No problem in this world has only one solution.
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Greenback scenarios
- Thread starter FrostBead
- Start date
No problem in this world has only one solution.
M
morganist
Quote from FrostBead:
I was thinking roughly of what kind of scenarios can unfold. Obviously details are almost impossible to predict. I'm not sure there are tons and tons of ways it can unfold. Key participants will be government, the American people voting in the next election, Fed, China, IMF/world, the various states, some more.
If we are correct that economic activity will slow down even further (into recession) then the mentioned parties above will act reactionary and not in a proactive fashion, which limits options.
The way I see it is all non-US parties can only decide on how much debt to hold, whether or not they use the US dollar for trade/reserves. That should affect how long the debt/structural deficit problem can be postponed. The stars if this drama will only be the US gov/people.
As a lateral thinker I have another solution. The way I would go about it is through an alterrnative system. If you can think up another way to repay the debt the problems could go away. If you read my post on my blog below
http://morganisteconomics.blogspot.com/2011/02/should-countries-entering-into-sdrms.html
It doesn't put forward a solution but it takes the thinnking away from the current theory of borrow more and pay later. I have another solution though.
To mention the timetable of any event.
I looked at the estimates of the budget:
http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf
It's fairly optimistic to think that the revenue side will increase around 50 % in just 3-4 years and double around 2018. Consider the recent revisions (and retroactive revisions) to prognoses of the economy.
Surely some last minute panicky front-loaded spending cuts could emerge, but we should balance that against that revenues most probably won't be near projected numbers.
The estimated deficits looking three years forward will total 2.8 trn USD. Considering that Foreign over time built up holdings in US treasuries of 3 trn (China 1 trn). Who's going to absorb that debt? Certainly stocks and other assets will sell-off as prospects seems worse (much like the movement we see today, S&P down and treasury yields down as well) and that money will park in treasuries.
Anyone know the total market cap of stocks in the US?
Can markets today absorb 3 trn USD over three years? Can the rest of the world buy 3 trn in its current shape (EZ problems)?
A lot of money is needed for the world's biggest economy to go from 100 to 120 % debt/gdp.
There will be a powerful upwards pressure on treasury yields (not necessarily due to sell-off) coming from the future treasuries needed to be sold. Markets can alleviate pressure for a while and Foreign too (but they most likely will demand change to the projected debt path).
I believe that within two years we will have seen: Fed propping all new deficit debt (aka QE3 - perhaps disguised as rate target), default or cold turkey spending cuts?
I looked at the estimates of the budget:
http://www.cbo.gov/ftpdocs/121xx/doc12130/04-15-AnalysisPresidentsBudget.pdf
It's fairly optimistic to think that the revenue side will increase around 50 % in just 3-4 years and double around 2018. Consider the recent revisions (and retroactive revisions) to prognoses of the economy.
Surely some last minute panicky front-loaded spending cuts could emerge, but we should balance that against that revenues most probably won't be near projected numbers.
The estimated deficits looking three years forward will total 2.8 trn USD. Considering that Foreign over time built up holdings in US treasuries of 3 trn (China 1 trn). Who's going to absorb that debt? Certainly stocks and other assets will sell-off as prospects seems worse (much like the movement we see today, S&P down and treasury yields down as well) and that money will park in treasuries.
Anyone know the total market cap of stocks in the US?
Can markets today absorb 3 trn USD over three years? Can the rest of the world buy 3 trn in its current shape (EZ problems)?
A lot of money is needed for the world's biggest economy to go from 100 to 120 % debt/gdp.
There will be a powerful upwards pressure on treasury yields (not necessarily due to sell-off) coming from the future treasuries needed to be sold. Markets can alleviate pressure for a while and Foreign too (but they most likely will demand change to the projected debt path).
I believe that within two years we will have seen: Fed propping all new deficit debt (aka QE3 - perhaps disguised as rate target), default or cold turkey spending cuts?
US should come up with a strategy to double its exports from $1.27 to $2.54 trillions.
M
morganist
Nice post, Frost Bead. I like your thinking. But, as I know you realize, there are no real solutions in any of those actions that are going to get the U.S. pointed in the right direction for a sustained recovery and a reasonably strong economy going forward. To do that you'd have to increase the size of the middle class and put money in their pockets. There is just so much money to go around, and if your going to pay a heart surgeon $800,000+ per year, plus benefits, after three years in practice there isn't going to be enough left over for the ten hard workers in the middle class that could make a reasonable living if the heart surgeon could scrape by on $300K a year.
Things have gotten badly out of kilter with a few taking out of the economy greatly in excess of their productivity. I could have used the company CEO as another example-- there are endless examples of how over the years clever small segments of the population have been able to turn to their advantage certain aspects of government. But in the process of this concentration of money in the hands of the few we have decimated the middle class. The bottom 70% of wage earners earn less today, when their wages are discounted for inflation then they did 25 years ago, while the top 5% of earners are making 400% more than they did 25 years ago. And there is a smaller segment that has seen some real wage increase, but not great deal. We have to regain a middle class, folks , if we want to have a robust economy! How to do it is up to you, but i'm afraid there is no alternative to some wealth redistribution. After all, it is the wage distribution in a country that defines the middle class! I'm not suggesting that we give money away, I'm suggesting that we pay ordinary wage earners a living wage.
To increase the size of the middle class, structural, social, political and ideological hurdles have to be overcome. I don't see the Fed or the Treasury being able to do those things.
Things have gotten badly out of kilter with a few taking out of the economy greatly in excess of their productivity. I could have used the company CEO as another example-- there are endless examples of how over the years clever small segments of the population have been able to turn to their advantage certain aspects of government. But in the process of this concentration of money in the hands of the few we have decimated the middle class. The bottom 70% of wage earners earn less today, when their wages are discounted for inflation then they did 25 years ago, while the top 5% of earners are making 400% more than they did 25 years ago. And there is a smaller segment that has seen some real wage increase, but not great deal. We have to regain a middle class, folks , if we want to have a robust economy! How to do it is up to you, but i'm afraid there is no alternative to some wealth redistribution. After all, it is the wage distribution in a country that defines the middle class! I'm not suggesting that we give money away, I'm suggesting that we pay ordinary wage earners a living wage.
To increase the size of the middle class, structural, social, political and ideological hurdles have to be overcome. I don't see the Fed or the Treasury being able to do those things.
Yes agree.
It is not desirable to give rich people tax cuts. I will not agree to the assumption that it will spur growth (consider opportunity costs). Just think of that kind of growth that would be, yachts, jet-setting, jewellery, art, cocaine? They will not consume more of the basics.
Had government kept the money it could have invested in infrastructure. My understanding is that several places in the US are built assuming that the car will take you everywhere, well oil is getting more expensive... Mainly, think of those mega projects that even no indivual listed company could undertake because benefits are externalities. It would be net positive to make those investments compared to giving tax cuts to richie rich (even considering the dead weight taxation creates).
Government should be where the markets can't be or shouldn't be (like banking). TP with their small government and no taxation, that's just crazy. That might sound fiscally prudent given circumstances of wasteful governance, but it forgoes so many large scale investments.
I think that would be somewhat decent politics in a stereotype economy. For the US I have no solution, debt levels in real purchasing power must go down - whether it be rocky road default or inflationville.
It is not desirable to give rich people tax cuts. I will not agree to the assumption that it will spur growth (consider opportunity costs). Just think of that kind of growth that would be, yachts, jet-setting, jewellery, art, cocaine? They will not consume more of the basics.
Had government kept the money it could have invested in infrastructure. My understanding is that several places in the US are built assuming that the car will take you everywhere, well oil is getting more expensive... Mainly, think of those mega projects that even no indivual listed company could undertake because benefits are externalities. It would be net positive to make those investments compared to giving tax cuts to richie rich (even considering the dead weight taxation creates).
Government should be where the markets can't be or shouldn't be (like banking). TP with their small government and no taxation, that's just crazy. That might sound fiscally prudent given circumstances of wasteful governance, but it forgoes so many large scale investments.
I think that would be somewhat decent politics in a stereotype economy. For the US I have no solution, debt levels in real purchasing power must go down - whether it be rocky road default or inflationville.
I'm guessing that you are fairly young. Am I right? I'm impressed with your thinking in any case. And not because I agree with you, but because it's logical!
There are two major problems the U.S. faces today. They are out of control health care costs, and out of control military spending. Incorrectly one hears politicians, and the media harp on "entitlements" as if all entitlements were a major part of the problem. This is dead wrong. Only one entitlement is significant here, medicare/medicaid, and the problem has nothing whatsoever to do with the fact that it is an "entitlement"! So a very big reason we can't make progress is the false and misleading rhetoric. There is both an ideological and financial force bolstering this false rhetoric, and that's going to make it virtually impossible to get it right!
If the U.S. could fix these two impossible to fix problems --medical and military--it could return to a robust and healthy economy with a large middle class, as it once had. But I doubt these these things will be properly fixed in my lifetime, because to do so would require logic trumping human nature.
We can summarize human nature very nicely as Malcolm Muggeridge did, by recognizing that all human activities are driven by some combination of vanity, greed, and instinct. These always trump logic, except in the rare, serendipitous occasion when you make more money, I make more money, and by pure chance, it's logical. In the case of medical and military I don't see any way around the problem in an atmosphere of false rhetoric. Perhaps I'm wrong and a brilliant solution can be found that allows a combination of logic, vanity and instinct to trump greed -- but it is usually the other way round.
Here, I only want to briefly discuss the medical problem.
I am old! I was raised in a family of physicians, grandfather (19th and 20th centuries), father and three uncles, three aunts were nurses. several younger cousins are practicing physicians today in the U.S. and Canada. All of them very well trained and several of them prominent in their fields. Three of them, my Dad, and my uncles Don and Jack, it's fair to say, were extremely prominent. They founded a clinic and one hospital in different regions that are still functioning today. My dad, though in private practice, published several papers in medical journals during his career. That is extremely rare today for physicians not associated with medical schools. The practice of medicine then was very, very different than it is today.
I mention this because I have definite opinions on how the U.S. health care problem could be fixed, and you should know my background because like everyone's, my opinions are heavily influenced by my childhood, education, and life experiences. So my preferred solution to the medical problem we face is obviously due to my background. I admit that. Sadly, however, I doubt we will fix our medical problem and do it well. We will do something for sure, we're forced to. But it won't be good, only less bad.
I am a advocate for capitalism. I could say of capitalism what Churchill said of democracy. It's the worst economic arrangement, but it's far better than any other.
You said, Government should be where the markets can't be or shouldn't be (like banking). This is key. And it gets us thinking about the proper role of government in health care and whether or not the capitalist model is suitable when it comes to health care. What defects there might be in the model, and how best to deal with them?
Consider just briefly, the capitalist model. Capitalism is an economic construct where capital and the means of production are in private hands. We capitalists get giddy just thinking about that. But we forget that capitalists hate free competition, they like low labor costs, naturally, and they want as little interference from government as possible, preferable none. Most importantly, they revel in monopolies and cartels.
(Incidentally, I've railed endlessly in these forums against conflating free-enterprise with capitalism, because in theory they have nothing to do with each other, and in practice they are opposites. If I read more more post about capitalism and free enterprise as if they were dancing hand in hand down the yellow brick road, I am going to scream and start throwing things! The only way capitalism can co-exist with free enterprise is if a referee is watching ready to send the capitalists to the penalty box.)
Now, consider health care in light of the capitalist model. To a capitalist, healthcare is the goose that laid the golden egg! Here you have a service that no one in their right mind would refuse. "Would you like me to repair your broken leg sir, our do you prefer to be crippled for the remainder of your life and suffer a great deal of pain?" "Do you want me to look up your rear end and see if there is a big lump of cancer, or do you prefer to chance it?" "Do you want this pill that will save your life? It will be a bit expensive, but keep in mind you can't get it unless you go through me, or others just like me, so don't bother shopping around. You're so sick now that I expect you'll be dead by the time you can make it to Canada."
If you haven't realized it up to now, the American model of private healthcare is a near perfect embodiment of a Cartel -- every good capitalist's dream come true! For the Cartel, the ever encroaching presence of government referees, the DEA and Medicare/Medicade enforcers, is a mere headache, but the Cartel could not exist at all were it not for government protection, and in this regard the FDA is key, because the majority of physicians make their living by writing prescriptions.
There are two health care sectors in the U.S.: 1> the private which is government protected, and to a lesser extent government regulated, and 2> the public, which is government sponsored and government regulated to a greater extent. The private sector does all it can to keep the public sector from growing and to hold the public sector referees at bay; a battle ever so slowly being lost, in spite of the private sectors cleverness and financial might. To the extent that either the public sector grows, or its referees blow their whistles in the private sector, profits could be lost, but this hasn't happened. Instead, and amazingly, profits and costs in both sectors are growing, and growing much faster than the GDP.
How is this possible? Obviously something is very, very wrong.
Although the one word answer implies a false simplicity: the word is "CARTEL." The Cartel must be broken and brought to its knees if the pattern of costs rising faster than the GDP is to be corrected. The way to break a Cartel is by introducing competition, or to use that favorite American expression: "Free Enterprise".
The probability of enough competition being introduced to break the Cartel is, however, minuscule. There was a recent attempt to do exactly that with the Obama health care initiative. And while some minor inroads toward introducing competition did survive, the major thrust in that direction, the public option, was killed, and is dead and buried.
The Cartels message never changes: it is always focused on fear and risk. But if we are to bring the rate of cost increases down to no more than the rate of inflation, and even then U.S. costs would remain the highest anywhere, we must break the power of the Cartel by introducing competition. There are many good and practical ways to do this, but I'm not optimistic.
I'm reviled by the alternative, socialized medicine. But I suppose that is because i'm a prisoner of my upbringing.
There are two major problems the U.S. faces today. They are out of control health care costs, and out of control military spending. Incorrectly one hears politicians, and the media harp on "entitlements" as if all entitlements were a major part of the problem. This is dead wrong. Only one entitlement is significant here, medicare/medicaid, and the problem has nothing whatsoever to do with the fact that it is an "entitlement"! So a very big reason we can't make progress is the false and misleading rhetoric. There is both an ideological and financial force bolstering this false rhetoric, and that's going to make it virtually impossible to get it right!
If the U.S. could fix these two impossible to fix problems --medical and military--it could return to a robust and healthy economy with a large middle class, as it once had. But I doubt these these things will be properly fixed in my lifetime, because to do so would require logic trumping human nature.
We can summarize human nature very nicely as Malcolm Muggeridge did, by recognizing that all human activities are driven by some combination of vanity, greed, and instinct. These always trump logic, except in the rare, serendipitous occasion when you make more money, I make more money, and by pure chance, it's logical. In the case of medical and military I don't see any way around the problem in an atmosphere of false rhetoric. Perhaps I'm wrong and a brilliant solution can be found that allows a combination of logic, vanity and instinct to trump greed -- but it is usually the other way round.
Here, I only want to briefly discuss the medical problem.
I am old! I was raised in a family of physicians, grandfather (19th and 20th centuries), father and three uncles, three aunts were nurses. several younger cousins are practicing physicians today in the U.S. and Canada. All of them very well trained and several of them prominent in their fields. Three of them, my Dad, and my uncles Don and Jack, it's fair to say, were extremely prominent. They founded a clinic and one hospital in different regions that are still functioning today. My dad, though in private practice, published several papers in medical journals during his career. That is extremely rare today for physicians not associated with medical schools. The practice of medicine then was very, very different than it is today.
I mention this because I have definite opinions on how the U.S. health care problem could be fixed, and you should know my background because like everyone's, my opinions are heavily influenced by my childhood, education, and life experiences. So my preferred solution to the medical problem we face is obviously due to my background. I admit that. Sadly, however, I doubt we will fix our medical problem and do it well. We will do something for sure, we're forced to. But it won't be good, only less bad.
I am a advocate for capitalism. I could say of capitalism what Churchill said of democracy. It's the worst economic arrangement, but it's far better than any other.
You said, Government should be where the markets can't be or shouldn't be (like banking). This is key. And it gets us thinking about the proper role of government in health care and whether or not the capitalist model is suitable when it comes to health care. What defects there might be in the model, and how best to deal with them?
Consider just briefly, the capitalist model. Capitalism is an economic construct where capital and the means of production are in private hands. We capitalists get giddy just thinking about that. But we forget that capitalists hate free competition, they like low labor costs, naturally, and they want as little interference from government as possible, preferable none. Most importantly, they revel in monopolies and cartels.
(Incidentally, I've railed endlessly in these forums against conflating free-enterprise with capitalism, because in theory they have nothing to do with each other, and in practice they are opposites. If I read more more post about capitalism and free enterprise as if they were dancing hand in hand down the yellow brick road, I am going to scream and start throwing things! The only way capitalism can co-exist with free enterprise is if a referee is watching ready to send the capitalists to the penalty box.)
Now, consider health care in light of the capitalist model. To a capitalist, healthcare is the goose that laid the golden egg! Here you have a service that no one in their right mind would refuse. "Would you like me to repair your broken leg sir, our do you prefer to be crippled for the remainder of your life and suffer a great deal of pain?" "Do you want me to look up your rear end and see if there is a big lump of cancer, or do you prefer to chance it?" "Do you want this pill that will save your life? It will be a bit expensive, but keep in mind you can't get it unless you go through me, or others just like me, so don't bother shopping around. You're so sick now that I expect you'll be dead by the time you can make it to Canada."
If you haven't realized it up to now, the American model of private healthcare is a near perfect embodiment of a Cartel -- every good capitalist's dream come true! For the Cartel, the ever encroaching presence of government referees, the DEA and Medicare/Medicade enforcers, is a mere headache, but the Cartel could not exist at all were it not for government protection, and in this regard the FDA is key, because the majority of physicians make their living by writing prescriptions.
There are two health care sectors in the U.S.: 1> the private which is government protected, and to a lesser extent government regulated, and 2> the public, which is government sponsored and government regulated to a greater extent. The private sector does all it can to keep the public sector from growing and to hold the public sector referees at bay; a battle ever so slowly being lost, in spite of the private sectors cleverness and financial might. To the extent that either the public sector grows, or its referees blow their whistles in the private sector, profits could be lost, but this hasn't happened. Instead, and amazingly, profits and costs in both sectors are growing, and growing much faster than the GDP.
How is this possible? Obviously something is very, very wrong.
Although the one word answer implies a false simplicity: the word is "CARTEL." The Cartel must be broken and brought to its knees if the pattern of costs rising faster than the GDP is to be corrected. The way to break a Cartel is by introducing competition, or to use that favorite American expression: "Free Enterprise".
The probability of enough competition being introduced to break the Cartel is, however, minuscule. There was a recent attempt to do exactly that with the Obama health care initiative. And while some minor inroads toward introducing competition did survive, the major thrust in that direction, the public option, was killed, and is dead and buried.
The Cartels message never changes: it is always focused on fear and risk. But if we are to bring the rate of cost increases down to no more than the rate of inflation, and even then U.S. costs would remain the highest anywhere, we must break the power of the Cartel by introducing competition. There are many good and practical ways to do this, but I'm not optimistic.
I'm reviled by the alternative, socialized medicine. But I suppose that is because i'm a prisoner of my upbringing.
Just thought this up:
Strictly looking within the US market. The US economy will stagnate in terms of real production as a result of this relationship: US economy is based on consumption, which is/has been heavily reliant on debt. Debt going south means the economy will go south. People do not borrow any more (empirically observed today); they repay debt; they can't afford things. Deflation pressure! When people can't buy things businesses will fall. US production goes down. Imports (remember how import dependent the US is) will get more expensive (explained further down) - fuel on fire. Businesses cannot make profit when input prices goes up. Less production!
We see prices go down (deflation) but much SLOWER than production goes down. On the forex market this should mean that if US produces less, the dollar is worth less. Weaker dollar - high import costs and squeezed businesses. It would not matter that Fed prints money and buys treasuries if the purchasing power of the US consumer keeps getting weaker. We would see deflation AND a lower USD - contigent on production dropping faster than prices.
HOWEVER, IF the US government finds a bogus reason to give people money - which I see as the most likely case. People will buy things with monopoly (printing press) money, businesses will survive and decline on monopoly money, but input (much from imports) will get ever more expensive for this monopoly money currency. Hyperinflation will result. Production goes down in the hyperinflation as well.
Think of what is happening at the moment. Fed launches QE1&2. Commodity prices are up, dollar is down. At the moment it is not "giving" away money literally (but they will!), but it is very keen on not taking any money either: government is at the moment keeping tax cuts and high social security spending. GDP has stalled because private spending is dropping, it has not imploded because the government is still increasing its debt.
Strictly looking within the US market. The US economy will stagnate in terms of real production as a result of this relationship: US economy is based on consumption, which is/has been heavily reliant on debt. Debt going south means the economy will go south. People do not borrow any more (empirically observed today); they repay debt; they can't afford things. Deflation pressure! When people can't buy things businesses will fall. US production goes down. Imports (remember how import dependent the US is) will get more expensive (explained further down) - fuel on fire. Businesses cannot make profit when input prices goes up. Less production!
We see prices go down (deflation) but much SLOWER than production goes down. On the forex market this should mean that if US produces less, the dollar is worth less. Weaker dollar - high import costs and squeezed businesses. It would not matter that Fed prints money and buys treasuries if the purchasing power of the US consumer keeps getting weaker. We would see deflation AND a lower USD - contigent on production dropping faster than prices.
HOWEVER, IF the US government finds a bogus reason to give people money - which I see as the most likely case. People will buy things with monopoly (printing press) money, businesses will survive and decline on monopoly money, but input (much from imports) will get ever more expensive for this monopoly money currency. Hyperinflation will result. Production goes down in the hyperinflation as well.
Think of what is happening at the moment. Fed launches QE1&2. Commodity prices are up, dollar is down. At the moment it is not "giving" away money literally (but they will!), but it is very keen on not taking any money either: government is at the moment keeping tax cuts and high social security spending. GDP has stalled because private spending is dropping, it has not imploded because the government is still increasing its debt.