gdog

U.S. Dealing with a Boatload of Debt - Moody's

Well said Sir!

The coming period will require the testicular fortitude and foresight demonstrated by the likes of Chris, and Warren Buffet.

Join us! In 30 years we shall be known as the greatest generation.


On Feb 05 03:56 PM Chris B wrote:

> I hate the national debt and I hate paying 9.5% of my taxes to cover
> the INTEREST ONLY on debt that we built up in previous years just
> because we didn't want to pay higher taxes or cut spending at the
> time. We're get absolutely nothing in return for those billions
> in interest spending. Not more infrastructure, not better security,
> not better schools - nothing. The ROI on the Iraq war is negative.
> It's the price we pay for being selfish and irresponsible in previous
> years.
>
> However, if the beginning of the great depression is any guide, now
> is NOT the time to rediscover fiscal conservativism. The good times
> were when we should have been running balanced budgets so we could
> be better prepared for times like this.
>
> 9 out of 10 economists will tell you that cutting government spending
> in the middle of what was then a severe recession was a contributing
> factor in making it the great depression. It was only when the US
> took on unprecedented amounts of debt and put people to work building
> roads, bridges, tanks, and ships that the depression ended. The
> boatload of WWII debt was paid off after several years of subsequent
> economic growth boosted tax revenues (at the higher tax hikes that
> had been justified by WW2).
>
> The world has given us a once-in-a-lifetime gift; offering to loan
> the US government trillions of dollars at interest rates of less
> than 2%. If I could borrow money at those rates, I'd be in business
> because I could surely find a way to earn yields greater than that.
> Similarly, the US should be able to put this money to use to generate
> long term economic gains (infrastructure, technology, education,
> etc.) that will generate revenue above and beyond the cost of the
> loans - just as was done in the late 40's through the 60's.
>
> First, get us out of the depressionary spiral by investing in the
> future, then balance the budget when things get better, then reap
> the rewards.

Economy Watch: What if Stocks Were Priced in Gold?

Thank you John, I'm glad you find my comment interesting.

Your questions, I believe, are striking at the heart of a long debate in economics over the government's ability to influence output through fiscal and monetary policy, and a general economies ability to maintain or achieve equilibrium.

The basic theory goes that in times of reduced output, governments should spend in deficit to spur growth, this is difficult when sticking to a commodity currency like gold, once the government is out, its out.

The opposition to this view seems to believe that government influence is not needed and a economy will achieve natural balance in a short amount of time. This classical view of human economic behavior is ridiculous in it's reliance on human rationality, which is required to be at an equilibrium.

Humans are not rational, and their behavior cannot be modeled through physical mathematical models alone. Imagine an alcoholic, and his preference for alcohol. Before having any drinks, he would prefer to have none, once having a single drink he would prefer to have 10, once having 10 he wishes he had not had any at all. This preference chain presents serious problems for a mathematical model because of it's inherent irrationality, but this analogy can be extended to Citi, and Morgan Stanley's preference for high leveraged finance; and hence things become very complicated.

Fiat currencies allow for a government to adjust to market conditions to achieve a "more favorable" result for an economy when market participants fail to act in rational manners.

Oftentimes its not even a question of rationality, a simple "economy" with three participants two goods, and two time periods, requires a 12x12 (12 dimensional) system of equations to "solve" for equilibrium conditions. This is very difficult to do. Add in irrational behavior by participants on top of this, and equilibrium becomes nearly impossible to compute, and thus adjustments to observations become necessary, and it is the hope, in our real economy, that these adjustments can be made quickly, and fiat money makes this possible.

(As a side note, the addition of "non-replicable" assets, or assets that cannot be expressed as a combination of other assets, credit derivatives are such an example, means that an equilibrium calculation becomes truly impossible as a n-1 system (with n-1 equations and n unknowns) has been formed, which is solvable only down to a single, likely bounded, vector (prices and general consensus can take on many different values bounded by reason, which is what we are currently observing globally with asset prices in general). The other time we have seen this in recent history was with enron and the manipulation of CA energy prices, now like then, corruption and lax regulation were key to the problems.

I don't think that quite answers your question, but I tried.




On Feb 02 07:12 PM JohnAl wrote:

> Mr. Ahlgren, another well thought out and well written article.
> Thanks.
>
> Your reasoning is sound. Like you, I've lost confidence in the
> dollar, but it appears that we're either wrong or early. I'm in
> gold, but I'm still hedging my bets. They may be able to patch this
> thing up one more time. People want to believe in the dollar, which
> comes down to belief in the US government. Obama popularity polls
> may be the best indicator out there. The expectations are high that
> he's going to be able to fix things. To the degree his popularity
> wanes that's an indication that "hope and change" are on the decline.
> That's an indication that it's time to buy more gold.
>
> Gdog, your's was a very interesting comment. Especially this:<br/>
>
> "Productive ideas, innovation, intellectual capital, these are the
> things the are important in a knowledge economy, in any economy.
> This is where uninhibited scare resources always flow.
>
> Investment in the US is all that matters. New technologies, new energy,
> wonderfully productive things yet thought of that will change and
> shape our lives. This is what the US does. It is what we are very
> good at.
>
> ... Come on people. Believe in this country!"
>
> I agree, but for the life of me I don't see how sound money, based
> on gold or something else, is incompatible with this. I don't see
> how sound money doesn't help this country.
>
> Why do you think fiat currency is good for the US or any country?

Economy Watch: What if Stocks Were Priced in Gold?

Gold...

Imagine a martian looking down, it see's us digging yellow stuff up from the ground, and then digging wholes again to put it back in for storage; he thinks to himself..."these guys are frickn crazy!"

Gold has no productive value (actually very very little productive value).

Productive ideas, innovation, intellectual capital, these are the things the are important in a knowledge economy, in any economy. This is where uninhibited scare resources always flow.

Investment in the US is all that matters. New technologies, new energy, wonderfully productive things yet thought of that will change and shape our lives. This is what the US does. It is what we are very good at.

Do I think the price of gold will rise? yes probably, is it a signal of the horrific future you imply, absolutely not.

Come on people. Believe in this country!

In any case, if you don't then consider:

The us has a lot of dollar denominated debt, it also has the gold market close to cornered, if gold rises as the dollar devalues, than the US balance sheet gets better and better, and ultimately nothing changes. (So if you got excess dollars you sure better let the US buy them back).

There is still a lot of undiscovered gold, it just happens to reside in some of the least explored regions of the globe. So there is a ceiling on gold, were just not quite there yet, partly because it has no productive value.

Is It Time to Buy? What History Shows

Mark10r: I would say this true except that the gov't is artificially inflating treasury prices.

Is It Time to Buy? What History Shows

Sideways?

Maybe for some...

Govt allows banks to use toxic assets for loans to buy treasuries, pushes price of treasuries up, foreign govt's also want treasuries as their currencies tank. Interest rate goes to zero.

Gov't is flush with cash, goes on the biggest building spree since whatever year. Bridges, barracks, roads, bio tech, clean energy tech, stem cells, tunnels, levees for new orleans, schools, hospitals. Everything a caring government might build with oodles of free cash. If this creates any economic activity at all, it's a net gain for the gov't and everyone who invests.

Probably also a great time for small business sub contractors.

Allocate accordingly.


On Dec 09 06:52 AM The LFB wrote:

> I really don't know why you and everyone else who writes about this
> stuff doesn't see this:
>
> Put EPS on an S&amp;P chart. You will see that the sustained 2003-2007
> rally didn't begin until long after earnings had crashed and AFTER
> they begun to rise once again.
>
> And if you look at the EPS during the rally, you'll see it goes up.
>
>
> Of course there will be intermediate ups and downs-we're in a 18%
> upswing on the S&amp;P right now from the Nov. 21 low. But these
> are moves for traders, not investors.
>
> Stocks are probably more likely to move up and down like this without
> a sustained rally for several years because earnings still have further
> to fall.
>
> The ones who saw price declines coming and bought debt are way ahead
> of the game. Why? Because in the three months to October, headline
> CPI fell at a 4.4% annualized rate which means during that time they
> were earning maybe 8% annualized. And they got to sleep at night.
>
>