're totally in the dark though. While the bond market isn't infallible, it's a much better predictor of the future than, say, Fox News or the Wall Street Journal opinion page.

On a tangent to this: It was Julian Simon, a libertarian think-tank economist, whose writings once taught me to prefer the predictions implied in market behavior over predictions blurted out by talking heads in the mass media. It was Simon who bet --- and won --- against fashionable predictors of doom like Paul Ehrlich, who said the world would soon run out of food and other resources. I am stunned to see how completely Simon's intellectual heirs have abandoned his approach, now that their own patrons are the ones making the fashionable doomsday predictions.

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@cicerone imposter,

cicerone imposter wrote:

I've been selling off my bond funds for over a year, and feel very comfortable with the results. My funds balance is above what it was on 12/31/2011, and I've taken out quite a bit from my funds this year.

Good for you!

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@georgeob1,

georgeob1 wrote:

Do you really believe this stuff???

Yup. Thomas already laid out the specifics, so I won't go over those again. Suffice it to say that the US would be mad to emulate the bad examples set by the UK and the Eurozone by imposing austerity measures in order to rein in budget deficits when what the federal government really should be doing is spending money to stimulate the economy.

1 Reply

@joefromchicago,

It's not about spending "more" money; it only requires cutting back defense spending, gifts to countries, cutting the waste in Medicare (paying $900 for a $90 item is a huge waste that can be controlled by competitive bidding) and oil and farm subsidies, to stimulate our economy.

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@Thomas,

Treasury bond yields are so low precisely because the FED is so assiduously printing money to buy them. The obvious committment of the Fed in this area is all that is holding our bond yields down. The bond market you cite as a reliable predictor isn't functioning at all (in the case of this country) as it has traditionbally done. Under Bernacke it has become the crutch that enables our government to service its growing debt at affordable levels. Moreover when business confidence returns and the hoards of cash they and others are holding starts being invested and spent, we are very likely to see a resumption of inflation. That is the usual pattern and a similar process has unfloded many times before. However, with government debt so high the Fed (at least if it retains its current inclinations) will be caught between conflicting imperatives, and may find itself unable to contain any inflation that appears.

The largely unspecificed "elementary" economic principles you refer to so frequently as "Econ 101", do not appear to be widely accepted. In particular the Keynesian multiplier is fairly widly thought to be more illusion than fact, particularly for states with already high debt loads. Despite truly huge government investments in the infrastructure you so favor, Japan's debt based economy appears to have lapsed into a now generation long zombie like condition. Do you also believe the European countries and Canada have been wrong to reduce the size of their debts? Do they too lack an unbderstanding of the basic economics to which you so confidently refer?

So far we have been fortunate in that the demographic collapse that is threatening many (not all) European states has not manifest itself here. This is a fact that poses a very serious threat to the sustainability of both competitive economic activity and in particular the social welfare programs and restrictive labor laws favored by many European nations. Recent reports here suggest that advandage of ours may itself now be disappearing as female fertility here, particularly amopng immigrant groups is falling fast.

We are already starting to see a flight of U.S. capitol to other countries in search of higher returns, That's not a good sign for any acceleration of the recovery we are now seeing.

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@georgeob1,

I doubt very much there is any threat of inflation when the top 25% owns 85% of the wealth of this country. It simply means, those wealthy folks aren't going to make up the loss of buying power of the middle class and poor to create a shortage of demand for goods and services.

That's the reason during this christmas shopping season, we see more discounts on almost everything. Since consumption makes up 70% of our economy, there's no fear there will be any over-buying to create shortages any time soon.

Most middle class and poor families are struggling to survive on wages that barely keeps up with inflation. The rich keeps socking away their wealth - and not spending it on consumer goods.

Inflation? When?

From Wiki.

Quote:

Overall the number of wealthier households is on the rise, with baby boomers hitting the highs of their careers.[1] In addition, wealth is unevenly distributed, with the wealthiest 25% of US households owning 87%[2] of the wealth in the United States, which was $54.2 trillion in 2009

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@parados,

Year on year growth of the debt as a percentage of the GDP is dropping under Obama. That's a FACT.

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@georgeob1,

georgeob1 wrote:

Treasury bond yields are so low precisely because the FED is so assiduously printing money to buy them.

The quantity of Fed-printed money in circulation (2.7 billion dollars) is a rounding error compared to America's outstanding debt (11,500 billion dollars). In other words, almost all demand for America's federal debt comes from places other than the Fed. Even if the effect you suggest exists in theory, it's four orders of magnitude too small to explain the low interest rate in practice.

Your point also fails out to check out in another way: If the Fed is setting the interest rate too low, as you seem to suggest it is, we should be observing savers deserting treasury bonds (because their return on investment is too low), or entrepreneurs eager to grab the free money banks keep giving them. What we observe is just the opposite: Savers are hoarding bonds, while businesses don't want to invest. So the actual behavior of supply and demand in the bond market is far from supporting your story of runaway Fed activism. Instead, it is telling us that interest rates are too high even at zero percent.

georgeob1 wrote:

However, with government debt so high the Fed (at least if it retains its current inclinations) will be caught between conflicting imperatives, and may find itself unable to contain any inflation that appears.

Then I suggest you go to the futures market, invest a good part of your assets in short positions on inflation-adjusted bonds, and look forward to the fortune that awaits you whenever your prognosis comes true.

georgeob1 wrote:

The largely unspecificed "elementary" economic principles you refer to so frequently as "Econ 101", do not appear to be widely accepted.

For the specifics, you can search the Web for "LS-IM model". And, yes, it's one of the elementary models in macroeconomics, the workhorse of macro-101 textbooks. What else am I supposed to call it? That aside, you've got a point there: A lot of conservative economists reject those textbook insights. They have been distinguished by being Wrong Every ******* Time (TM) ever since the financial crisis of 2008.

Here's how: From the beginning, freshwater economists kept predicting that runaway inflation was just around the corner in America. (Inflation went nowhere, and so did inflation expectations). They kept predicting soaring interest rates (interest rates came down, not up, and so did expected future interest rates.) They kept predicting that austerity policies worldwide would boost GDP by improving business confidence. (Those policies have plunged their economies into recession; some economies have recovered somewhat since, but none to the pre-crisis level.) So yes, many economics have abandoned the macro-101 textbook, presumably thinking they were fancy. They all ended up with egg on their face, while those who stuck to basics got most of their predictions right.

georgeob1 wrote:

Do you also believe the European countries and Canada have been wrong to reduce the size of their debts? Do they too lack an unbderstanding of the basic economics to which you so confidently refer?

Yes I do --- if by "reducing the size of their debts" you mean reducing them after the financial crisis. I have nothing against bringing down a country's debt. But there is a time and place for that; it's when the economy is growing or even overheating, not when it's stagnating or even shrinking.

3 Replies

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