Great Comment on "Meltup" Inflation Film

Friday, May 21, 2010

My previous post entitled "Inflation 'Documentary' Lacks Evidence" received an excellent comment from TJ. His comment has motivated me to flush out more of my thinking and respond to his counter points. Thanks TJ, I appreciate your input!

I agree with about 1/2 of the bullets and disagree with the rest. You are correct that the video should give more evidence. One of several bullets I disagree with is Soc Sec. It is a generational Ponzi scheme where those who got in early had pretty good benefits and today it is not sustainable. The number of workers supporting each retirees has greatly shrunk. Soc Sec today is broke - they have to supplement the SS taxes collected to have sufficient payouts. This will get worse. Medicare is in even worse condition.

The problem with social security is the unforeseen possibility of a drastic reduction in the sheer numbers in successive generations. The baby boomers were our largest generation and successive generations, X, Y & Z, were smaller in number. This clearly creates a major structural challenge to a program based on transfer payments. Adding the disabled, children with deceased parents, raising benefits, etc. have all contributed to the higher necessary input payments. I suppose my argument is one of semantics, it's just not a literal Ponzi scheme but it certainly does have plenty of structural problems that need to be resolved. I see no way around it becoming a needs-based program and I am certainly not counting on it for my retirement.

On "higher taxes will lead to less tax revenue" - this is true at some level of tax rate. Don't you recall when the income tax was reduced it generated more revenues? Again at some point of reduced taxes it would not bring additional revenue.

Yep, it's true of some level of taxes will not lead to greater revenue and the opposite is true as well. I just hate the use of absolutes in a claim like the one they made. Yes, Reagan's reduction in tax rates resulted in higher revenues, no argument there. But, looking at tax rates, we are at historic lows for top tax rates and it seems inevitable that these rates will need to rise in the foreseeable future.

"Of course this comes with consequences down the line but the intention is that it will not be as bad as allowing a total collapse. These are lessons we learned in the Great Depression........." You sound like a believer in Keynesian economics. Keynesian economics will not work forever and it will surely fall someday - maybe sooner than later.

I'm not a believer in many interpretations of Keynesian economics. I see the government's role as "lender/employer/demand of last resort" as extremely important in times of complete meltdown. I do not believe in the interpretation of Keynesianism that motivated times such as Johnson's Great Society. I do not think the government is the best allocator of capital during good times, I think that role is best left to the free market.

But, I traded equities on Wall Street from the height of the market in 2007 and through the 2008 crash. I witnessed first-hand the complete panic that beset investors. Without government intervention I truly believe the entire financial system would have collapsed. I see no way Merrill Lynch, Morgan Stanley, Goldman Sachs, Citigroup, Bank of America, General Electric and many others would have survived if no actions were taken after Lehman went bankrupt. The expansion of deposit insurance, guarantee of commercial paper, TARP capital injections, etc. were absolutely crucial stabilizing mechanisms for the system. When the entire world wanted to deleverage at the same time, the only entity capable of leveraging up as demand of last resort was the US government.

I agree this level of involvement must decline over time but remember that Keynes was primarily interested in saving the free market system during times of great stress so that its potential could be unleashed again in better times. This recession necessitated the use of Keynes' prescriptions as it has been a massive demand side contraction, much like the Great Depression and Japan's lost decade.

Have you noticed the destruction of the dollar since the depression? Prior to the depression gold was relatively stable - a good monetary medium. Gold's long term trend since it was $30/ounce has skyrocketed.

Well, this is a very complicated issue and I'm not sure it lends itself to simple interpretations like the dollar got killed and gold has skyrocketed implying our mistakes. Since leaving the gold standard, the price of gold has exploded quite rapidly. But, for a commodity in demand with fixed supply, this isn't all that surprising. While the gold standard did enforce monetary discipline to some degree it had become a major hindrance for a massive economy like the US.

The value of currencies are largely relative. The dollar's decline is also largely a result of the creation and strengthening of the monetary union in Europe with the euro representing now over 50% of the DXY index. After WWII the only dominate economy was the United States and we greatly benefited from this as the "last man standing". But, over time Japan has rebounded to become a global economic power and Europe has completely recovered and grown becoming a fully functioning, integrated force in the global picture. Much stronger economies around the world have only worked to improve all our standards of living even while they have developed into very capable competitors to the US.

"there is no need to not have any debt as long as we can service this debt over time. It may be very useful for us to accumulate debt during difficult times and work to pay it off in better times..................As long as a country can produce more than $1 for every $1 it spends to service its debt, it is entirely logical and intelligent to have debt within reason." The problem IS the debt level is unreasonable. When you say to service the debt, it sounds like paying interest on the debt. Of course the GDP is higher than annual interest on the debt. The annual interest per citizen is $2100 and growing rapidly. How can this be sustainable and this is just the interest on the debt - let alone welfare and defense spending.

The national gross debt is 90% of GNP and increasing. With high sustained unemployment the gross debt levels are unsustainable. You seem confident in the current recovery. What recovery? The "perceived" recovery is running out of gas. We probably will see another dose of bailouts - bye bye Keynesianism. Greece is 130% of GNP with blood in the streets.

The borrower is a slave to the lender.

The level of debt is worrisome to be sure. We are walking a fine line but the current circumstances show a still very high level of demand for US Treasuries and interest rates are very low. I don't see interest rates rising substantially until we see a sustained economic recovery which should help us to grow our way out this mess. GDP numbers have been very strong, let's not forget. Yes, we've had massive stimulus and the unemployment situation has not turned the corner yet but it has stabilized.

Ultimately, I am confident in the US economy. I believe we have the greatest economic engine in the world and it releases the incredible innovative human spirit like nothing before it. I see areas in biotechnology, pharmacology and green technology as new waves of the futures. We can still invent and export our ingenuity to the world. Our engine has sputtered but I haven't lost faith yet.
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