Dear Mark,
I'm also enjoying this conversation quite a bit. Thanks!
Our companies have not failed in my opinion as much due to free trade as due to our tax code. We allow the liquidation of capital to easy, and tax it at only 15 percent, it causes everything to always be sold. If getting capital is hard, and liguidation is easy, soon you have no capital intensive businesses.
It's an interesting way to look at things. Doesn't it seem that capital has been easy to get in the US? Too easy, in fact. I would argue that the easy money caused a lot of bad investment, depressing real returns on investment. That in turn made leverage necessary in order to push returns up (to avoid the Japanese scenario where bad investment from easy money ended up destroying returns). And leveraged investments carry intrinsically higher risks.
If you look at the low tax rates on capital gains as a way to ease the flow of money, you can see why it encourages capital to move around looking for the highest return. It also means that you don't have to stick with a particular business investment, which is precisely what you're saying.
I would agree with you that raising capital gains taxes would be a good idea, as part of a package to discourage financial risk-taking. But it will make it harder for new businesses to get funded, and for old businesses to go through lean times.
The Chinese are a huge threat to us on every level, military, economic, and political, the have used their new wealth to influence our political system to allow them to do things nobody else can, they are huge holders of our debt, and they are constantly threatening use of military force against our allies. If they did not not support North Korea, then they would have not been an issue a long time ago.
The Chinese only use the threat of force with regards to the issue of Taiwan, and that's not exactly incomprehensible. If you compare Chinese foreign policy with that of any other nation, it's hard to claim that they are a "hard" power.
North Korea is a painful issue for all involved. Yes, China offers some support for North Korea, as does Japan and South Korea. In general, everyone now agrees that some combination of military deterrence and political engagement is needed to keep the situation under control. In its first few years, the Bush administration tried to use a force-only approach, with North Korea's development of nuclear weapons as its only demonstrable success.
I completely agree that the China-US economic relationship is perilous, but the Chinese leadership has at least as much to lose by having an economic falling out with the US. As it is, they must be scared sh*tless.
I have huge different opinion on SSA, I am convince it is a means to transfer wealth from the working to the non-working wealthy. [...] When [the government] borrow money they are spending it now and promising to either incase the money supply in the future or take money from the people to pay it back.
That's true. It was set up as a pay-as-you-go system, and when analyzed over longer time intervals, it isn't necessarily a fair system. Taxes will have to increase when more people are retired. That's a simple truth. What is really unfair is that this tax-hike is being postponed. It should happen now, and it should also make the tax progressive in stead of weighing disproportionally on the poor.
Look at the year 2025, this year is when SSA is balance, just as much money coming in as coming out, so the government will no longer be able to borrow money from SSA.
Actually, it won't take that long for this particular issue to come home to roost. The SSA and Medicare will have a balanced budget in 2017. More importantly, starting around this year, their surplus will decline every year, forcing the government to implement more savings or higher taxes every year.
Mind you, SSA and Medicare will still be simply cashing in on its treasuries in order to fund its deficit for decades more. It is difficult to see what else it should do with those trillions of dollars they have stashed away. It is only in the very far future, if absolutely nothing is done, that there could be an issue with these programs.
So the government has no choice at this point they cancel SSA at least in the form it is now.
Well, no. It will probably increase the retirement age a bit, or rather make full benefits kick in more gradually. It will also increase SS and Medicare taxes, hopefully turning them into a flat or progressive tax. The earlier the better, of course.
I don't think that cancelling SSA would be fair, especially for the working stiffs that need the money more. Your "trust fund baby" does not need SS or medicare, as he will earn his money after he "retires" anyway, still without lifting a finger.
If the MACS are TBills why do they yield ~ 1 percent more than a TBill? It is because they are not Tbills you and you have a risk they may not be paid back.
They yielded more than T-Bills so that everyone could pretend that they were not government entities.
1 percent on 5T is a lot of money, and that is what is wrong.
About 50 billion a year, to be exact. That was a very cheap price to hide the fact that the US government was making mortgages several percent cheaper for Americans. Aside from the possibility that it would combine with a period of really easy money to create a bubble, of course.
The MACs new the loans were not going to get paid back, everybody knew this, but the people that bought the debt felt the government would never let them go under, and they were correct.
Hmm, now we're getting into conspiracy territory, I'm afraid. I don't know how many people believed that the rising house prices would make these loans profitable even in default, how many people thought that people would simply find a way to keep paying anyway, and how many people just didn't allow themselves to think about the fundamentals of these constructs. Let's not forget that everything was done to obscure the underlying assets for most of these investment vehicles.
I suspect that some people must have realized that all this was predicated on a unhealthy dose of optimism. Probably some real estate brokers knew exactly what they were doing, and some financial wizzes must have understood it too. But the line between fraud, ignorance and simple incompetence is difficult to draw.
I do think that the shareholders were close to being "zeroed out", weren't they?
The government did not have to make the debt good, the were not requried to.
Well, they kinda were. The implicit guarantee is what made Freddie and Fannie work.
The 1T of debt we have added will never be paid back, and it will just cause inflation,and once inflation forces up the value of the assets that the loans were made against it all evens out.
Look, the debt was bad. Whether or not the US government is stuck with it or individual financial institutions, pension funds and foreign investors does not really make a difference in that regard. The loss of wealth (or rather, the exposure of fictitious wealth) is real, humongeous and difficult to deal with. Letting the banking sector go must have been very tempting, but we know from experience that this could bring the worldwide economy to a standstill for a generation or more.
I don't think that the bailout is being handled particularly well, especially the newest stage of it. But letting the MACs go was just not an option.
But our standard of living goes down as our dollar is worth a lot less and we have less capital to invest. It would have been better to right down the loans now, and then move in.
The American way of life is over anyway - it has been built on debt for over 3 decades. The bulk of the capital the US invested over the last decade was either fictitious (leveraged up) or foreign. I don't think there's much of a way around it. The question is whether the transition to a more sustainable economy is long or really long and somewhat controlled or completely chaotic. Pain is simply not optional...
Writing down the loans isn't something that can be done without repercussions. For instance, declaring all Freddie and Fannie paper worthless would take 5 trillion dollars out of the accounts of banks, pension funds and foreign governments, causing widespread defaults and sour the rest of the world on all kinds of US debt.
This would have forced the pain on the bond holders at a much higher level than the average person, as it would have required much less debt.
These bond holders would disproportionately be wealthy or old, as these are typical investment vehicles for wealth protection. Unfortunately it's also the vehicle of choice for unsophisticated investors that were just looking for an ultra-safe investment. Many pensioners would lose their shirts. Is that better than spreading the cost over the entire working population over a decade? I am not sure.
I agree out tax rates are tolow on uneared income, but I think they are to high on earned income.
In comparison to every industrialized country, they are pretty low. In most European countries, governments take about 50% or 60% of your income. I do agree that capital gains taxes should be increased as well, but you got to be careful not to completely discourage risk taking.
When was the last time you have seen a huge factory open up here?
I could argue that there are a lot of them opening up. It's just that more of them are closing... But your point is valid: the US isn't very competitive in manufacturing.
Thanks for an interesting discussion.
