Greenback scenarios

To Piezoe:

I am 24. The description of human nature made me laugh. I appreciate you telling your background as I try to be objective about things myself. Objectiveness has inherent utility (especially for trading) and I also take pride of self for trying to be as objective as I can. I can tell by you finding it important to share your background that you try to be objective as well. That makes me able to trust your understanding of things to a much higher level. Thank you for the insight of the situation of medical care in the US. As you said, political subjects are so veiled in rhetorics that you often do not what to believe.

I am so aware of capitalists hating competition. Just look at Michael Porter's 5 forces - the whole framework shouts out loud how much a business hates competition. I think capitalism is the most efficient form to conduct economic activity for a market. The key is to shape (regulate) the market after the interest of society. The problem arises when capitalists can influece the border of the market, affect regulations. I am under the impression that USA governance is captured by interest groups to much higher degree than other western industrialized countries. Look at how the finance industry have killed regulations in the US over the past century...

I am from Sweden so most of our medical care is provided by government. My current best solution of medical care is that you have both capitalists and government operating the market. I do not have any percentages on how it should be distributed. My thinking is that government calculates approximate cost of treating patients it has and would give capitalists about that amount if a patient turned to them instead. Government keeps tabs on return on equity for these capitalists and reduce subsidies given if return on equity becomes too high. Obviously, we need to differentiate between treatments so we know where productivity has increased to we can lower subsidies more specifically. This would rein in costs and allow productivity gains to be passed onto consumers (patients). The government should also keep some spare capacity so that if capistalists try to reduce capacity to capture the market then government will counter balance.

I would also keep regulation present so that capitalists do not abuse the inelastic pricing power on health that physicians hold, ie. not allow premium but disgustingly expensive drugs to be premiered over generic but perfectly fine substitutes. Financing of medical care must not be the US way either - insurance takes care of everything. That provides disincentives for too many parts - the patient, the doctor.... This is just some rough idea of how I think it could work.

Notice that my idea is not going to the most optimal structure conceivable. A heavy hand holds entrepreneurs back because I don't believe we want to squeeze every possible penny, when it comes to medical care. We want to SHAPE the market, but let capitalists kill each other within it (compete).

Regarding the finance industry I think that you have to socialise it. It is too big to fail, meaning that we will not have any survival of the fittest, just survival of the present. Free enterprise/market is like evolution - the most efficient ones survive and the rest goes under. If this mechanism is gone then what's the point of free-enterprise? A private party trying to be as efficient as possible is not that different from a government agency trying the same (not confident about this statement though)? There is also the question of inherent monopoly power involved, if you are going to give people the privilege of making economic profit (different from accounting profit) then you should tax it way differently from normal business.

I must go to sleep, dead tired. I'll continue this post tomorrow. Not sure what I've written makes any sense haha.

I realize we've strayed a bit from thread topic, but I guess i get to play god in my thread? ;D
 
Quote from FrostBead:

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.
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According to Bernanke, the Fed has not been printing. They've been expanding their balance sheet by buying bonds; thus increasing the money in circulation but not the total amount of money (according to Bernanke). They have income from the assets they acquired from banks as collateral, and that is the source of the money they are using to buy Treasuries, at least part of it. (It is not clear to me where the money came from to loan to banks in exchange for collateral. But Bernanke insists they have not been printing.)

The us economy has been based on consumption, as you say. About 70% of it. This is why declining real wages over the last 25 years for the lower 60 or so percent of wage earners could not end well. Credit was used to fill the gap between middle class earnings and expenses in an attempt to maintain living standards..


We won't see any deflation in the overall economy in spite of deflation in some sectors, like housing and construction.
Deflation would be disastrous in a debtor nation where much of the debt is held externally (Japan is different, most of the debt is held internally) because debt would be paid back with dollars that had more purchasing power than the dollars borrowed, thus increasing real interest rates. The Fed has the power to prevent deflation, and will exercise it as needed..

Social Security contributions have produced a very large excess of contributions over expenditures, roughly 2 trillion. The Treasury borrows from Social Security. The money is owed by law to Social Security. Social Security actuaries have calculated that 2 cents additional contribution per dollar earned is needed going forward to assure soundness of the system into the foreseeable future. We are entering a period in which the Trust will have to begin redeeming the bonds it holds. The problem is that there is a large deficit in the discretionary budget, and also in the medicare trust funds, and hence no money left to pay the money owed to the Social Security Trust fund. The government will have to borrow to pay the debt obligations owned by the S.S.Trust. The disability trust fund is separate and in a bit of trouble. Medicare contributions also go into Trusts (there are several for medicare). But the medicare trusts have to be supplemented from the general budget (more borrowing). Medicare is a serious problem. Social Security is not. They should not be lumped together. Social Security can be very easily fixed, but there are ideological forces working against it. (Wall Street, in particular, wants to weaken, or kill it, and Wall Street is the ultimate source of much incorrect or misleading information. The reasons Social Security hasn't been fixed already are strictly political and ideological. Medicare is a different matter altogether.

The medicare administrators could force a reduction, or a plateau, in health care costs but politics prevents this. The population is aging and most medical care involves those that are medicare eligible. Medicare negotiates and sets fee maximums. Physicians taking medicare patients can charge more than the maximum allowed by medicare, but can not by law collect the difference. If a physician refuses to take medicare patients they may be cutting out most of their practice, depending on their specialty,. They won't do this obviously, and thus medicare has the upper hand in setting compensation so long as there is not political interference, which there is. Political interference is the reason Medicare was not permitted to negotiate with drug companies for lower costs. But medicare does have the potential to control medical costs, it it were only allowed to exercise its power,
 
Quote from piezoe:
According to Bernanke, the Fed has not been printing. They've been expanding their balance sheet by buying bonds; thus increasing the money in circulation but not the total amount of money (according to Bernanke). They have income from the assets they acquired from banks as collateral, and that is the source of the money they are using to buy Treasuries, at least part of it. (It is not clear to me where the money came from to loan to banks in exchange for collateral. But Bernanke insists they have not been printing.) [/B]
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To me that just sounds like "I'm not buying between shopping sprees". The income from assets, isn't that dividends from QE's? Bernanke insisting on that they have not been printing is a credible as Geithner saying that it is in the US interest to conduct a strong USD policy; Obama insisting that US debt is AAA. The word strong has a positive connotation and is part of the subterfuge employed to keep the show going. With a little knowledge in economics you know that a debtor nation would rather have a weak currency. The facade is crumbling...

I also think the Fed will have to act to avoid deflation. Every lacklustre economic performance will have to be met with a commensurate response from Fed.

Quote from piezoe:
Social Security contributions have produced a very large excess of contributions over expenditures, roughly 2 trillion. The Treasury borrows from Social Security. The money is owed by law to Social Security. Social Security actuaries have calculated that 2 cents additional contribution per dollar earned is needed going forward to assure soundness of the system into the foreseeable future. We are entering a period in which the Trust will have to begin redeeming the bonds it holds. The problem is that there is a large deficit in the discretionary budget, and also in the medicare trust funds, and hence no money left to pay the money owed to the Social Security Trust fund. The government will have to borrow to pay the debt obligations owned by the S.S.Trust. The disability trust fund is separate and in a bit of trouble. Medicare contributions also go into Trusts (there are several for medicare). But the medicare trusts have to be supplemented from the general budget (more borrowing). Medicare is a serious problem. Social Security is not. They should not be lumped together.
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I didn't know any of them generated positive cash flow. I read that Geithner raided some Trust funds to avoid default earlier this year (to postpone default deadline to Aug 2nd. Anyway, isn't retirement liabilities where mountainloads of money are missing? They discount future payouts with 8 % return on their current assets AND still there is a huge shortfall (read it in the Economist). Retirement funds are insolvent all over the world, not just America. The stockmarket tumble we see happening will hasten the inevitable liquidity crisis. Where did you get the 2 cents on the dollar to balance Social Security? I wouldn't trust official numbers at the moment - officials everywhere are trying to ignore pension liabilities as much as possible.
 
I agree with your first paragraph in all respects except that I don't think Bernanke is lying. He would be too easily found out and that would ruin his credibility. I don't know how QE1 and the stimulus, i.e., corporate subsidies, was pulled off without printing, so I wonder if when he said the Fed was not printing he meant to refer only to the period since QE1. But the Fed does have assets always that they can draw on. And perhaps there was a behind the scenes arrangement with other central banks. No idea how they did it, but a significant portion of bailout money has been paid back with interest, but not all so far.

With regard to your last paragraph, I'm not surprised that you were unaware that Social Security has produced a large excess of contribution over payout. (You can get a precise figure from the Trustees 2010 summary report.) Much of the information you read re social security in the media is misleading, or simply wrong! There is a concerted effort afoot aimed at trying to kill S.S., and if that can't succeed, at least weaken it or put it in a situation, that given enough time, will cause it to fail. Too bad. It is a well run program based firmly on actuarial principles. You can get accurate information from the Trustees report available at the government website. Or just do a Google search. Very easy to track down accurate figures. The 2 cents per dollar number is right from the most recent report, 2010. This is always reported in the media and by those who want to Kill S.S. as a 16% increase in contribution needed. This is correct! the current rate is 12.5 cents on the dollar and the rate needs to go up 2 cents to 14.5 cents. That's a 16% increase. Those who want to save S.S. report this as 2 cents on the dollar; those who want to kill it report it as a 16 % increase! You have to keep your wits about you at all times when dealing with a hot button issue like social security. A small but vocal minority is philosophically opposed to it, and a powerful lobby,i.e., Wall Street, see it as a potential gold mine if they can only get their hands on even a portion of S.S. money. That's what was behind the "privitization" push during Bush II. The actuarial basis of social security requires wide and full participation for it to work as intended. Even diverting a portion of ones contributions to a private plan would seriously damage the integrity of the system. Nevermind the reality that everyone already has the opportunity to build a private plan. (But many can't afford it, of course!)

I have no problem with those who oppose S.S. on philosophical grounds, but I want them to come out and say so, not spread lies. And Wall Street, well we traders know what Wall Street is about.

I am dismayed that the head of the S.S. administration, a Republican, does such a lousy job of defending the agency he heads. He keeps a very low profile and says nothing when S.S. opponents are saying absurd things, for example that it is a "Ponsi" Scheme! He needs to be replaced with someone who will help get the correct information out. The folks spreading these lies have repeated them so often that many assume they are factual.

It is fine to be opposed to Social Security, though it is a big mistake in my opinion. but it is not fine to lie or mislead.

Incidentally, there have been periods in the past when the Trust had to borrow, and other periods, as now, when the Trust contained a surplus.

With regard to Geither dipping into the Trust and spending the money for other than social security, he can't. It is protected by law and he can't spend Trust money directly for any other purpose. If Geither wants to get his hands on that money there are two legal ways: 1) To sell bonds to the Trust, i.e., borrow from it., or 2) Pass new laws altering the contribution rate, the retirement age, or the payout formula; thus reducing the the rate at which the Trust needs to redeem its bonds and effectively leave more money at Treasury to spend in the discretionary budget.

It is also possible to repeal the law protecting the Trust, but that would be political suicide, so I see virtually no chance that will happen unless the U.S. is in the process of financial collapse. It isn't.

I've written extensively on Social Security, its good and bad features. Mostly very good I would say. The main feature is that those who die young subsidize those who live longer than their actuarial lifespan. This may sound bad, but it is the genius behind social security, because it allows one to receive enough pension to get by, barely though, and never run out of money no matter how long one lives, and do this with a much smaller monthly contribution than would be needed in a private plan like a 401K to produce the same inexhaustible monthly benefit. Obviously the lower middle class and the poor have no chance of being able to contribute enough to a private plan to assure a reasonable retirement income and would have to be subsidized. Best to let the actuaries handle this in a defined benefit plan than the taxpayers at large.

We have a very good retirement arrangement as things stand. We protect the poor and lower middle class and at the same time provide opportunity to those with enough income to build a private plan in addition. It is pure selfishness, and ignorance regarding the advantage of defined benefit plans, that is behind those of means who want to kill social security. It is not in their best interest, but they don't realize that because they are fed so much garbage by those with a profit motive for wanting it killed.

There is a win win prospect for both Social Security and for Wall Street. And that would be to do what Norway does and invest social security Trust funds worldwide in equities and bonds. But that can't happen now, because the U.S. Treasury has become addicted to borrowing from the Trust. That very large continuous stream of cash flowing in was invested in Treasuries (they are special bonds specifically for S.S.). This was not just a little help in holding down borrowing costs! Now that the Trust will have to start redeeming bonds as the baby boomers retire, the Trust as a Treasury-buying client won't be there. Unfortunately, the Treasury does not have enough to pay the Trust what it owes without more borrowing. That's what everyone is worried about. This money is owed to the American people, it is their money. They are entitled to have it returned to them with interest. It would be wrong to renege on the promise made, because the money was spent elsewhere.
 
Hi, I will look into the trustees. I'm prioritizing news flow as things are really volatile and rioting still going on in the UK.

Social security would have been a superb balance check in the system had it been independent and only mandated to grow the funds as they see fit. IMO

Intuitively, after reading that people (analysts, scientific community) have underestimated longevity continuously and SS being secretly forced (?) to invest in treasuries (with negative real interest rates) it is far for adequately funded. To somewhat tie it back to thread topic: Treasuries = long dollar, and treasuries will plummet unless Fed buys over the coming 2-3 years. SS will take a big purchasing power hit for going long treasuries. This is not criticism against how SS is run.

If it was entirely privatized (as Wall Street wants) I can think of several ways the trusts would be looted. One form of looting we have in Sweden is pension funds being allocated to mutual funds which pose as actively managed funds but track index to 95+ % and has a 1-2 % management fee. These funds are being run by Sweden's big four banks and they consistently underperform index as a result of the higher fees. The Banks profit like crazy. Still, year after year pension funds and regular investments by Joe & Jane Doe trickle to these funds.
 
Do you like the way Norway runs their public retirement system? It seems they have low costs because it is run directly by the central bank and they invest world wide.
 
After a quick internet search I would have to say yes.

Benefits seems to be split into one basic component and one extra level depending on income tax contributions. The basic level, defined benefits, are like insurance in general. It stops everyone from being forced to have a huge rainy day fund. Insurance is a smart economic institution.

The second level seems to be capped which creates some wealth transfers (progressive taxation). I don't know whether more progressive taxes are needed in the Scandics, but if you take say, the 50% who have the worst GINI coefficient of the industrialized countries, they definately need more societal cohesion even if it means a lower GDP. High inequality is inefficient. I personally believe this, philosophically and economically, but lets not get too much into this as it's one of those debates that never get anywhere. ^^

If you have huge public institutions running the pension scheme they can negotiate much smaller fees. I think smaller fees will outweigh the benefits over any alternative private solution we see today. With well set up risk mandates you do not want to limit the investment universe (force domestic investments etc).

Can you think of anything bad about it?
 
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