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Record US Debt Vs. Keynesianism: A Bloomberg Presentation
Bloomberg has released another terrific interactive presentation on the ongoing duel between Keynesian economics and record debt levels (both in the US and in most developed countries). While certainly nothing new to regulars, it does provide a glimpse into the final chapters of the debate between record deficit-fans and what is be ultimate natural trade off - upcoming sovereign defaults on a global scale.
From Bloomberg - record deficit creation has generated certain benefits in a time of unprecedented economic crisis... however at a staggering cost:
Even with all the bumps and bruises in this recession, America's economy has had a smooth ride for a long time. Kudos for that goes to the country's use of counter-cyclical policies. For decades, the U.S. used deficit spending and low interest rates to soften recessions. (During boom times, it did the reverse.) This long-standing approach is now at risk due to the unprecedented amount of leverage built up over the last decade – especially in the public sector.
But it is a different picture in the public sector.
The net result is that the economy as a whole is more leveraged than ever as public sector borrowing more than offsets private sector deleveraging.
Far from being an accident of policy, the increase in government debt is consistent with its decades-long counter-cyclical approach of dampening the extremes of the business cycle, actively bolstering the economy when it's weak and reducing support when it's strong. (The government's policy closely follows the advice of economist John Maynard Keynes.)
Keynesianists will argue that boosting public lending is critical in avoiding sharp moves in the broader economy. Sure enough, Bloomberg's empirical analysis seems to corroborate this point:
Yet, as noted above, this interventionist approach comes at a price. And currently the price is that 90% of GDP (or almost 150% if one adds GSE liabilities) is encumbered by interest paying debt. As long as the interest is manageable, this works. When interest spirals out of control, as it eventually will, the whole house of card tumbles.
Bloomberg's politically correct conclusion:
If the reality is that we simply can't afford more debt and have to pull back from counter-cyclical policies, history suggests that we should expect a rise in economic volatility. The stability of the last few decades may not come again for some time.
The less palatable conclusion is that Keynesianism is on its death bed. And with an entire generation (not to mention an upcoming one) schooled in the precepts of a failed ideology, just who will be able to right the wrongs accumulated over more than 50 years of blind deficit spending? If saying the "stability will not return for some time" is a euphemism for the great unknown that will follow a tide of developed world defaults, so be it.
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Instability is the new black.
When I was a kid, the hottest new European trends and fashions always hit first in California.
No one actually follows Keynes advice. He advocated deficit spending to blunt recessions, and then payback the debts incurred in the boom periods. Keynes is not even a "Keynesian" as most understand the term. He is rolling in his grave over the neo-Kaynesian court economists ruining our world today, who spend in good times and spend more in bad times. Eventually all nations will be unable service their interest payments (without printing currency). China is not going to foot the bill, not for much longer...
+100000000
The modern distortion for political ends of Keynes' work is a travesty.
But remember, the current batch of hooligans believes this: Current IOU's will be "revalued" based on whoever has the political power. the government creates and allocates the "chips" in our monetary system; a new government can take them back and start over.
Warning: Assuming you have alot of chips because you're smart as opposed to in the right place at the right time may cause disappointment...
We are watching the process in action
I disagree with the assesment that these people have distorted keynes. From my view point the "means are the ends", it similar to the idea of the relationship between structure and function. The end result to Keynes ideas are always like this because power corrupts and fiat currencies consolidate power.
Yup. Centralized capitalism will fail just like centralized socialism. In the same way that the tools of Marx is never actually wielded by someone who followed Marx, the tool of Keynes has never been actually wielded by someone who followed Keynes. The same can be said for Friedman. Hopefully, the next generation will understanding how power corrupts and will not so eagerly give power to interventionists and central planners again.
"who spend in good times and spend more in bad times"
+ !!
This man gets it. The US has typically run large deficits during recessions, and smaller deficits during booms. That is not the gospel according to Keynes.
However, look northward, angels. Until the current mess, Canada had been running real, actual federal budget surpluses for years. Note that we don't have unfunded Social Security or Medicare problems that aren't on the books, either. Yes, we ran a very large deficit last year, and it will be still be large, though smaller, this year. But Canada is already climbing out of the hole, and I don't doubt we'll be back to paying off federal debt in a few years.
It's not that Keynesianism does or doesn't work; it's that it's hardly ever been tried.
I doubt that, but even if it's true, that theory needs to take a number and wait until laissez-faire has been tried.
The closest to laissez-faire is the city-state of Hong Kong, which has consistently scored very high on the Index of Economic Freedom (Heritage Foundation). Despite the very free market nature of no minimum wage law, no sales tax, low corporate tax, low income tax, etc. Hong Kong is highly socialist in having public housing, public health care, state-owned land, state licenses fees, etc. The Index of Economic Freedom also rank Canada higher than America even with the Canadian heavy regulation on banking and the Canadian socialized health care. The high banking regulation saved Canadian banks from the financial crisis and the trade off of having a strong capital position during the bust is weaker growth during the boom.
The top 400 U.S. individual taxpayers got 1.59% of the nation’s household income in 2007, according to their tax returns, three times the slice they got in the 1990s, according to the Internal Revenue Service. They paid 2.05% of all individual income taxes in that year.
In its annual update of the taxes paid by the 400 best-off taxpayers, who aren’t identified, the IRS also said that only 220 of the top 400 were in the top marginal tax bracket. The 400 best-off taxpayers paid an average tax rate of 16.6%, lower than in any year since the IRS began making the reports in 1992.
To make the top 400, a taxpayer had to have income of more than $138.8 million. As a group, the top 400 reported $137.9 billion in income, and paid $22.9 billion in federal income taxes.
About 81.3% of the income of the top 400 households came in the form of capital gains, dividends or interest, the IRS data show. Only 6.5% came in the form of salaries and wages.
Over the past 16 tax years 3,472 different taxpayers showed up in the top 400 at least once. Of these taxpayers, a little
more than 27% appear more than once. In any given year, about 40% percent of the top-400 returns were filed by taxpayers who weren’t in that exclusive club in any of the 15 years .
In all, the IRS received nearly 143 million individual tax returns for 2007, the year that ended with the onset of the worst recession in decades.
Not to imply any animosity on your behalf but those top 400 taxpayers EARNED (or their capital earned it for them) that 1.59% of the nation’s household income. We still don’t (yet) live in a system where a finite amount of income is distributed by any central authority.
I don't know why I bother replying to some random "anonymous" dweeb, but when you say "earned" pardner, there had better be a smile on those very thin lips of yours, sonny.
We've had an epidemic of debt-financed billionaires, as in they peddled debt, they way they once peddled snake oil, and before their execution they need to be tarred and feathered just like in the righteous old days.
Paulson, Greenspan, Peterson, Schwartzman, Greenberg, Cayne and the rest of those crooks didn't EARN squat!
They stole from the rest of us....
And great comment, JuicytheAnimal
Sorry but if the government sets up dumb rules, like California did with it’s energy markets or when the Feds kicked their homeownership wish fulfillment into high gear, I’m not sure it’s even unethical to take advantage of those dumb rules and try and make as much money as you possibly can. If the government let the mortgage bond laden banks and brokers bite the dust when they blew it yes it would suck for a while…sure… but the air would clear eventually and we’d all pick up the pieces and rebuild. Now, because of the bailouts the pain will be much greater but much slower (for now) and all those dice-rolling bigshots get to keep the giant wads they should have lost… on our dime! Those guys placed bets, it worked for a while and then they blew up. But the crime is the government bailout that let them keep the money they should have lost. Who had more skin in the game and played higher stakes than Dick Fuld? No one – and because Lehman didn’t get bailed out he pretty much lost it all. That’s the way it should be.
Many smaller players took advantage of the same dumb rules buying properties with little/no down payment and low rates, flipping, mortgage hustling and the like. Some got out in time, some didn’t. Some who didn’t are getting more government help now than they probably should be given what they knew what they were doing at the time…but the principal is the same…just the $ amounts are different.
But it all stems from the government’s steroid push to juice homeowner rates beyond where they should have been in an unmolested credit market. Given the table the government set, yes some smart Wall Street fat cats figured out how to game the system and make a buck. In other news bears continue to use the woods as a bathroom. But none of those Wall Street honchos in their wildest dreams ever thought that one day someone would swoop in a pay off their hundred billion $$ casino tab. That would just be too good to be true…a free lunch in fact. Only the government would come up with a dumb idea like that.
And hey, editor….who let the above clown get away with inciting violence against specific, real people?
look - take your logic to the city basketball courts and try to game their pickup games with some loophole rules and see what happens to you.
The government is suppose to be PAID by us to protect the common interest.. not allow every lawyer backed con man to make hay with some poorly written rules (or agreed upon backdoors)
if you want everyone for themselves.. then smile when a few wild mobs smash through your door and blame you for not making it stronger and fullproof just like the rules you blame in the same vein
You're dating yourself. Ever since JFK passed an executive order allowing public employees to unionize the government exists to serve itself and it's employees. Just think about the incentive structure and look at the crumbling infrastructure around you. Another dumb government idea we let happen.
I don't want everyone for themselves I want rational rules designed by people who don't believe in magic.
And there are damned few people left in this country who are in shape enough to form a 'wild mob' for over three minutes.
When you sell me something that you assure me is a good safe asset, while you are snickering with your colleagues about "toxic sludge", I don't think you've "earned" anything; I think you've committed fraud.
If you're suggesting Wall St. sold these MBS in good faith, believing they were in fact AAA worthy, you're either hopelessly naive, or you work for an IB PR department.
And, yes, on the usual legal principle that responsibility flows to the top, I think Paulson, Blankfein, et al should be on trial, and ultimately, in jail and broke.
Again, the Government made the rules and the mandates surrounding the mortgage market...including those bogus AAA ratings that come from S&P/Moody's - two government protected oligopolies. Ever wonder why there are scores of firms that rate equities but effectively only two bond rating agencies?
Besides if the government says to the banks: 'give more mortgages to these special groups of people without risk adjusted higher rates...or feel our wrath' the banks are just going to figure out a way (more or less legally in this case) to pass that risk downstream. Without the government mandate to make credit a civil right none of this would have happened.
"Keynesianists will argue that boosting public lending is critical in avoiding sharp moves in the broader economy. "
This would be relevant if the banks were actually lending...
Partial History of
U.S. Federal Marginal Income Tax Rates
Since 1913
Applicable
Year Income brackets First bracket Top bracket Source
1913-1915 - 1% 7% IRS
1916 - 2% 15% IRS
1917 - 2% 67% IRS
1918 - 6% 77% IRS
1919-1920 - 4% 73% IRS
1921 - 4% 73% IRS
1922 - 4% 56% IRS
1923 - 3% 56% IRS
1924 - 1.5% 46% IRS
1925-1928 - 1.5% 25% IRS
1929 - 0.375% 24% IRS
1930-1931 - 1.125% 25% IRS
1932-1933 - 4% 63% IRS
1934-1935 - 4% 63% IRS
1936-1939 - 4% 79% IRS
1940 - 4.4% 81.1% IRS
1941 - 10% 81% IRS
1942-1943 - 19% 88% IRS
1944-1945 - 23% 94% IRS
1946-1947 - 19% 86.45% IRS
1948-1949 - 16.6% 82.13% IRS
1950 - 17.4% 84.36% IRS
1951 - 20.4% 91% IRS
1952-1953 - 22.2% 92% IRS
1954-1963 - 20% 91% IRS
1964 - 16% 77% IRS
1965-1967 - 14% 70% IRS
1968 - 14% 75.25% IRS
1969 - 14% 77% IRS
1970 - 14% 71.75% IRS
1971-1981 15 brackets 14% 70% IRS
1982-1986 12 brackets 12% 50% IRS
1987 5 brackets 11% 38.5% IRS
1988-1990 3 brackets 15% 28% IRS
1991-1992 3 brackets 15% 31% IRS
1993-2000 5 brackets 15% 39.6% IRS
2001 5 brackets 15% 39.1% IRS
2002 6 brackets 10% 38.6% IRS
2003-2009 6 brackets 10% 35% Tax Foundation
Wow, and I''d have pegged the '45-65 time period as America's zenith, who knew it came with a 90% tax bill!!
You said:
This would seem to imply that the US is not a developed country. Unfortunately, by a range of standards including income inequality, unemployment, and import/export balance, I think that implication may be justifiable.
Oddly, we were a developed country, but maybe not anymore. It strikes me driving around my city. I see things like big bridges carrying the interstate across the river. I see grand brick school buildings, all of which were built at least fifty years ago. I see streets now filled with potholes, a worn down and unattractive airport.
I think to myself, we couldn't build that today. We haven't built a new high school in god knows how long. We could never afford new bridges on the scale of what was possible in the mid-20th Century. Highway projects across the nation are bogged down in red-tape and land-use wars. We would never go through the expense to put someone on the moon today (despite Bush's plan to do this, on the way to Mars, I very much doubt it will happen.)
I know that grand public works are not the only measure of success, but it does strike me that my America isn't capable of doing these things that my grandparent's America was capable of. And most of the reason is fiscal, not that we are backwards.
"I know that grand public works are not the only measure of success, but it does strike me that my America isn't capable of doing these things that my grandparent's America was capable of. And most of the reason is fiscal, not that we are backwards."
People who touted the stimulus by bringing up Hoover Dam conveniently ignored the fact that a project like Hoover would never get off the drawing board today, for a multitude of reasons.
The cultural ethics of the country today would prevent most of the grand projects we benefitted from to be constructed. A country that found its definition of "progress" in growth and the construction of skyscrapers and curved-arch dams, along with school buildings, gyms, train stations, etc., would be completely out of place in this day and age.
It's not that the country isn't capable, it just doesn't have the will (and now, it doesn't have the money, either).
I think the problem is that back then we would only need a few lawyers; today we would probably need a couple teams... the legal system is kinda fucked.
I think the problem is that back then we would only need a few lawyers; today we would probably need a couple teams... the legal system is kinda fucked.
That ship sailed a long time ago.
Public sector employees exist to vote themselves more goodies not to build bridges. Public sector wages and benefits have reached staggering heights yet our infrastructure, schools and other heavy lifting is worse than ever.
Meanwhile all the easy stuff like diversity counseling, edu-biz happy talk and PC cheerleading is blooming like algae all throughout government.
As happened in Rome, Spain and countless other empires. This is just part of the cycle.
I dunno, seems like the rich folks could help out a bit more huh? I mean after all, they get more services from our government, like bail-outs.
Why not tax away all the top 400's wealth each year? After all their incomes are a pimple on the ass of an elephant compared to our government's spending.
Envy is an ugly trait.
"Tax the rich, feed the poor. Till there are no rich no more." Ten Years After
Then who will feed the poor? The question is never answered.
"We are all doomed", Dr. Marc Faber
The rich get richer and richer while the working class feeds the poor. Ya see, feeding the poor is really like feeding the rich because if uncle same feeds them and keeps them healthy then they don't have to pay a liveable wage and their corporate profits increase. And the working class (although shrinking as working poor grows) carry the majority of tax burden. Plus, monies spent on social welfare programs are only a fraction of what our government spends on Corporate hand outs. And I wouldn't cry if say those 400 folks only made a million per year instead of 138M. Envy is a reasonable trait when you do your share of the work and you don't get your share of the reward. Funny how it's an admirable trait for a corporation to want to grow market share and profits...but for a worker to want more shame on us! Long story short a big part of the problem in this country today is that the money & therefore power is too concentrated and it's getting worse every year. NOBODY needs to be worth 100 million much less a billion. That is more like playing the game of monopoly, and you know what happens when one person has it all. Game over! We're in another guilded age. And they have destroyed the economy and the country will follow if things don't reverse.
But yes, the government (Aka the rich folks spending everyone elses money) needs to stop pissing way cash too. Doesn't have to be one or the other. Perhaps if they got taxed a little more they wouldn't be so happy go lucky to spend spend spend knowing it would come from their future monies. But they don't give a fuck..cause they're not going to pay for it. And with no death tax when they die....they still don't even pay up. Instead their rich spoiled porn video making socialite children get to play with it.
Wow, you've really been spamming the sh*t out of this board today.
It was a fraudster bailout, not a rich bailout. Fraudsters won't even be rich had the government not backstop their losses. The self-made rich does not require or desire government help. The short-cut to riches only exist because the fraudsters got into government.
Banks aren't lending because they know interest rates are going up based upon the fed abnormal stimulative policies...The fed can push on the string all they want but that will not make it move.
It's so freaking obvious that banks are waiting for normalized interest rates before they'll lend. The normalized rates will normalize asset/service prices and we can start to build from a solid foundation. Anything else is just betting on red or black.
Someone who makes 50K a year pays a larger percentage of their income to taxes than the average person who made more than 138.8 million.
that may be true, but:
a. the multi-millionaire pays much more in absolute terms, and
b. taxes per se aren't the problem, it's the leverage and disconnect between taxing and spending afforded by the Fed's monetary policy and a fiat currency.
But it's the same rich fuckers who run our government. They are the ones who decide how much gets spent and on what. Absolute terms? Who cares. We are supposed to have a "graduated" income tax. That's fair. The multi-millionair benefits much more from his government then the worker. It is only fair that those who get more services pay more. And when I say services I mean shit like...government gives food stamps and free medical benefits to Walmart workers because walmart salaries do not pay enough for them to buy their own food and medical services. And I mean, government bails out their stock market and their investment banks etc when their bets fail. Wow, that's alot of services that I don't get.
And taxes per se are the problem....coming down the pipe. How else shall they pay down those debts? These fuckers got rich in this environment. I got broke. They can pay for it.
You said
There's that 4 letter F word again.
It's not rich against poor. It's rich against middle.
You got broke? Let's talk about broke when the dow hits 3k.
Then we can talk about...inflating the debts away.
Not good for j6p. Sad thing is, the more people i talk to about what's going on, the more blank stares i get. Many people get angry. Fuck em. Let em pay.
Well,
If you "got broke" it was because you had your head in the sand, believed the cr*p your realtor told you about buying more than you could ever afford to actually pay off (I mean who needs to worry about sh*t like that when "prices always go up" and you could always use it like a piggy bank whenever you needed some cash???) and, well, generally never bothered to figure out it was your responsibility to have a clue.
Not that the system isn’t “rigged” – but then that is something one should know long before they are in a position where they could “got broke”. Maybe if we, as a country, got over the “us VS. them” socialist B.S. and returned to some shared burden’s (part of your interesting comments in this thread was the lack of any mention that over 50% of this country pays NADA in taxes – ‘cause I guess they get nothing from it...).
One point you ought to get through your head – it’s far, far beyond broken at this point (though I am sure going back to 70+% tax rates can break it a bit more...). In fact the best thing that could happen is that it all crashes down. Surprisingly (or not if one knows history) such does not mean “everyone loses”. Many will come out just fine, but the mangled system we have created will get a much needed reset.
if you "got broke" just move to Cali and rob some muthafuckers.. even if you get caught, they'll be letting out the prisons during their BK parade soon
go earn your keep
That is such pathetic and patently false bullcrap, faustian fool.
Anyone familiar with the tax structure and revenue recovery knows that to be a falsehood, fool. The majority of American-based corporations don't even pay fed tax, nimwit.
Hedge fund managers defer their income forever. The same with many of the highest paid execs, and the tax laws favor deferred income only for the very wealthiest, read the tax code dishonest one.
I'm so fed up with you professional propagandists -- put up the data and tax codes to prove me incorrect, as we real experts know whereof we speak.
Taxes unpaid are indeed the problem, faustian fart! Profit shifting, profit laundering, how many hundreds of offshore finance centers (tax havens) are there, clown?
Let's see some data for a change....
lol, you sound so angry.
Look, just so I don't get on the 'stalk' list of someone calling themselves 'sargent', here's my feeble attempt at data. I'm not an "expert" at this, I'm proud to say, so I may have misinterpreted something in here.
http://www.irs.gov/pub/irs-soi/06in02tr.xls
That's individual tax data for 2006, the latest year I could find quickly. Just taking two data points as an oversimplified sample: tax generated from those with adjusted gross income between $50k and $75k (which happens to be me, unfortunately), if you divide total tax generated by number of returns, (E25/B25), you get $5,738 as the average tax generated per return for that income bracket. Next do the same for $1mm-$1.5mm bracket, and you end up with $293,981 per return. But I'm the first to admit I may be missing something.
As for taxes unpaid being the problem, (faustian fart, I gotta use that one), I believe the Treasury (and then the banks) gets first dibs at the money printed by the Fed, to pay for various spending programs that would be difficult for politicians to sell to the public were they forced to rely solely on tax revenue. As I understand it, this is 'free' money, above and beyond taxes. Assuming the money supply keeps expanding, this becomes the inflation tax. We (the middle class) pay for it one way or the other.
Listen, I'm all about anti-fascism. I just think the wellspring of fascism is the Fed's easy money, not tax evaders. I don't have the statistics I would really like, which is: what fraction of government spending is funded by the Fed's printing press, and what fraction by taxes.
What?? Only for a brief time during Clinton's Admin. did we run a surplus to dampen the boom times (and it didn't work). Usually we run a deficit boom or bust, and that is the real problem.
"What?? Only for a brief time during Clinton's Admin. did we run a surplus to dampen the boom times (and it didn't work)."
That's because most of the surplus was from Social Security revenue--which was then sunk into Treasuries, aka Taxpayer IOUs.
We haven't actually reduced our overall public debt since 1957. 53 freakin' years and counting. Warren Harding before that did it by slashing government jobs, and Andrew Jackson did it through sales of public lands. Oddly enough, those two methods might actually still work today, but no one except for maybe Ron Paul would be crazy enough to commit political suicide like that.
Ron Paul is brave since he always has that old penny collection to fall back on :)
Let's sell Alaska to the Russians (they can move in and we can expand the NHL in a few cities there)
Sell Hawaii to Japan since they still have wet dreams of owning it
And we can get bribed by China to let them invade Taiwan
"with an entire generation schooled in the precepts of a failed ideology, just who will be able to right the wrongs accumulated over more than 50 years of blind deficit spending? "
If only it worked that way. Unfortunately, when politicians, or political movements, invest decades of time and effort convincing the public that they actually know what they're doing...there's no turning back, just more twisted rationalizations for why it hasn't worked yet. John Maynard Keynes and his acolytes in the church of big government are the endgame to the American founding fathers' vision for a free and democratic society.
What free and democratic society would that be? Every last one of the founding fathers was an industrialist pig. The so called Constitutional Convention was nothing more than a trade show on the banks of the Delaware River.
A big problem is, so much of our popularly accepted history, ingrained in us from childhood, is nothing but an urban myth glowingly portrayed as fact. I don't know what the solution is. Self education? You can't save anybody but yourself.
Speaking as a bourgeois descendent of industrialist pigs (though with no aspirations to industrialist pigdom myself - I suppose you could ship me to the gulags as an artist/intellectual, though) I feel at some pains to point out that, while you are quite right that the American Revolution was driven by the ambitions of a wealthy minority, the Republic it produced has been massively beneficial both for the vast majority of those who have lived in it and the vast majority of the rest of the world. Has it got serious problems at the moment? Of course. Are those problems the fault of its original constitution or the Bill of Rights, or the men who drew them up, whatever their motives? I put it to you that they are not, any more than the appalling misgovernment of my own country by Uncle Gordon and friends is the fault of Magna Carta. My country has had over three hundred years of uninterrupted approximate liberal democracy and yours more than two. I think it's hard to argue that anywhere else has been nearly so pleasant a place to live over that time, on average. That elements of the process are and have always been corrupt, even large elements and horrifyingly so, does not make any attainable alternative preferable. As Sylvester Stallone would have said if he had had the benefit of a classical education, "Vivendum est quod est".
In collegium 25 years ago, the Professori taught us Rational Expectations Hypothesis and Efficient markets Theorems. They say you can not make monies in the stocksmarket. So I stay out of stock market and real estate market and I never lose my money. Thanks collegium. College is nice.
I believe it was Keynes who said, "We are nihilists Lebowski, we believe in nothing."
From IMDB:[while dunking the Dude's head in the toilet]
Blond Treehorn Thug: Where's the money, Lebowski? Where's the fucking money, shithead?
The Dude: It's uh... uh... it's down there somewhere, let me take another look.
hah, so very fitting. keynes would often come into a meeting, give a presentation, be asked a few questions and then flip his very stance on an issue after agreeing with the reservations / ideas of those amongst him. keynes was the original flip-flopper.
that said, his teachings / precepts have been wholly hijacked by those who believe in neither his ideas nor any ideals but instead simply employ his 'alleged' platform for the machiavellian advancement of their ulterior motives. but enough about every single keynesian alive today, haha. keynesianism, hahah, what an abysmal joke.
And so budget surpluses are good? Everytime the USA has had a surplus, it has been quickly followed by a severe recession. When government surpluses exist, the private sector goes on a debt binge.
Not just the USA. It is consistent and counterintuitive but govt surpluses lead to financial crisis. Govt running surpluses forces other parts of the economy to run deficits. With our massive trade deficit with China, the Chinese needed to purchase high quality US denominated debt to sterilize the excess dollars. When we started running surpluses, we stopped issuing govt debt and the Chinese went looking for new sources of dollar debt. Wall Street was more than happy to provide asset back securities, back with CDS so as good as TBills!. Presto, instant huge credit bubble in the good ole USA followed by debt depression.
There's something I don't really understand about living in the US. It's been 14 years now and my income taxes have mostly been going down, my salary going up (I'm a professional). But in all this time all I've heard (no matter what the economic situation is) is that we're doomed and government deficits are going to be our undoing and eventually I (we) will be asked to pay the bill. Are we there yet?
Signed: Confused.
What profession are you in? Are they hiring? Perhaps you work for the banks? My income has been cut by 2/3rds not to mention being unemployed near 1 year out of 5 for the past decade. And that's with a bachelors in computer science, communications skills, a customer service attitude, white skin and being quite talented to boot.
I think we're damn close to "there" if not there now. ...the "10%" unemployed know it.
Dude, you could be my younger sibling!
And I would hazard a guess the top poster is a derivatives dealer or swaps arbitrageur.
Umm, it's not the taxing (or the tax rates), it's the spending!
Amen. Spending is out of control. Taxing is not the problem.
For spite, I am willing to let ALL of the Bush tax cuts expire. Let's see how Mr. Economy and Mr. Market likes those old tax rates liberals long for.
Have not seen ANY liberals returning their Bush tax cuts the past decade (including hyper rich liberals Soros and Buffet). What hypocrisy.
it'll never happen since all the fear mongering that all raises in taxes will go directly to Shaniqua's Condom Fund and then to Sha-naa-naa's Abortion Fund since she never used the condoms... but YOU still paid for them anyway
every republican's nightmare
I'm sure Shaniqua and Sha-naa-naa will still be able to find money for crack, if not the condoms. What's the street value these days?
The End of Empire
http://www.foreignaffairs.com/articles/65987/niall-ferguson/complexity-a...
No defaults necessary. Central banks merely create new money and pay off the interest and the debt. It works as long as people take your money. Like a big con game.
Living near Cambridge (UK, Keynes's University) and much as I dislike Keynes (an egotist in thrall to, or in awe of, Ayn Rand), my (limited) understanding of his theory was to save in times of good to use in times of famine (ooh, Egypt?), which Governments have patently NOT done.
DavidC
The flaw in Keynes' reasoning was in his understanding of human nature. He gave politicians a rationale for deficit spending, at least part of the time. He allowed them to to distribute money and power as they saw fit, while sparing them the indignity of going hat in hand to the voters and asking for a tax hike. Just borrow from the future and avoid the immediate pain and backlash.
Keynes' mistake is a very obvious one; spending without paying is as addictive as any drug ever discovered. There was never any chance that governments which embraced Keynes would balance the books over the course of an economic cycle. The outcome, government debts spiralling out of control on a global basis, has been a foregone conclusion ever since we all became Keynesians.
I thnk it is time to bring back the monarchy here in the USA. And I would also recommend return to the Hapsburg rule and territorial boundaries.
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The top 400 U.S. individual taxpayers got 1.59% of the nation’s household income in 2007, according to their tax returns, three times the slice they got in the 1990s, according to the Internal Revenue Service. They paid 2.05% of all individual income taxes in that year.
In its annual update of the taxes paid by the 400 best-off taxpayers, who aren’t identified, the IRS also said that only 220 of the top 400 were in the top marginal tax bracket. The 400 best-off taxpayers paid an average tax rate of 16.6%, lower than in any year since the IRS began making the reports in 1992.
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The problem with these facts is that a vital piece of information is always omitted: while the bottom slice has a hard floor of zero income, the top slice is open ended. Moreover, the tax system is progressive. While the bottom slice pays no taxes, the top end has a highly varying amount of taxable income v total income.
In other words, it is easy to try to prove too much by citing these numbers. Sadly, they are frequently cited by people who are looking for an excuse to justify coveting the wealth of others.
When concept of capitalism was first being developed up to Adam Smith's classic work "The Wealth of Nations", it was recognized that overall standard of living would be maximized by having a true free market system. It was also recognized that a free market system could only really thrive in a democracy. Our constitution was based on these two important concepts.
For myself, I had always wondered whether in a true free market system with little government intereference, if an elitist wealthy class would emerge that would ultimately enslave the rest of the populace. What I have since learned is that under a socialist system, especially a national socialistic system (fascism, which is what we're becoming), that is guaranteed. The rich use the government to further enrich themselves.
Our constitution empowers the government to protect private wealth. Someone coming into our home and stealing the product of our labor is a thief and it is the responsibility of the state to return our wealth if possible and punish the offender. But there are many shades of gray as to what constitutes sound business practise, and what constitutes parasitic behavior by some entity against individuals.
This is where democracy wins, because if the people feel the rich have pilfered society via parasitic behavior, then government is one means of re-addressing the excessive economic stratification. Indeed, even Adam Smith argtued that the rich should pay much more tax since they have more wealth that the government has been empowered to protect. But its my understanding that the rich currently pay less on a percent basis, because of their influence over government officials.
The wealthy paid most of their income in taxes during world war II, a war that many viewed as necessary to protect the wealth of individuals in the US by protecting US sovereignty from a fascist state that was bent on not stopping in Russia. During the wars since then, taxes on the rich have fallen, and yet we've been through the Korean War, Vietnam "conflict", Persian Gulf War, Iraq War, and the war in Afghanistan. All this does not include the massive military we've developed. During all this, taxes on the wealthy have declined, with the argument that rasing them would deter economic development.
Well maybe it has, but be forewarned, while million sof americans have lost their jobs, the financial sector is giving out record bonuses....the very financial sector that has been bailed out to the tune of trillions. No matter how we proceed to re-addressing the imbalance, its going to get very ugly. The social unrest Paulson claimed would happen in 2008, never really could be stopped.
Didn't Cheney say "in the final analisis, deflicts don't matter. Ronald Regean proved that."
looks like 85' was the tipping point.
That counter cyclical v. GDP range analysis is multicolor crap. Sample size of 5? causality? Other factors?
Tyler,
Thank you for this great article. I appreciate Bloomberg because of all the main stream press outlets, they come closest to expressing what's really happening. However, I take issue with a very important point in the above article, one that you had not addressed and yet one that is such a fundamentally important point that I feel it should be blazooned in the sky.
"For decades, the U.S. used deficit spending and low interest rates to soften recessions. (During boom times, it did the reverse.)"
This statement at face value is wrong and misleading. It is true that the countercyclical approach was softened by the lowering of interest rates by the Fed during recessions, and the raising of interest rates during boom times, although the self-declared success of monetary policy by the Fed has been and should be challenged.
However, it is NOT true that the government reversed deficit spending during boom times. In fact, Ronald Reagan and George W. Bush and their allies in congress ballooned spending regardless of what the economy was doing. Keynes argued that fiscal policy is another approach (in addition to monetary policy) to moderating the business cycle, but that occurs only if the executive and legislative branches of government have the necessary discipline to produce surpluses during boom times. They simply do not.
During downturns, the president and congress borrow money to promote social programs to maintain social stability. During boom times they borrow money and give it to their special interest groups to attract funding for re-election. Fiscal discipline is so low on their prioity list, that fiscal policy as a tool for counter-cyclical control of the economy is near if not at the top of the list of all misguided Keynsian principles.
It is because of the governments historical inability to allow surpluses to develop during boom times that the public debt load has grown to grow to unsustainable levels.
Exactly.
And so why didn't we save (run surpluses) in the good times?? Because Americans became lazy, entitled, victims insistent that government take over more areas of their life and relieve of maladies of every scope and type. And politicians like to oblige them and control more resources to feel good about themselves.
Until we put about 50% of government back in the can, we are doomed.
Wow. Are you ever stupid.
The U.S. doesn't ever have to default on its debt because it can print the money that it is denominated in. It likely won't come to that, and if it did it could be inflationary, but the fact remains. The risk of a US default is extremely close to zero. The US government faces REAL constraints, but not NOMINAL constraints.
Anyone wanna buy some CDS on Treasuries?
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