It is astounding how significantly one idea can shape a society and its policies. Consider this one.
If taxes on the rich go up, job creation will go down.
This idea is an article of faith for republicans and seldom challenged by democrats and has shaped much of today’s economic landscape.
Another reason this idea is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the median American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, we go out to eat with friends and family only occasionally.
I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.
We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Rather they are a consequence of an eco-systemic feedback loop animated by middle-class consumers, and when they thrive, businesses grow and hire, and owners profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.
This was supposed to be a TED talk but, fortunately, the people who run those things aren’t complete idiots and are capable of prolonged rational abstract thought. However, it’s obvious from the excerpts that Hanauer completely out of his league when it comes to economics.
[Aside: before I begin explaining why Hanauer is talking out of his rectum, let me first state that I have no interest in defending the rich per se. Some rich people are terrible, like the banksters of the Fed and Wall Street that defrauded the citizens of the united states out of hundreds of billions of dollars, and some rich people are awesome, like the all the VCs and Angel investors that help to fund the start-ups of hundreds of new businesses. Like all groups of people, there are some complete turds, some good role models, and a decent amount of mediocrity.]
Hanauer is completely out of his league because he focuses solely on consumption as the key to wealth. I’ve addressed this in passing before
, but now seems like an appropriate time to pick up on the point again:
consumption is not wealth-creating, it is wealth-consuming.
In fact, that is the definition of the term.
Short-term consumption does an especially good job of illustrating this point.
If one day I bake a cake and the next day I eat it, what do I have on net?
Yes, I created a cake, but I also consumed it as well, and therefore I have nothing to show for my efforts, save for some temporal feelings of being full and tasting something sweet.
And feelings, being dynamic and unquantifiable, are not exactly the stuff of wealth.
For proof, go to a bank and try to take out a loan by using future emotions as collateral.
Real wealth, in contrast, is not consumption but rather accumulation. It is worth pointing out that accumulating wealth does not preclude its usage (think of real estate, for example). In this case, things are produced and/or cultivated, but they are not immediately consumed. This is generally referred to as capital accumulation or capital formation.
Now, Hanauer’s analysis fails because it fails to account for the role of capital in production. You can’t produce anything unless you have materials for production, people and/or machines for production, and a place to actually produce things. And you can’t consume stuff unless you produce it first. These elementary observations are apparently too complex for Hanauer to consider, which is why he claims that the wealthy don’t create jobs.
In a tautological sense, this is true simply because the wealthy don’t often consume more than the poor (although it does beg the question of who buys luxury cars and yachts, but that’s somewhat beside the point). In a technical sense, this can be true as well, as not all wealthy people are directly responsible for the creation of jobs. However, since production—and its attendant jobs—are generally contingent on either having capital or having access to capital, it should be obvious that the rich are necessary for job creation if for no other reason than the simple fact that they have capital that can be used for job creation.
In a technical sense, it is not necessary for capital to be held by the wealthy, seeing as how anyone can technically have capital. However, it is the rich that, by definition have the capital. And since capital is necessary for production and thus, according Hanauer’s erroneous assertion, wealth, it stands to reason that there must somewhere be the accumulation of capital. And those who accumulate capital are the wealthy.
Thus, the wealthy are necessary for job creation, if for no other reason than by virtue of the fact that they have capital. Thus, taxing the rich, particularly taxes on their capital, means that that there will be fewer jobs because there will be less capital with which to enable production.
The second problematic assertion that Hanauer makes is that the government is better or more efficient at managing capital than the wealthy. This is predicated on two assumptions. First, Hanauer assumes that the wealthy simply sit on their capital. Second, Hanauer assumes that the government is generally more efficient than motivated investors at allocating capital.
The former assumption is easily dispensed with as Hanauer himself notes (chase the link to find it) that the wealthy have become wealthier. While a good portion of this is more than likely due to defrauding taxpayers, as was seen in the housing banking crisis of 2008, it is hard to deny that wealthy people generally make a point of increasing their wealth by a mechanism known as investing. Investing is basically people letting other people use their capital in exchange for money. Thus, the wealthy are allowing their capital to be used productively instead of merely sitting on it.
The latter assumption is a little more difficult to address, but it is worth noting that the government has created a ton of messes when it gets involved with capital allocation.
Pretty much every bubble in the central banking era is proof of this.
Anyhow, the assertion that the government is generally
superior at allocating capital is provably false (see the footnote to this post
for further evidence).
Thus, when all is considered, Hanauer’s argument is nothing more than Keynesian nonsense, as evidenced by its single-minded focus on consumption as the driver of wealth. It predicated on fallacious assumptions, it ignores basic economic principles, and is nothing more than shallow demagoguery. Incidentally, much like Krugman’s economic “analysis,” this is yet another example of the narrowness and short-sightedness of Keynesian analysis. There is no depth to it, for it focuses on one variable, as if one aspect of the market holds the key to explaining it all. Basically, Keynesians are like children with the way they think, since they cannot apparently consider multiples variable simultaneously, or even guard against common fallacies and short-sightedness.
Finally, note that this analysis, like most other examples of Keynesian analysis, calls for increased government intervention and control. Isn’t it about time we acknowledge that Keynesianism is nothing more than an attempt to justify socialism using capitalistic rhetoric?
The discussion about State Bank of India (SBI) has treated one proposition as a given: that it is the job of the Ministry of Finance to continually inject capital into SBI so as to enable the growth of the SBI balance sheet; that SBI has a legitimate claim upon fiscal resources at all times.
I’m not sure this is a good way to think about the business of banking. The first task of a bank should be to produce adequate retained earnings so as to support the desired growth. If a bank cannot produce retained earnings enough to grow, there is reason for thinking that it should not grow.
Let’s compare the performance of the best private bank (HDFC Bank) and a good PSU bank (Bank of Baroda) from this perspective.
Growth of the balance sheet and leverage
Let’s look at how the two banks have fared, from 1999-2000 onwards, on the core issues of balance sheet growth and leverage:
|Bank of Baroda
From 1999-2000 to 2010-11, there has been a sharply superior performance by HDFC Bank. At the start, it was a small bank – with a
balance sheet of just Rs.11,731 crore while BOB was roughly 5x bigger. By the end, HDFC Bank was at a balance sheet size of Rs.277,429 crore while BOB was at Rs.358,397 crore.
What is more, HDFC Bank did this while being more prudent: they deleveraged in this period: They went from a leverage ratio of 15.33 to a leverage ratio of 10.93. In contrast, BOB stayed at a much higher leverage (18.12 at the start and 17.07 at the end).
The bottom line: BOB grew net worth by 6.5 times and the balance sheet by 6.11 times. HDFC Bank grew net worth by 33.17 times
and the balance sheet by 23.65 times.
So how did the net worth grow?
In the naive intuition that’s being bandied about in the discussion about SBI, there would be an expectation that the expansion of net
worth would be obtained by asking shareholders (new or existing) for money. What happened in HDFC Bank and BOB was a bit different.
The hallmark of a healthy bank is the production of retained earnings which can be ploughed back into the business. HDFC Bank did
that: over this period, it brought 13.23% of total assets (summing across the 12 years) back into the business, so as to grow net worth. BOB did not do as well: it brought only 7.86% of total assets back into the business.
In addition, HDFC Bank raised 13.66% of total assets by bringing in fresh capital. BOB, in contrast, brought in only 2.11% of total assets into the business. You could criticise the Ministry of Finance for being niggardly in giving BOB equity capital.
A thought experiment: Strangle HDFC Bank of access to fresh equity
Suppose we replay these 12 years while allowing HDFC Bank to only grow through retained earnings. We cut off all growth of net worth through issuing fresh equity capital. Suppose we force it to deleverage as it has: from 15.33x in 1999-2000 to 10.93x in
2010-11. Where does this leave us?
The answer: In 2010-11, HDFC Bank would have had total assets of Rs.146,742 crore if this policy had been followed. It would still have obtained growth of 12.5x through this period.
This thought experiment, then, serves as a nice demonstration of what a healthy bank should be: it should make money, pay dividends, and plough back adequate retained earnings to support growth of the balance sheet.
A well run bank must put retained earnings back to work. If a bank is unable to fund its own growth by increasing net worth through
retained earnings, there is reason to be concerned about the health of the core business.
A steady flow of new capital from shareholders, in order to enable growth, is not that different from recapitalisation in response to bad assets.
Public money is precious. The Ministry of Finance would do well to be very, very stingy in doling out public money to PSUs. Each Rs.5000 crore that goes into a PSU comes at an opportunity cost of 1000 kilometres of NHAI highways which could have been built using that money.
If a PSU cannot grow its balance sheet, odds are the problem lies within: it needs to become a better run business and thus grow the
balance sheet using retained earnings. Such PSUs are precisely the ones who are the least deserving to gain fresh capital. If anything,
fresh capital should be directed into banks like HDFC Bank (as the private capital markets have), who are doing a great job of producing retained earnings.
Blog post series, like the vuvuzela, is the new bacon; it works with everything and with John Hempton’s recent excellent series on the economics of default in the Eurozone and Edward’s recent postings on AFOE in which he pulls out some of our old paper abstracts has inspired me to a series in which I try to pin point exactly how demographics and macroeconomics interact and where I believe we need more focus and work.
When it comes to the overall link between demographics and macroeconomics we already have a number of core workhorse models in the form of the life cycle and life course framework where the former deals with consumption and savings decisions as a function of age and the latter deals, broadly, with life time events and their individual and aggregate importance on economic dynamics. The adequate impact on the macro economy from the dynamics of demographics must then be developed as a function of the attempt to do two things; firstly, to continuously develop the life cycle and life course theories themselves and secondly to seek out new ways to apply life cycle and life course theory to existing macroeconomic problems and themes.
In the first series, I will begin with the latter. Overall, I will highlight 6 areas where demographics enter macroeconomic theory and research as an important variable and I will try to offer my view on where to progress further. I will begin with two classics in the form of growth theory and open economy dynamics.
Firstly, I need to say that I am not an expert on growth theory and this represents somewhat of a problem since growth theory although somewhat out of vogue at the moment has grown to become an extremely diverse field with a wide number of different schools and discourses. For the purpose here it will suffice to note that most economists today still use some form of the classic production function framework which has its roots in the work by Charles Cobb and Paul Douglas in 1928 and was popularized in 1958 by Solow’s famous article. This is what it looks like;
Where Y is output, K is physical capital, A is the illusive residual or more specifically technology/production function, L is the size of the labour force and H is a measure of human capital. Now, I certainly won’t do any math at this point and it is important to note that the functional form may take many exotic forms (which are not necessarily Cobb-Douglas), but just to give you one example the following is a Cobb-Douglas production function which incorporates human capital as above (here with constant returns to scale);
The key point I want to emphasize here is simply that we have output as a function of some input and that we would like to account for and explain the dynamics and behaviour of this input. How might we imbue this model with reasonable characteristics that reflect demographic dynamics? As it turns out, we already have some pretty solid frameworks to deal with this questions and we can see this by looking at the inputs one at a time.
The evolution of capital (K) – In most traditional models the evolution of capital is simply expressed as the fraction of income save minus any depreciation of the capital stock in the last period and here of course we have several workhorse models to show demographic dynamics that are all wrapped up in the form of the life cycle hypothesis of savings and consumption. Usually and since most of these models are constructed on the basis of Walrasian microfoundations, we have some form of intertemporal optimization problem ticking away in the background which assumes an OLG (overlapping generations) form. The classic model here is the Diamond model who is based on Diamond (1965) which is the father of all OLG models, but over time a plethora of different OLG models have been developed with differing degree of analytical complexity.
The basic problem here though remains the concept of the steady state which means that we must construct model such as to allow the change of capital through time (or its derivative with time) to be 0 in the long run. Please note here that this condition is not imposed on the basis of empirical behaviour but on the basis of (mathematical) analytical tractability. So, apart from the uncertainty surrounding exactly what this ”long run” is it also locks in the analysis and assumes away a large part of the important aspects of even basic life cycle behavior. Specifically, the idea that once reaching a steady state any change in the savings/consumption rate will one have transitory effect and that the economy will automatically (and always) converge to the same growth rate/state as before is a problem. Essentially, the whole idea of a steady state whether be it in the form of an exogenous or endogenous growth theory framework is a huge problem since it is evident that such a thing does not exist. And even if we could establish over a very long run horizon that such an average/constant path is a good approximation we would be ironing out all the interesting and important questions in the process.
The evolution of human capital (H) – The adoption of human capital into the growth theory framework is famously due to a paper by Mankiw, Romer and Weil in 1992 in which human capital is proxied by rates of schooling and thus the perspective becomes one of the quality of human capital and to the extent that the formation of human capital also includes the evolution of the population (or perhaps working age population) we can say that this is a direct way in which demographics enter the framework. Again, we might simply ask here; to what extent does the aggregate quality of human capital in an economy depend on the age structure of its population and here I am not only talking about the level of education but much more broadly about the idea of innovative capacity as a function of population structure.
The evolution of technology (A) – Technology and productivity are famously assumed exogenous in the Neo-Classical tradition while New Growth theory as it was developed in the 1980s and 1990s emphasised the need to specifically account for the evolution of technology. Today, I would venture the claim that there is a consensus that productivity and technology is a function of what we could call, broadly, institutional quality which encompass almost anything imaginable from basic property rights to the level of entrepreneurship. Indeed, a large part of research is still devoted to pinning down exactly which determinants that are most important here both across countries and through time. Now, I would argue that, in the context of standard growth theory, this is where the scope for the study of the effect of population dynamics is largest. Thus I don’t think it is unreasonable to expect the level and evolution of productivity growth and technological development to be a function of the current population structure but also its velocity which is a function of e.g. migration (new inputs?), future working age size etc. Also, this is also where human capital and the evolution of technology is joined at the hip through the idea of innovative capacity and readiness.
As you might have inferred from the exposition above, I have some difficulties with growth theory. I can admire the framework for its internal logic and I can see why it is an important part of a macroeconomist’s toolkit, but I also think that growth theory (as I describe it above) has outlived itself. In this sense, most of the questions that we have as economists when it comes to the evolution of growth and welfare of our economies both individually and through their interaction is not addressed by growth theory. Especially the effect of an ongoing and ruthless process of ageing is completely impossible to analyse in the standard framework. Naturally, I am also being a bit unfair here since the kind of growth theory I am describing above is also too simple to give adequate credit to where the field is today. For example in relation to demographics, I am grossly overlooking important strides in the development of OLG models which have been perfected continuously so that we today have a very large battery of very complex models. But also more generally, growth theory is being used today to produce a lot of useful research. As I say, it remains a key tool in our toolbox.
Yet, the basic growth theoretical setup remains flawed in key a number of un-salvagable ways. Concretely, specifying a production function and specifying the underlying inputs as differential equations through whose solution we reach a steady state equilibrium is not, in my opinion, the way to go. Thus and in an intuitive sense I feel much more at home, for example, in the company of evolutionary growth theorists  whose argument and methodology is more agile. In summary then and as I try my utmost not to become a hostage of the notion of a steady state I will simply make the following observations in the context of what we macroeconomists consider the main inputs to growth where the ”age” is simply an unspecified collection/function of variables that pertains to fertility, age structure, mortality etc (and of course a whole slew of other factors, but for the sake of argument let us keep it monocausal here).
Where age in the context of the capital stock relates to the size and evolution of the capital stock as well as savings and investment dynamics, in the context of human capital it may be argued to enter directly, but may also affect the quality of human capital. Finally, I think that the impact of demographics on innovation and especially the idea of velocity of innovation and innovative capacity represents an area which is not well understood. In general though and short of letting some variant of demographics enter directly, I think an important research program would be to examine the effect from demographics on the inputs to growth which we traditionally operate with. Especially, the process unprecedented process of ageing is a completely new phenomenon here in the context of traditional growth theoretical analysis.
Open Economy Dynamics
An enduring feature of macroeconomics is that the entities we study are not black boxes but interdependent entities who interact in very complex ways in the global economy. This statement was true 40-50 years ago and today it is almost a cliché. In fact, for non-macroeconomists it must seem very strange that we still distinguish so strongly between closed and open economy analysis as the use of studying the former must surely be almost nill. I would agree with this statement but simply note that important things do actually happen when we go from a closed to an open economy and the way this transition is operationalised is important in itself.
Now, I could write a lot about this (in fact, I have penned a whole thesis about it), but I will only cover the essentials. What you need to know upfront are two things. The first is that the economic theory used to handle the effect of age structure/demographics on open economy dynamics is again the life cycle framework and, in most cases, we still have a OLG representative agent model taking care of the microfoundations. Secondly, it is important to be aware of the concrete specifics of the transition from a closed to an open economy. Luckily, this can be handled by some very simple algebra from macroeconomics 1-0-1.
The whole point is to find an expression for savings, so for the closed economy we have;
By definition every unit of output has to equal a unit of income, and national income in any given period can either be saved or consumed. This means that national income can either be put aside for saving or consumed through government (G) or private consumption (C). In this way, we define national saving in any given period as;
This is a fundamental result in basic macroeconomics and what is equally fundamental is why this changes in one key aspect when we move into an open economy setting. We then have;
With (x-m) equal to the trade balance and by doing the same exercise above we get;
In this context and remembering that the life cycle hypothesis tries to map consumption and saving as a function of age, the transition from a closed to an open economy becomes crucial in order to see how demographics may affect open economy dynamics. As such, allow me to quote the following passage of my thesis which I find myself coming back to when thinking about this topic;
The best way to think about this  is to imagine that savings and investment are in a race governed and controlled, as it were, by the transition in age structure that occurs as a result of the demographic transition. Initially, as the transition sets in with a decline in mortality and where fertility only follows with a lag, investment demand outruns the supply of savings and the economy is running an external deficit. Steadily however, the supply of saving catches up with investment demand which itself begins to decline and thus the external balance moves into a surplus. Finally, the pace of savings accumulation is replaced by outright decumulation (dissaving) and the external balance moves into deficit as savings decline faster than domestic investment demand
This is stylized of course, but especially the idea of the race between savings and investment is a very helpful metaphor. Consider then a closed economy; in such a setting there can be no race as described above since savings and investment will be tied together at all points in time, but in an open economy savings and investment dynamics are exactly what provokes relations between economies and more specifically, the fact that the economies have different preferences for savings and investment at different points in time. This gives a very strong foundation for thinking about how demographics affect open economy dynamics.
Concretely, and in order to tie the argument up on the underlying theory capital flows occur precisely because economies have different intertemporal preferences for consumption and saving and since this intertemporal preference itself is a function of age (through the life cycle/OLG framework) demographics become a driving force for international capital flows.
This as it were is also where the fun begins since exactly how this process should be understood both from the point of view of the individual economy, but also in a global context remains, for all intent and purposes, an unresolved question. Surely, we have studies that use basic life cycle frameworks to simulate capital flows between economies and they do have some intuitive appeal and explanatory power, but they are hampered by, in my opinion, by an inadequate understanding of the life cycle thesis and how exactly it manifests itself. As I noted in the beginning, part of all this also requires a continuous development of the life cycle hypothesis itself and here this becomes important. Personally, I have cast my eyes on two areas of research where I believe that the influence of demographics on open economy dynamics is important.
1 – Global Imbalances
This represents an enduring feature of the global economic system and while everyone can agree that they need to be resolved some way or the other I think that the proper understanding of demographics shows us that they are essentially structural. Especially on the side of surplus economies I have argued (both in my thesis and in genera) why we cannot suddenly expect economies such as Germany and Japan to do their part and crucially, why we should expect more economies to venture down the same path as they are also ageing rapidly. Importantly, this provides a concrete theoretical spin to the question everyone seems to be asking at the moment of who exactly is going to run the deficits? The pessimistic answer here is no-one and herein lies the rub.
2 – Export dependency
This one is essentially the concrete theoretical proposition used to make the argument above on global imbalances. Ageing leads to a decline in domestic demand and in a closed economy there is really not a lot you can do; savings/investment will fall and consumption will be lacklustre since there is no underlying dynamic to feed it other than dissaving. However, in an open economy you can fight this through claims on other economies or put in another way, you can save more than merited by domestic demand and thus you can invest your savings abroad. Note here that technically this is exactly what e.g. Germany and Japan are doing in the sense that their excess savings have to be matched by excess borrowing/investment demand elsewhere.
I am still developing these two areas, but there are plenty of meat on this topic I think. One crucial task is to develop the life cycle hypothesis on the basis of observed behavior of economies as they age and another is to.
Stay tuned for the next post in this series which looks at the influence from demographics on asset prices, demand, and return and composition of consumption. Suggestions and comments on potential omissions on my part are welcome.
 - Most often operationalized through an OLG framework.
 – Evolutionary Growth goes back to this one “Nelson, R.R., Winter, S.G., 1982. An Evolutionary Theory of Economic Change. Harvard University Press, Cambridge, MA” and is a must read I think. The work by Jan Fagerberg is a good place to begin as well as for a more modern exposition.
 – I.e. demographics and savings and investment behavior in an open vs closed economy
The great monetary scientist Isaac Newton, who served as England’s Master of the Mint for 24 years, also did some ancillary work in physics. The laws of Newtonian physics are known by nearly everyone and are often used by analogy to apply logical reasoning in other fields. In this case, a few of these laws are particularly applicable in discussing the impending state of the economy in 2010 based on the massive momentum of 2009.
LAWS OF MOTION
Stated in layman’s terms the three great Newtonian laws of motion are:
1. A body persists in a state of uniform motion or of rest unless acted upon by an external force.
2. Force equals mass times acceleration” or “F = ma.
3. To every action there is an equal and opposite reaction.
In regards to human action a body seems to stay at rest rather than work unless acted upon by some type of force. The force can be either internal such as hunger, the desire for self-actualization or anywhere in between on the Maslow hierarchy of needs or external such as a saber-tooth tiger, boss or customer. To sustain life the human body must consume fuel.
Capital is the means of production and the difference between production and consumption flows into or out of the store of capital. Out of this dynamic human society has attempted to efficiently allocate capital to produce more and this has resulted in institutions, large and small, where individuals work in the attempt to produce in order to meet their needs and wants. Of course, the great fiction of government is that everyone can live off someone else’s production.
MASSIVE FAILING INSTITUTIONS
The chains of habit are too weak to be felt until they are too strong to be broken. The mass of the economy times its speed in the Information Age has resulted in a tremendous force. But this mass has largely been built from the atomic level upon something which is inherently unstable and undefinable leading to chronic fingers of instability. What Is A Dollar?
The problem is debt and because psychology is changing, The Great Credit Contraction has begun and the rate at which the mass of the economy is evaporating is truly scary. While many attribute the ongoing financial crisis to the subprime mortgage mess, which is surely a contributing factor, the problem is much more systemic than a few defaulted mortgages.
But now the second wave of Option ARMs are getting ready to reset at the same time the Federal Housing Administration is requiring higher down payments. But where are these renters going to find a job when over 6.1M people have been unemployed for 27 weeks or more?
And what about all the discouraged workers who are not included in the labor force because they have ceased looking for non-existant jobs? The Detroit News reported:
Despite an official unemployment rate of 27 percent, the real jobs problem in Detroit may be affecting half of the working-age population, thousands of whom either can’t find a job or are working fewer hours than they want …
Mayor Dave Bing recently raised eyebrows when he said what many already suspected: that the city’s official unemployment rate was as believable as Santa Claus. In Washington for a jobs forum earlier this month, he estimated it was “closer to 50 percent.”
With so many unemployed almost all of the States, with California being the poster child, are under severe financial pressure. For example, 40 state unemployment insurance funds are either broke or moving in that direction. While there are people starving in the chaos of Haiti about 37M Americans are now on welfare state food stamp programs, the rate of acceleration is expanding at about 20,000 per day and 1.4M Americans filed for personal bankruptcy in 2009. And this is a rosy situation considering the FRN$ is still the world’s reserve currency!
The Baby Boomer generation has driven trends their entire lives because of their mass and acceleration. From Gerber baby food to the housing booms and busts caused by costumed government officials gallivanting in genocide which caused serious aberrations in demographics and are now getting increasingly explosive politically as the 2016 election will see 78M Baby Boomers pitted against 112M Millennials.
Social Security and Medicare are out of control kudzu that are strangling the economy. Additionally, virtually all pension funds in the United States are massively underfunded with epic games being played with the discount rate. As Forbes reported:
The GAO study found that states’ cumulative unfunded liabilities were $405 billion, while Novy-Marx and Rauh figure $3.2 trillion is a more accurate number.
All those tax eating costumed government officials are going to be extremely happy when they realize their retirements evaporated. But with unemployment benefits draining the capital of the economy like vampires while the productive members of society are punished via increased taxation and regulation the entrepreneur has either learned how to vanish or been turned to stone by the local Gorgons.
The result has been massive declines in State and local tax revenues. Even Federal corporate income tax receipts were down 55% for the fiscal year ended 30 September 2009.
KICK THE CAN
So like a classic Ponzi scam the answer has been to attempt to bailout the State and local governments via Federal resources.
For example, a chief bailout recipient Citigroup is accepting California IOUs indefinitely at face value; a surreptitious Federal bailout of California in a preemptive attempt to keep them from seceding monetarily by taking the next step of unconstitutionally decreeing the IOUs legal tender for all debts public and private. The Euro faces the same type of structural issues.
But if the States unconstitutionally decree FRN$ legal tender then why not their own little colored coupons? With 13% of US GDP a $30B deficit California should have nothing to worry about with a mere $30B+ cash-flow issue. After all, the California Dollar could have a bear on it; the Florida Dollar an alligator, the Texas Dollar a long-horned bull and the New York Dollar a vampire squid. They would be such fitting symbols!
And so the adjusted monetary base has exploded.
The FRN$ is destined to evaporate and the increase in debt is only hastening the rate.
Despite propagandist cheerleaders on television the economy is in horrible condition. The Obama administration’s attempt to alter the speed and direction of the economy is textbook action for intentionally exacerbating the greater depression. Like in the recently released movie Daybreakers soon the starving vampire squids of Wall Street, Washington DC, State and local governments will run out of their productive human livestock and only a few understand their true predicament. They think they can ’save or create 3M jobs’. Seriously?
No one knows how this ginormous mess will play out. But the massive momentum of 2009 has largely shaped the direction for 2010. While the FRN$ may rise in the short term it is an extremely risky play because of how fast hyperinflation could strike the FRN$.
Of course, among the chief uses of silver and reasons to buy gold, platinum and lead are to keep you and your property safe from the costumed vampire tax eaters who will likely spring Obama’s retirement trap by nationalizing retirement accounts and forcing purchases of US debt to bolster Treasuries.
Using force or intimidation against innocent people or their legitimately acquired property is unfair, immoral and unsustainable. The current state of the economy and where it is headed is merely the result of cause and effect from economic law. George Mason, the father of the Bill of Rights, observed this principle hundreds of years ago in his writings contained on page 966 of The Papers Of George Mason:
As nations cannot be rewarded or punished in the next world, so they must be in this. By an inevitable chain of causes and effects, Providence punishes national sins by national calamities.
Please, leave your thoughts on how you think 2010 will play out.
DISCLOSURE: Long physical gold, silver and platinum with no interest the problematic SLV or GLD ETFs, the platinum ETFs or Treasuries.