What would a US sovereign debt crisis be like?

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athelas
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What would a US sovereign debt crisis be like?

Postby athelas » Sun Sep 26, 2010 1:20 am UTC

From the blog of an economics professor who's usually pretty conservative about his prognostications:
1. The Affordable Care Act won't be repealed or declared unconstitutional, nor will Republican candidates be running against it six years from now. Trying to repeal parts of it would likely backfire and destroy the private insurance industry, given that the process would be ruled by public choice considerations rather than rational technocracy. We still would end up with a larger public sector role in our health care institutions....

3. Social Security won't much change, keeping in mind that the number of elderly voters is growing larger every day. Given all their elderly white voters, the Republicans are already "the party of Medicare." The Democrats have become "the party of Medicaid." That locks three major programs into place, more or less. I don't hear serious talk of major cuts in defense spending.

4. Taxes won't be raised much (do the Dems seem to have great love for reversing the Bush tax cuts?), spending won't be cut enough (the recent Republican document is extremely weak), and within twenty years we will have a sovereign debt crisis in the United States, as one day a Treasury auction won't go well. I'll predict, but not favor, the emergency passage of a VAT, a' la TARP, which will restore fiscal stability but lower the long-term rate of growth. When that time comes, the VAT will indeed be necessary, though ex ante I would opt for less social protection and a higher rate of economic growth.
I'm inclined to agree: every government program has a huge entrenched interest behind it. Seniors want Medicare and Social Security, public sector unions want to ratchet up bureaucracy, tycoons want corporate welfare and more anticompetitive regulatory capture, and the huge number of poor who pay no income tax have every incentive to push for more government spending. On the taxation side, there is significant resistance to increasing taxes and history suggests that we can't actually squeeze out a larger fraction of tax revenue compared to GDP. The only popular kind of tax - on the rich - will raise only a small amount of revenue.

Put two and two together and I don't see any way for the US to avoid a sovereign debt crisis. My question is: what effect will it have on ordinary folks? Will it be a simple matter of the government saying hey, we don't actually have as much money to spend as y'all thought we did, or will it have a shock on the broader (private-sector) economy?

Note: the topic of this thread is the effect of a sovereign debt crisis. I think most of us agree that a sovereign debt crisis in the works; if you don't, lay out a way by which it can be averted, and that would be a valid topic for debate. But the blame game is not the purpose of this thread - and "put my tribe in charge - they're better people!" is not a way out of this mess.

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Re: What would a US sovereign debt crisis be like?

Postby lutzj » Sun Sep 26, 2010 3:21 am UTC

How would you define a "sovereign debt crisis?" Running out of foreign credit and being forced into serious austerity measures? Defaulting on some or all of foreign debt?
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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Sun Sep 26, 2010 7:22 am UTC

It mostly depends on defense spending IMO. The recent changes to medicare via "The Affordable Care Act" are projected to keep it at ~6% of GDP, so that shouldn't get horribly out of control as was projected in the past. Without changes SS will have to cut benefits to about 75% of what they are currently from 2037 to 2084, but that might be compensated for by an increase in the retirement age and a decrease in the benefits wealthier individuals get from SS. Either way I don't think those are break the banks issues. We were able to pay down the WWII debts by taxing the crap out of the wealthy and cutting defense spending a bunch. Military spending bounced back quicker w/ Korea and Vietnam, however a high top marginal tax rate of 70+% stayed around until Reagan. I'm thinking we'll see something of a flip, more cuts to defense along w/ an increase in taxes for the wealthy, as steps towards balancing the budget.

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Re: What would a US sovereign debt crisis be like?

Postby Dark567 » Sun Sep 26, 2010 4:31 pm UTC

roflwaffle wrote:We were able to pay down the WWII debts by taxing the crap out of the wealthy and cutting defense spending a bunch.


I don't know if you looked at the graph above, but taxing the crap out of the wealthy didn't provide a much larger revenue than what we have today.

As to the US's response to a debt crises(which I imagine to mean no one is buying the debt any longer), I imagine that the biggest response will be to inflate some of it away. It's the most politically expedient, the average person doesn't realize its going on until far after the decision has been made. It allows government to both print money to pay off the debt, and at the same time reduce the value of the outstanding debt. I am not sure that moderate to high inflation will be enough, but I expect it will be the first weapon of choice in a debt crises.
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Re: What would a US sovereign debt crisis be like?

Postby morriswalters » Sun Sep 26, 2010 6:02 pm UTC

Look at Germany after 1929. Or the South American countries who defaulted.

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Re: What would a US sovereign debt crisis be like?

Postby athelas » Sun Sep 26, 2010 6:17 pm UTC

Dark567 wrote:As to the US's response to a debt crises(which I imagine to mean no one is buying the debt any longer), I imagine that the biggest response will be to inflate some of it away. It's the most politically expedient, the average person doesn't realize its going on until far after the decision has been made. It allows government to both print money to pay off the debt, and at the same time reduce the value of the outstanding debt. I am not sure that moderate to high inflation will be enough, but I expect it will be the first weapon of choice in a debt crises.

Yeah, the same bunch of folks think that it'll be much harder to inflate debt away now, thanks to more financial sophistication. The price of long-term debt will spike as people expect you to keep inflating, which kind of defeats the purpose. It would work if we had a big pile of debt: then you could suddenly inflate and pay it all off with Monopoly money. But since the debt is made up of lots of different cycles of debt, the you'll fool the guys whose debt matures a day from now, but everyone else will adjust their pricing accordingly.

So yeah, inflation doesn't look like a good ace up the sleeve. :/

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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Sun Sep 26, 2010 11:42 pm UTC

Dark567 wrote:
roflwaffle wrote:We were able to pay down the WWII debts by taxing the crap out of the wealthy and cutting defense spending a bunch.
I don't know if you looked at the graph above, but taxing the crap out of the wealthy didn't provide a much larger revenue than what we have today.

As to the US's response to a debt crises(which I imagine to mean no one is buying the debt any longer), I imagine that the biggest response will be to inflate some of it away. It's the most politically expedient, the average person doesn't realize its going on until far after the decision has been made. It allows government to both print money to pay off the debt, and at the same time reduce the value of the outstanding debt. I am not sure that moderate to high inflation will be enough, but I expect it will be the first weapon of choice in a debt crises.
Correlation isn't causation and all that, but in terms of real dollars, higher top marginal tax rates tend to correlate w/ lower defecits, although as a whole there is still a general trend of increasing deficits. Deficits were lowest from post WWII to the mid/late sixties and really started to rise after the first cut to ~70% (From ~90%). That trend continued w/ the tax cuts to ~50% and ~28%. The only reversal we saw of that general trend was when Clinton bumped the top marginal tax rate up to ~40% and thanks to that as well as other measures we saw the first years w/o a deficit in about three decades. Besides increasing government revenues slightly, high top marginal tax rates can also be used to cut taxes for the poor, provide assistance for the unemployed, and so on, which is where we're going to see the greatest multiplier. Tax cuts for the rich just tend to result in more money saved and vice versa.

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Re: What would a US sovereign debt crisis be like?

Postby athelas » Mon Sep 27, 2010 2:49 am UTC

Correlational data's really hard to dig out...GDP growth is also a large contributor. The Clinton tax raises definitely raised revenue, but they wouldn't have generated a surplus if not for the strong economic growth of the dotcom boom, which is exogenous to tax policy.

I don't rule out that some sort of novel tax policy could raise enough income (The VAT was mentioned in the Cowen blog) but it's not enough just to say raise marginal tax rates. An explanation of such a policy would have to explain why huge variations in marginal tax rates in the past failed to really budge the amount of taxation as a percent of GDP.

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Re: What would a US sovereign debt crisis be like?

Postby Bubbles McCoy » Mon Sep 27, 2010 4:31 am UTC

A VAT might work in the long-term, but I think we're faced with a few short term problems that preclude it. I've heard a fair bit of noise from businesses that even if money's available to be loaned, there's a high degree of reluctance to actually take any on account of general uncertainty. Part of this is unavoidable and a structural part of a recession - reluctance to invest won't fully go away until the economy is moving again and the economy won't get moving until investment picks up; it's a fun little catch-22 that makes most recoveries somewhat gradual. However, in this case this reluctance has been accentuated by a couple of other factors, from the ambiguous effects the health care bill will have on employer mandates to the lack of a viable path to fiscal balance.

While new taxes might ultimately help fiscal balance, I'm unconvinced that a VAT alone would help the situation at large. America doesn't exactly have a reputation for tax code efficiency, and I doubt many would take the lone imposition of yet another tax as a strong signal that the government is trying to make doing business around here any easier. A larger restructuring of the code for both individuals and corporations might work if simplifies things nicely even if overall taxes go up in the process, but simply adding another layer to this mess isn't sending much of a positive signal to businesses concerned with the government's attitude toward business.

roflwaffle wrote:The recent changes to medicare via "The Affordable Care Act" are projected to keep it at ~6% of GDP, so that shouldn't get horribly out of control as was projected in the past.

Ugh. This is exactly why I dislike Paul Krugman, even if he has the occasionally interesting thing to say he so often wraps it up in condescension and misrepresentation. I've seen this Trustees report before, and while it's encouraging he overstates it. The table I presume he used to draft that graph is Table III A2 (page 54), yet they go in detail earlier in the paper as to why this growth has no grounding in historical fact (around page 12-13). Their conclusions do support the idea that the deficit will go down to 1.9% instead of the baseline of 3.8%, yet Krugman uses the .6% deficit that the report says will not happen unless congress changes its habits. He not only uses this wrong number in his graphs without any mention of what the Trustees believes history would implicate as the most likely scenario, he goes on to claim that anyone who believes further action must be taken to ensure long term solvency has some explaining to do when the report itself says further action must be taken.

roflwaffle wrote:Besides increasing government revenues slightly, high top marginal tax rates can also be used to cut taxes for the poor, provide assistance for the unemployed, and so on, which is where we're going to see the greatest multiplier. Tax cuts for the rich just tend to result in more money saved and vice versa.

What sources are you using when referring to the multiplier? You're not technically wrong, but usually when people discuss spending multipliers as being beneficial to the economy they are referring to short-term stimulus actions, which doesn't necessarily fit the bill for the current problem. We're out of the recession, and the problem is now more long-term whereas most studies of multipliers in these kinds of cases will explicitly state that they make no claims towards the effect on the long term effect on the economy (traditionally, a drop in the savings rate would imply a long term drop in the rate of capital accumulation and hence reduced economic potential). There might be cause enough to do something along the lines of spending stimulus in the short term, but it's not effective on the kind of timescales that are relevant when looking at a potential debt crisis - to the contrary, the reduction in savings would drive up interest rates on government debt and force a crisis even sooner.

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Re: What would a US sovereign debt crisis be like?

Postby bobjoesmith » Mon Sep 27, 2010 8:18 pm UTC

Well i dont ever think we will default; imagine the massive amounts of trade we do with other countries. The Great Depression dragged half the world down with it, so how much worse will it be if have a debt crisis? Even Greece's government was bailed out for fears of the tremors in the market it would create, how much more the US's government?

I would just like to offer a few solutions to any potential debt tho...

Jack tobacco and liquor taxes (really high), place a tariff on goods containing more than 30% sugar (say along the lines of 10%... have you seen Lucky Charms recently? not to say i wouldn't pay for the marshmallow goodness). Increase retirement age. Lower sales tax. Legalize marajuna and tax it heavily. Less liquor and tobacco will incur less health effects, thus you gain revenue off taxes and lowering cost of treatment for related diseases. Sugar leads to diabetes and heart disease, and currently our sugar prices are some of the lowest in the world. Would it really hurt Coca Cola to lose 10 cents on the dollar? Or for us to pay $1.20 for a coke can rather than $1? No, but that extra 20 cents could act as deterrent (darnit! i just have a dolllar) You'd kill two birds with one stone. medical marijuna can be less harmful than tobacco, tax that heavily too. Lower sales tax (yes thats state based but whatev) = more buying = more profits to tax from. Through all this you raise income and lower expenditure.

Lower standing army size, increase unmanned drone count, and robotics. men need food, water, medics, supplies, lots of gear, facillities to work out, eat, sleep... robots need... an empty space, a mechanic and gasoline (or watev alternate source you wnat) Military takes up huge percent.

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Re: What would a US sovereign debt crisis be like?

Postby Dark567 » Mon Sep 27, 2010 9:00 pm UTC

bobjoesmith wrote:Well i dont ever think we will default; imagine the massive amounts of trade we do with other countries. The Great Depression dragged half the world down with it, so how much worse will it be if have a debt crisis? Even Greece's government was bailed out for fears of the tremors in the market it would create, how much more the US's government?

Yes the US does massive amounts of trade. Yes it will be even worse with a debt crises. Yes it would cause greater tremors than Greece. Exactly why does any of that mean the US won't default? Unlike Greece there aren't enough other countries that could bail out the US.


bobjoesmith wrote:Jack tobacco and liquor taxes (really high), place a tariff on goods containing more than 30% sugar (say along the lines of 10%... have you seen Lucky Charms recently? not to say i wouldn't pay for the marshmallow goodness). Increase retirement age. Lower sales tax. Legalize marajuna and tax it heavily. Less liquor and tobacco will incur less health effects, thus you gain revenue off taxes and lowering cost of treatment for related diseases. Sugar leads to diabetes and heart disease, and currently our sugar prices are some of the lowest in the world. Would it really hurt Coca Cola to lose 10 cents on the dollar? Or for us to pay $1.20 for a coke can rather than $1? No, but that extra 20 cents could act as deterrent (darnit! i just have a dolllar) You'd kill two birds with one stone. medical marijuna can be less harmful than tobacco, tax that heavily too. Lower sales tax (yes thats state based but whatev) = more buying = more profits to tax from. Through all this you raise income and lower expenditure.

Most of that, with the exception of the increasing the retirement age, is chump change to the government. Would increased automation save money for the military? Eventually, but the R&D to get there isn't cheap.
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Re: What would a US sovereign debt crisis be like?

Postby Economica » Mon Sep 27, 2010 9:27 pm UTC

A US debt crisis would be pretty boring, methinks, in that it's essentially embedded in demography and entitlement spending.

If the US is going to see a debt crisis, it will be because the Federal government simply will not be able to find the revenues (by this I mean loosely, so both tax receipts and sales of bonds) to pay for health-related entitlement spending. Everything else -- Social Security, defense spending, the minor things the government spends money on occasionally -- is small relative to health-related entitlement obligations, both statically and dynamically.

A few quick stylized facts that may be of interest:
- Revenues hit an upper bound at 20% of GDP. This has been pointed out above, but is worth repeating.
- Defense expenditures are about 5-6% of GDP currently and show a practical minimum of perhaps 3% of GDP. Historically you're probably looking at 4% of GDP as a good benchmark.
- Retirement security entitlements run about 4% of GDP and it's a simple accounting exercise (though no simple political exercise!) to get that particular house in order, stabilizing it at about 5% of GDP, or at worst 6%.

The difference is health expenditures -- those show inexorable upward trend driven by demographic change compounded by the extreme inefficiency of the American health care system.

Image
The above summarizes things nicely; the scale is in percentages of GDP.

If you want to know where expenditures show an unsustainable trend, look no farther than healthcare.

Anyone looking for a revenue solution, short of something broad-based like a VAT, is willfully deluding themselves.

--

As far as effects, this shouldn't be too hard: higher short-term nominal rates on government bonds regardless of what the Fed has to say, possible failure of the Fed to be able to push around the short-term nominal rate as it used to be able to, and fiscal restructuring to correct the long-term imbalances. Costs of borrowing increase and bleed into the private financial market, which bleeds into investment and the real goods market. The tricky thing is that, as Cowen mentions, this is likely to happen suddenly, sort of like the financial crisis. Even people who see it coming will not be able to predict the timing.
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Re: What would a US sovereign debt crisis be like?

Postby savanik » Mon Sep 27, 2010 10:42 pm UTC

Just as a quick FYI, here's the 2009 budget 'crib sheet' - not representative of typical budgets because of TARP and all, but a good thing to look at. Took these features straight from http://www.gpoaccess.gov/usbudget/ - so it's straight from the horse's mouth here. Formatted so you can drop in your favorite spreadsheet of choice as-is. (Apologies for spam.)

Category,Subcategory,Millions USD
National defense,Total,"$697,763"
Social security,Total,"$689,801"
Income security,Total,"$610,571"
Commerce and housing credit,Total,"$451,669"
Medicare,Total,"$436,987"
Health,Total,"$373,616"
Net interest,Total,"$186,904"
"Education, training, employment and social services",Total,"$167,555"
Transportation,Total,"$124,995"
Veterans benefits and services,Total,"$96,948"
International affairs,Total,"$63,376"
Natural resources and environment,Total,"$57,393"
Administration of justice,Total,"$56,603"
Energy,Total,"$42,799"
"General science, space, and technology",Total,"$35,036"
General government,Total,"$30,220"
Agriculture,Total,"$24,136"
Community and regional development,Total,"$23,759"
Undistributed offsetting receipts,Total,"-$92,639"

As an addendum - TARP went under both 'Commerce and Housing Credit' and 'Income Security', and the 'Health' category is dominated by 'Grants to states for Medicaid'. Income Security is unemployment, and Interest is the net interest we're having to pay on our debts.

By my count, we've got roughly 66% of our federal budget in entitlements (Income security, TARP, Medicare, Medicaid) and 17% in National Defense, with interest on the debt accounts for 5% of our budget.

Reducing entitlements is really the best place to start to prevent a fiduciary crisis.
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Re: What would a US sovereign debt crisis be like?

Postby CorruptUser » Tue Sep 28, 2010 1:33 am UTC

The biggest problem I see is that income taxes are much higher than people realize. You might get a total of $40,000 a year, before paying maybe $10,000 in Social Security, FIT, and all the various state taxes (not even counting property and sales taxes), but guess how much your employer paid? He (or she) also had to pay 6.2% matching for Social Security (SS), Federal Unemployment Tax (FUTA), Medicaid tax, Medicare tax, and so forth. Whatever you receive from your employer, your employer has to pay an average of 40 percent more in taxes you don't see, FUTA being the biggest one. If I had to guess, I'd say that to even begin to fix FUTA is a political minefield even worse than Social Security. Imagine how long you would last in Washington being known as "the guy that wants to bankrupt injured workers".

If the tax burden was clearly placed on the employee and not the employer (as opposed to discreetly, in the form of lower wages), people might hesitate about supporting all the entitlement programs.

A simple and effective solution to taking care of Medicaid, Medicare, SS, and all the other entitlements would be the Negative Income Tax as proposed by Friedman. For those not willing to sift through wikipedia, basically all entitlements are replaced with Guaranteed Minimum Income (GMI). No registration, little bureaucracy, all citizens receive it. All incomes, not counting GMI, are taxed at a flat rate. The net result is the equivalent of welfare if you don't make enough, and a steadily increasing tax rate the more you earn. There is no possibility of being in the welfare-trap, which is the case where the loss of welfare from accepting a job offer makes you poorer because you lose the welfare.

For example, let's say the GMI is $15,000 and the tax rate is 30%. If you earn $10,000, you pay $3,000 in taxes and get $15,000 in GMI, for a net of $22,000. If you earn $300,000, you pay $90,000 in tax and receive $15,000 in GMI, for a net of $225,000. All other forms of welfare, whether it's FUTA, food stamps, Medicare, Medicaid, or even minimum wage laws, will become unnecessary.

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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Tue Sep 28, 2010 8:06 am UTC

Bubbles McCoy wrote:Ugh. This is exactly why I dislike Paul Krugman, even if he has the occasionally interesting thing to say he so often wraps it up in condescension and misrepresentation. I've seen this Trustees report before, and while it's encouraging he overstates it. The table I presume he used to draft that graph is Table III A2 (page 54), yet they go in detail earlier in the paper as to why this growth has no grounding in historical fact (around page 12-13). Their conclusions do support the idea that the deficit will go down to 1.9% instead of the baseline of 3.8%, yet Krugman uses the .6% deficit that the report says will not happen unless congress changes its habits. He not only uses this wrong number in his graphs without any mention of what the Trustees believes history would implicate as the most likely scenario, he goes on to claim that anyone who believes further action must be taken to ensure long term solvency has some explaining to do when the report itself says further action must be taken.
Can you post some specific passages? I'm looking for what you're posting about but I haven't found it.
Bubbles McCoy wrote:What sources are you using when referring to the multiplier? You're not technically wrong, but usually when people discuss spending multipliers as being beneficial to the economy they are referring to short-term stimulus actions, which doesn't necessarily fit the bill for the current problem. We're out of the recession, and the problem is now more long-term whereas most studies of multipliers in these kinds of cases will explicitly state that they make no claims towards the effect on the long term effect on the economy (traditionally, a drop in the savings rate would imply a long term drop in the rate of capital accumulation and hence reduced economic potential). There might be cause enough to do something along the lines of spending stimulus in the short term, but it's not effective on the kind of timescales that are relevant when looking at a potential debt crisis - to the contrary, the reduction in savings would drive up interest rates on government debt and force a crisis even sooner.
Even in terms of longer time periods, we're still going to see a business cycle and spending on low income individuals will likely result in a positive multiplier regardless of whether or not we're in a recession. Tax cuts can too (especially for jobs or investment tax credits), but tax cuts that are specifically for wealthy households tend to have weaker multipliers AFAIK. It really comes down to choice. Someone who is poor almost universally has to spend all of the money they don't have to pay from tax cuts or recieve in food stamps/unemployment. Wealthy people don't have to, so at least some of them won't (who knows how many), and it's fair to say that at least some of them are wealthy because they save more then they spend, so that group won't spend the difference in tax cuts either (probably a fairly consistent part of that group). There's some evidence that the MPC of the rich can actually be higher than that of the working/middle class because they have less debt to pay off, but for the poor it's generally the highest AFAIK. In terms of stimulus spending during a recession, there's some evidence that it can have a really big multiplier under certain conditions, but while recessions are fairly common having a zero bound as the authors put it isn't.

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Re: What would a US sovereign debt crisis be like?

Postby Economica » Tue Sep 28, 2010 5:20 pm UTC

Fortunately, it's quite easy to show that the 'multiplier' is a pretty meaningless concept no matter how you look at it. Which means we can get to more important long-run issues: the structure of the tax system, the composition of expenditures, the effects of public expenditure on the supply side of the economy, and the level and growth rate of public debt. Which, incidentally, brings us back to debt crises...
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Re: What would a US sovereign debt crisis be like?

Postby savanik » Tue Sep 28, 2010 6:32 pm UTC

After some thought, the sequence of events I picture is roughly this:

1. People who actually know what they're doing see the writing on the wall with regards to treasury auctions going badly in the near future and start ratcheting up the interest rate on U.S. Bonds to make ends meet as quietly as they can.
2. Journalists find out and begin trumpeting 'The End is Nigh!' We see another 20-40% drop in the stock market.
3. Somebody finally gets around to ranking U.S. Debt as less than AAA.
4. PANIC!

I doubt we'll see hyperinflation, but rough times all around, even for foreign investors.
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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Tue Sep 28, 2010 11:23 pm UTC

Economica wrote:Fortunately, it's quite easy to show that the 'multiplier' is a pretty meaningless concept no matter how you look at it.
It's only meaningless if we use the author's definition...
6. A stable expected NGDP growth rate (me)
...
Indeed using my definition the multiplier will be precisely zero


And w/ that assumption we can't have recessions. :lol:

They're correct that the specific meaning depends on context, but assuming NGDP will be stable isn't a realistic model, even if it does get rid of a multiplier.

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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Wed Sep 29, 2010 12:20 am UTC

athelas wrote:Correlational data's really hard to dig out...GDP growth is also a large contributor. The Clinton tax raises definitely raised revenue, but they wouldn't have generated a surplus if not for the strong economic growth of the dotcom boom, which is exogenous to tax policy.
I don't think the dotcom boom influenced tax revenue enough to account for going into the black. Based on what I've read it was due to the changes to welfare, tax policy, and cuts in defense spending in terms off existing spending. On top of that, with one party having the presidency while the other had congress, additional spending was also constrained.
athelas wrote:I don't rule out that some sort of novel tax policy could raise enough income (The VAT was mentioned in the Cowen blog) but it's not enough just to say raise marginal tax rates. An explanation of such a policy would have to explain why huge variations in marginal tax rates in the past failed to really budge the amount of taxation as a percent of GDP.
It's definitely not enough alone, but it certainly helps. Something along the lines of an extra ~$.5 trillion per decade if we let the top marginal rate go back to what it was. Overall though, we're in this mess mostly due to excessive military spending, ~$.5+ trillion per year more than it was under Clinton, which is what we need to address. Speaking of which, if the blogger in the original post doesn't think we can reduce spending, then how did Clinton manage it?

Anyway, it's just my WAG that having a wealth gap above some amount reduces how competative our economy is just like it did w/ the USSR (but in the opposite way). W/ no wealth gap we eliminate individuals and/or small groups investing large sums of capital quickly. Otoh, w/ a large wealth gap we stifle small business and all the potentially profitable ideas that could come from that.

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Re: What would a US sovereign debt crisis be like?

Postby Vaniver » Wed Sep 29, 2010 2:47 am UTC

roflwaffle wrote:Speaking of which, if the blogger in the original post doesn't think we can reduce spending, then how did Clinton manage it?
Clinton did not have the problems that we will have shortly- the main one that comes to mind is retirement of the baby boomers. Something's got to give- and Yglesias's argument is that we shouldn't expect a response that solves the problem in time. What we should expect is it to be put off until a crisis makes it impossible to put off, and then we're in a scary situation.

roflwaffle wrote:Anyway, it's just my WAG that having a wealth gap above some amount reduces how competative our economy is just like it did w/ the USSR (but in the opposite way). W/ no wealth gap we eliminate individuals and/or small groups investing large sums of capital quickly. Otoh, w/ a large wealth gap we stifle small business and all the potentially profitable ideas that could come from that.
The methods you take to close those small gaps are significant, though. Angel investors are a huge part of the small business community, particularly the tech-related small business community- and it's easy to make that money dry up with poorly designed wealth and capital accumulation rules.
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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Wed Sep 29, 2010 7:27 am UTC

With Clinton it wasn't exactly a "do it or else" situation, but the basics remain the same. To reduce the deficit we have to either pull in more revenue or cut current spending. IIRC he initially brought the top marginal tax rate up and with the republican congress (What a novel idea! ;) ) reduced defense and welfare spending. By the time he was done he had turned a ~$400 billion yearly deficit from Senior into a a nearly $300 billion budget surplus for Junior, who really dropped the ball IMO. Considering how high defense spending is currently I'm sure we can cut a large part of that after we stop trying to stabilize other countries, which could pay for all of the projected medicare spending increases and some of the projected medicaid increases. I think that people would favor more healthcare as opposed to more occupations, but I could be wrong about that. SS just needs some reform like I mentioned before, and even if it isn't, payouts can still be maintained at ~75% of what they are currently for the next half decade plus.

What I was referring to in the second paragraph quoted wasn't specifically related to investing (although if we still don't have sufficient resources w/ all the investment banks right now the market is probably broken in that context). It's something that's closer to a fundamental problem. W/ nearly half of the population falling below the poverty line at some point within a decade span and about a third to a half of those who are chronically poor, a lot of people aren't even getting to the point where they can contribute to the economy like they have in the past.

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Re: What would a US sovereign debt crisis be like?

Postby Vaniver » Wed Sep 29, 2010 12:56 pm UTC

roflwaffle wrote:after we stop trying to stabilize other countries
When do you think that's going to happen?

There are murmurs about Pakistan, now, from Democrats. Letting alone the issues of Iraq and Afghanistan, and whether or not Iran explodes.

roflwaffle wrote:It's something that's closer to a fundamental problem. W/ nearly half of the population falling below the poverty line at some point within a decade span and about a third to a half of those who are chronically poor, a lot of people aren't even getting to the point where they can contribute to the economy like they have in the past.
That sounds like a family or social structure issue, not a wealth redistribution issue. What makes you think the chronically poor are unable to make inventive small businesses?

(I agree there are obstacles; where I disagree is the idea that the government is a force that will remove instead of entrench those obstacles.)
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Re: What would a US sovereign debt crisis be like?

Postby big boss » Wed Sep 29, 2010 7:51 pm UTC

athelas wrote: The only popular kind of tax - on the rich - will raise only a small amount of revenue.


I disagree with you on that point, the richest 1% of Americans have more wealth than the lowest 90% of Americans combined, there is something terribly wrong with this. The rich keep getting richer at the expense of the poor and if society is to function properly something needs to be done about this. I think raising the top tax bracket to a percentage that will significantly reduce the incentive to make more than whatever that top bracket is could be a good starting point because as it is right now there is no incentive for rich people to not try and make as much money as they possibly can (and in the process often screw over those below them).

Vaniver wrote:
roflwaffle wrote:
roflwaffle wrote:It's something that's closer to a fundamental problem. W/ nearly half of the population falling below the poverty line at some point within a decade span and about a third to a half of those who are chronically poor, a lot of people aren't even getting to the point where they can contribute to the economy like they have in the past.
That sounds like a family or social structure issue, not a wealth redistribution issue. What makes you think the chronically poor are unable to make inventive small businesses?

(I agree there are obstacles; where I disagree is the idea that the government is a force that will remove instead of entrench those obstacles.)


Many of the social problems stem stem from poor government planning, many government plans just further concentrate the poor in one area which will not help to alleviate the problem and which only further drives out businesses which do not want to be located in a poor part of town where the business is slow and the danger/the perceived danger of being robbed and or their customers being robbed and other crime is high.
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Re: What would a US sovereign debt crisis be like?

Postby Vaniver » Wed Sep 29, 2010 10:28 pm UTC

big boss wrote:The rich keep getting richer at the expense of the poor
The economy is not a zero sum game. Both the rich and the poor get richer- the rich just get richer faster.

There are some cases where the poor are directly taken from, and the rich are the beneficiaries- but generally this happens with government programs. Social Security, for example, is a net wealth transfer from the poor to the rich, both each year (since the older are wealthier than the young) and over lifetimes (since the poor start work sooner, spend less years between retirement and death, and get lower payouts when they are retired).
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Re: What would a US sovereign debt crisis be like?

Postby big boss » Wed Sep 29, 2010 11:20 pm UTC

Vaniver wrote:
big boss wrote:The rich keep getting richer at the expense of the poor
The economy is not a zero sum game. Both the rich and the poor get richer- the rich just get richer faster.

There are some cases where the poor are directly taken from, and the rich are the beneficiaries- but generally this happens with government programs. Social Security, for example, is a net wealth transfer from the poor to the rich, both each year (since the older are wealthier than the young) and over lifetimes (since the poor start work sooner, spend less years between retirement and death, and get lower payouts when they are retired).


I know its not a zero sum game, but if the wealthy didn't take all the wealth it could be distributed more equally. The income gap in the US over the past 50 years has increased dramatically, and its the income gap not the total wealth that is a better indicator of the suffering of a nation (the US is more wealthy than most countries in the world yet ranks 42 in average life span of its citizens). Now I'm not saying the wealthy don't deserve their nice homes and cars and all that, but there becomes a point I think where you have so much money that you possibly can't spend it all (unless you plan to buy a small country or finance an entire war or something outlandish like that), and that a large tax for the top bracket would do alot towards alleviating some of the countries problems.

edit: typos
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Re: What would a US sovereign debt crisis be like?

Postby Vaniver » Thu Sep 30, 2010 1:06 am UTC

big boss wrote:I know its not a zero sum game, but if the wealthy didn't take all the wealth it could be distributed more equally.
The second half of that statement contradicts the first half of it.

big boss wrote:a large tax for the top bracket would do alot towards alleviating some of the countries problems.
Really? It would be a big chunk of money, sure- but it would be a small chunk of the gap that needs to be closed. And it would run into the problem that it might slow down growth, which we desperately need to match the growth in public spending.
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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Thu Sep 30, 2010 2:40 am UTC

Vaniver wrote:When do you think that's going to happen?

There are murmurs about Pakistan, now, from Democrats. Letting alone the issues of Iraq and Afghanistan, and whether or not Iran explodes.
We'll probably be out less a few permanent bases within the next decade, and I don't think we would touch Iran w/ a 10' pole. The only reason we're in Iraq is because Jr's administration was incredibly dense and/or because he had issues, and the only reason we aren't "done" (whether or not we would have been successful is up for debate I suppose) w/ Afghanistan is because of Iraq. Who is talking about going into Pakistan?

Vaniver wrote:That sounds like a family or social structure issue, not a wealth redistribution issue. What makes you think the chronically poor are unable to make inventive small businesses?

(I agree there are obstacles; where I disagree is the idea that the government is a force that will remove instead of entrench those obstacles.)
There aren't any family or social issues I'm aware of besides discrimination based on religion, sex, or ethnicity. Do you have any particulars in mind?

In terms of disadvantages for the poor/working classees, on the public front we have a government that can be co-opted fairly easily for wealthy special interests as well as stagnant/possibly declining real wages for most during a time of economic growth. The last time real wages increased significantly in the last few decades was during Clinton's administration.

While economics is not a zero sum game, our current economic state probably isn't Pareto optimal. We have way more in the way of natural resources and harder working individuals than any other OECD country, yet our GDP per hour worked doesn't reflect that as it should. I agree that government behavior can block actions that are pareto optimal in some respects (country wide single payer health care for instance), but we're still squandering our wealth compared to other countries. They provide more in the way of social safety nets but have similar GDP per hour worked with far fewer resources. We should be crushing a country like France. They have few resources and a lot more government spending on social entitlement, but are somehow very close to us in terms of GDP per hour.

Vaniver wrote:
big boss wrote:I know its not a zero sum game, but if the wealthy didn't take all the wealth it could be distributed more equally.
The second half of that statement contradicts the first half of it.
How?

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Re: What would a US sovereign debt crisis be like?

Postby lutzj » Thu Sep 30, 2010 3:14 am UTC

roflwaffle wrote:
Vaniver wrote:
big boss wrote:I know its not a zero sum game, but if the wealthy didn't take all the wealth it could be distributed more equally.
The second half of that statement contradicts the first half of it.
How?


The phrase "take all the wealth" implies a finite amount of wealth, i.e. a zero-sum game.
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Re: What would a US sovereign debt crisis be like?

Postby roflwaffle » Thu Sep 30, 2010 6:34 am UTC

There's no restriction on a zero sum game being finite or infinite (In a situation where there were infinite losses and gains they would have to be of the same cardinality I suppose), just that "a participant's gain or loss is exactly balanced by the losses or gains of the other participant(s)." Wealth distribution in any manner (More to fewer participants or less to a greater number of participants) does not make our economy a zero sum game. It may change the outcome depending on how it's distributed, but that's it.

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Re: What would a US sovereign debt crisis be like?

Postby savanik » Thu Sep 30, 2010 7:41 pm UTC

roflwaffle wrote:Wealth distribution in any manner (More to fewer participants or less to a greater number of participants) does not make our economy a zero sum game. It may change the outcome depending on how it's distributed, but that's it.


Also, the economy is not a zero-sum game, no matter how many economists you throw at it, because people all too often confuse 'wealth' with 'value'. Examples follow:

I like chocolate cake. Who doesn't? It has value to me - I might be willing to pay $10 for a chocolate cake, but only $5 for a vanilla cake. Suppose someone else likes vanilla cake more than chocolate - they'd be willing to pay $10 for one of those, but only $5 for chocolate. If this other person has a chocolate cake they found at $5, and I have a vanilla cake I paid $5 for, and we both trade cakes, then BOTH of us have gained in value through the exchange.

If I give you money for a product, it is because I perceive that the product is worth more to me than the money I am spending. In turn, you value my money more than the product you're selling. Without this situation, exchanges will never occur - if you are trying to sell me an oil change at $50, and I can buy the oil for $20 and change it myself (and my time plus any other externalities is less than $30) then it makes no economic sense for me to purchase the oil change at that price.

Rich people are not rich because they are hoarding money, or stealing it from the mouths of babies. They're rich because we collectively gave them our money.
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Re: What would a US sovereign debt crisis be like?

Postby Vaniver » Thu Sep 30, 2010 9:17 pm UTC

roflwaffle wrote:Who is talking about going into Pakistan?
Obama did during his campaign; I'm not hearing much recently (although I believe the CIA is doing operations, but possibly with consent? Who knows).

roflwaffle wrote:There aren't any family or social issues I'm aware of besides discrimination based on religion, sex, or ethnicity. Do you have any particulars in mind?
I'm going to start off by assuming that by "discrimination" you mean "discrimination from others of different type."

Because, for example, black-on-black racial discrimination is a very different beast from white-on-black racial discrimination. The battle against the second seems to be mostly won, considering our starting point. The battle against the first has not really started in earnest.

As for family or social issues, consider: out of wedlock birth, which decreases investment per child, and neighborhood effects (someone who grows up in the ghetto is acclimated to the ghetto, has to survive the ghetto, and mostly only knows people who live in the ghetto). Those can exist entirely independent of religion/ethnicity/sex discrimination.

roflwaffle wrote:While economics is not a zero sum game, our current economic state probably isn't Pareto optimal.
Pareto optimality isn't that desirable a condition- particularly if you want to justify redistribution. Remember that a Pareto optimal move must leave no one worse off than it did before.

roflwaffle wrote:We have way more in the way of natural resources and harder working individuals than any other OECD country, yet our GDP per hour worked doesn't reflect that as it should.
Are we looking at the same chart? Because the countries with higher GDP per hour worked are Norway by a large margin and Belgium and the Netherlands by a small margin.

Norway (pop 5m) has significantly more in the way of natural resources per person than we do, and the minor edge that Belgium (pop 11m) and the Netherlands (pop 17m) have over us is not entirely surprising- since Europe is divided into many countries, we should expect some to be richer than us and some to be poorer if income is randomly distributed, even if Europe on the whole is poorer. You'll notice that Europe as a whole is significant lower than us on the GDP per hour worked scale. So it seems like it does reflect that, like it should.

roflwaffle wrote:How?
The word "take" is inappropriate, as is "all the wealth." You could also gripe about "distributed" if you were in the mood.

What people barter over in a voluntary economy is the economic surplus. A competitive market ensures that it is determined by the demand and supply curves- an uncompetitive market means it's determined by negotiating skill.

You can imagine being in a bazaar, buying a fruit- the shopkeeper tells you a price, you tell him a price, and this continues until one of you gives up. Your price will always be lower than what the fruit is worth to you, and his price will always be higher than what the price is to him. If both the value to you of the fruit ($5) and the value to him of the fruit ($1) is fixed, then there's a fixed amount of surplus that the two of you can bargain over ($4). (That's actually less than the total amount of surplus.) How that surplus gets divided between the two of you depends on your negotiating advantages.

However, you can also imagine going onto fruitBazaar.com, and instantly getting the best price from all the fruit merchants, buying it, and then you're done. Everyone has better information- you know more seller's prices, the sellers know each other's prices, and the sellers know better how many buyers there are. The haggling has already been done by the realities of the market.


One way to see the economy as a positive-sum game instead of seeing the economy as a zero-sum game is to focus on transactions. Then, instead of "annual income" you are thinking in terms of "voluntary exchange." It's clear when you think in terms of "voluntary exchange" than the only 'taking' going on is if there's uncompetitive markets- a monopoly fruit seller might set the price at $5, capturing all of the surplus, when a competitive market would set the price at $1. Such uncompetitive markets exist, and we should try to open them up to competition.

But if you think in terms of annual income, then everything gets skewed: you don't see where the income comes from. If your only data is "A starts with 10 apples, B with 5 apples" then you might think it fair that A give some apples to B. But if you think in terms of what got them to that place- maybe A has more trees, or is a better gardener, or spends more time gardening, or got luckier*- then it's not as clear that A should give some apples to B. It particularly makes no sense to say that A is taking all the apples if A planted more apple trees than B did.

*Rational, selfish people have already come up with a way of averaging out luck: insurance.
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Re: What would a US sovereign debt crisis be like?

Postby savanik » Fri Oct 01, 2010 4:42 pm UTC

savanik wrote:If I give you money for a product, it is because I perceive that the product is worth more to me than the money I am spending. In turn, you value my money more than the product you're selling.


Of all people, my mother just hit me in the face with a large dose of reality and noted two things:

1. People are not consistently rational actors, especially in large groups (called 'mobs').
2. Value works both ways. Specifically, while it's possible for both people to gain value in a trade, it's possible for both people to LOSE value, even in rational trading behavior. Example:

I borrow money from a bank to buy a car - I need a car to get to work, and I don't have $20,000 on me. I do, however, have $450 every month I can give them, and they are perfectly willing to give me a loan for the next 5 years under those circumstances. They make $7000 over 5 years, I have a car. Everyone's happy.

The next day, I get into an accident and have to declare bankruptcy due to medical bills. First order consequences only, I'm out a car ($20k value), they're out $20k on the principal of the loan. That money is just gone. It has vanished from the economy. You can mitigate the risk with insurance, they can still try and collect on the debt later, but the value of the car itself has disappeared into the junk heap.

Her ultimate argument was that the debt crisis is already upon us in the form of loans for things that don't directly increase production / pay for themselves. E.g. A car to get to work directly increases my production, and pays for itself in the long run. Buying a second car for $40k because I want something 'sporty' for the weekends does not.

Basically, we've invested our money poorly via consumer credit, and now we will be facing the consequences. She's very doom-and-gloom and investing in gold, but she did have some good points. Particularly about people not being rational.
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Re: What would a US sovereign debt crisis be like?

Postby CorruptUser » Mon Oct 04, 2010 4:19 am UTC

savanik wrote:Basically, we've invested our money poorly via consumer credit, and now we will be facing the consequences. [My Mother is] very doom-and-gloom and investing in gold


Agreed in more ways that most people understand. It wasn't just the companies' fault; the Community Reinvestment Act pretty much required banks to give a certain amount of loans to low income families. That is, people who are unable to pay back loans.

Also, please tell your mother not to bother with gold. If the economy recovers, she loses out. If the economy collapses, with hyperinflation and all, the government seizes much of her gold via Capital Gains tax.

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Re: What would a US sovereign debt crisis be like?

Postby Dark567 » Mon Oct 04, 2010 4:56 am UTC

CorruptUser wrote:Also, please tell your mother not to bother with gold. If the economy recovers, she loses out. If the economy collapses, with hyperinflation and all, the government seizes much of her gold via Capital Gains tax.

Well, unless the government collapses. I mean if you really are that doom and gloom, maybe you think thats a possibility. (Although if the government collapses we are all basically fucked anyway, gold is hardly gonna help)

But, yeah. Generally inflation favors stocks pretty heavily, theres no real reason to invest in gold as an inflation hedge.

CorruptUser wrote:Agreed in more ways that most people understand. It wasn't just the companies' fault; the Community Reinvestment Act pretty much required banks to give a certain amount of loans to low income families. That is, people who are unable to pay back loans.

CRA was just one part of a much larger cause, the entire government is obsessed with the idea of home ownership. The creation of Freddie Mac and Fannie Mae, a tax structure that grossly favors ownership over renting, encouraging the use of adjustable rate mortgages, lowering capital requirements of banks and Fannie and Freddie so more of the capital could be used to finance houses, etc.
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Re: What would a US sovereign debt crisis be like?

Postby savanik » Mon Oct 04, 2010 3:28 pm UTC

CorruptUser wrote:
savanik wrote:Basically, we've invested our money poorly via consumer credit, and now we will be facing the consequences. [My Mother is] very doom-and-gloom and investing in gold


Agreed in more ways that most people understand. It wasn't just the companies' fault; the Community Reinvestment Act pretty much required banks to give a certain amount of loans to low income families. That is, people who are unable to pay back loans.

Also, please tell your mother not to bother with gold. If the economy recovers, she loses out. If the economy collapses, with hyperinflation and all, the government seizes much of her gold via Capital Gains tax.


This is actually in her IRA, so it falls under a different tax structure - I believe that makes it more-or-less free to switch back and forth between investments within the account, but you have to pay regular income tax when you start to disburse the funds? I may well be incorrect there. But I do know she won't pay capital gains tax on short-term investments in gold.

Historically gold prices have been very stable. It doesn't appear that they really started fluctuating until around 1972 - and I'm still trying to figure out why on that bit. We left the gold standard much earlier than that - and it's a decade earlier than when the stock market really started to take off.

If the economy recovers, she loses out on opportunity - but she also has a much lower threshold of risk than someone like me, since she's looking to retire in the next 10-20 years. Not much time left for growth, and she doesn't want to lose another 1/3rd of her retirement holdings. If the economy nose-dives, gold will still at least be worth something, which most companies probably won't be able to say.

Myself, I'm seeing several red flags on the economy side, in particular, it looks like in the next 1-2 years that we're going to see a sharp contraction in the money supply with the mass retirement of consumer debt - which will cause deflation. Which will make people panic... etc.
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Re: What would a US sovereign debt crisis be like?

Postby Zamfir » Mon Oct 04, 2010 3:38 pm UTC

savanik wrote:It doesn't appear that they really started fluctuating until around 1972 - and I'm still trying to figure out why on that bit. We left the gold standard much earlier than that -

Nope. Look up Bretton Woods. Between the end of WW2 and 1972, the US kept the dollar tied to gold (I think 35 dollar per ounce was the official target), and many other countries tied their currency to the dollar.

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Re: What would a US sovereign debt crisis be like?

Postby savanik » Mon Oct 04, 2010 6:37 pm UTC

Zamfir wrote:Nope. Look up Bretton Woods. Between the end of WW2 and 1972, the US kept the dollar tied to gold (I think 35 dollar per ounce was the official target), and many other countries tied their currency to the dollar.


Wow - that's actually quite fascinating - and was completely uncovered in my high school American History class! :D All I remembered was that we left the gold standard as a result of the great depression. This apparently wasn't worth a mention. It explains the long-term stability of gold, though.

On the other hand, though, if you look at the 1987 crash (which is more or less the closest analogue we've got in terms of market structure) gold prices remained quite stable. So it seems like it's a good hedge against that sort of movement, if nothing else.
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Re: What would a US sovereign debt crisis be like?

Postby Zamfir » Mon Oct 04, 2010 7:01 pm UTC

savanik wrote:
Zamfir wrote:Nope. Look up Bretton Woods. Between the end of WW2 and 1972, the US kept the dollar tied to gold (I think 35 dollar per ounce was the official target), and many other countries tied their currency to the dollar.


Wow - that's actually quite fascinating - and was completely uncovered in my high school American History class! :D All I remembered was that we left the gold standard as a result of the great depression. This apparently wasn't worth a mention. It explains the long-term stability of gold, though.

On the other hand, though, if you look at the 1987 crash (which is more or less the closest analogue we've got in terms of market structure) gold prices remained quite stable. So it seems like it's a good hedge against that sort of movement, if nothing else.

But who needs a hedge against such things, unless you are a stock trader actively looking to take on risks in the first place? Money in the bank is just as good a hedge against such things. The only thing gold is a hedge against is a total collapse of the world order, because there is a good chance gold would be the currency after that.


As for Breton Woods, you're right that it is a strangely forgotten topic. For some reason the economic problems of the 1970s have become known as the "oil crisis", even though the system started collapsing years before 1973. I guess a nice tangible label works better than vagueries about currencies ties and their ill-understood macroscopic effects.

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Re: What would a US sovereign debt crisis be like?

Postby Vaniver » Tue Oct 05, 2010 6:30 pm UTC

Zamfir wrote:Money in the bank is just as good a hedge against such things. The only thing gold is a hedge against is a total collapse of the world order, because there is a good chance gold would be the currency after that.
Gold is also a useful hedge against inflation being higher than gold bugs believe it will be or against an increase in the amount spent by gold bugs. Going into gold now strikes me as a poor plan- gold is already priced for things getting worse, so things would need to get much worse to make gold a good investment.

Gold mining, however, tends to do well whenever inflation is high- so buy gold industries instead of gold. You won't be able to hoard it for the collapse of world order, but you will make more in times of continual inflation.
Last edited by Vaniver on Tue Oct 05, 2010 7:34 pm UTC, edited 1 time in total.
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Re: What would a US sovereign debt crisis be like?

Postby Zamfir » Tue Oct 05, 2010 6:45 pm UTC

Gold is also a useful hedge against inflation being higher than gold bugs believe it will be or against an increase in the amount spend by gold bugs.

Isn't that just speculation?


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