ABSOLUTE RETURN LETTER – THE RETIREMENT LOTTERY
2 March 2010 by Cullen Roche
10 Comments
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Comments
The only problem with the argument that government spending is absolutely needed is that it merely shifts debt from the household balance sheet to the government balance sheet. Given that the government either finances itself (ultimately) from (1) tax revenue and (2) inflation (i.e., printing money), both of which are claims on households’ future wealth, one would think that this is nothing but accounting gimmickry on an aggregate basis.
Other than boosting exports, the third option for debt relief is simply massive restructuring. We have had a long period where we have borrowed future income to spend today. Now we have to live with the austerity implied by that.
The real question is whether there is a bigger deadweight loss (the proper economic meaning) from a sudden massive readjustment or a pro-longed but less jarring adjustment. Nobody really knows the answer – Keynesians will pick the former as creating more DWL, Austrian-school economists would pick the latter, and the unanswerable question is a very simple framework for the division of opinions in the public.
The government can handle long-term deficits and does not fund these deficits via taxes. That is a common misconception. The US government can and does run deficits throughout most of its history. This debt is not the same as household debt. When we need money to finance actions we must borrow or save. When the government needs money they press a button.
The risk with Koo’s approach is that it assumes we can simply spend our way out of a debt crisis. The more important assumption is that the banking sector and consumer will allocate capital properly. In my opinion, this is false as more spending is likely to simply generate even greater mal-investment. Its a continuation of the boom/bust policy we have fallen in love with. The problem is, none of this is even remotely relevant if we don’t take care of the structural problems at hand – the banking sector is too large and the financial industry remains unregulated. Without first attacking these issues the spending is highly reckless in my opinion.
Completely agree that Koo’s opinion is based on the idea that after the private sector deleverages, it will lead to a new booming economy which will let the government deleverage itself. But the problem with Koo’s thought is Japan’s government will go into a debt death cycle if the economy really does improve forcing interest rates up.
I agree with Koo that deficit spending has kept Japanese GDP from falling off a cliff, but I would argue that his conclusion on deficit spending and his entire theory is inconclusive at this time. We will know whether he is right or wrong in 10 or 20 years, but by no means has deficit spending led to a booming economy in Japan.
I think the buill market of the 80s was promoted by increase in population, and also icnreased investment in stocksvia 401Ks. So, in an assence it was a bubble where those who invested earlier reaped the benefits and where able to retire while those coming later are stuck holding the bag.
it was a convinient fairy tale for Wall Steet that you can invest for 20 years and get 10%+ returns and retire.
In reality, if you plan to live 20 years in retirement, you should be saving 20-30% of your income for 40 years and hopefully preserve it and make 3-5% on it and not get it eaten away by inflation.
I don’t know who and when will break this news to the americans. As it is in 10-20 years we’ll ahve a lot of old people who bought into 401K retirement fairy tale and will end up living on whatever government can afford.
It’s astounding that people can’t grasp the simple concept that wealth (as opposed to money) does not grow on trees. We, individuals and governments, have consumed more than we produced, for a long time, or in simple terms we spent more than we earned. Now we, individuals and governments, must earn more than we spend, for a long time. Yes, that will cause a depression. It can’t be avoided because the consumption has already occurred and payment is due.
Our previous debt-bubble-fueled-overconsumption will be paid for, either by those who consumed, those who provided the goods, those who provided the credit, or the taxpayers. No matter which group pays, that group will consume less because they are paying for prior consumption. It doesn’t avoid anything if the government stimulates using more borrowed or printed money, just shifts the burden from one group to another. Creating future tax burdens by running large govt deficits just shifts the blame down the road a bit. Creating inflation is a tax on savers, which subsequently reduces their ability to consume. Defaulting on debt will be ruinous to creditors.
The “mother of all depressions” is still coming. We’re just rearranging the deck chairs and deciding who gets first dibs on the lifeboats.
There seem to be too many born again proponents of MMT and balance sheet recession theory by Koo (which is essentially MMT). As I see it, there are very practical issues in Koo’s and MMT proponents dealing with the current problem. They just want to deficit spend and print away to prosperity (or at least stability). While their theory and the accounting identity they have helped us all understand better is accurate, their policy suggestions are generally useless. Since fiscal spending and printing money is controlled by the government, which generally is inefficient, bureaucratic and riddled with special interests, will result in mal-investment that in turn leads to asset bubbles, not productive growth. Eventually, it will result in inflation (even if the economy has a substantial output gap as MMT proponents will argue) because the printed $ will chase non productive goods and services (aka asset bubbles) rather than productive growth.
Also, why does everyone just assume that because Koo says so, the Japan policy is indeed the “right policy” for balance sheet recessions – is Japan such a success that we should all try to emulate it? Or is it really the very best that can be done and so we are all doomed to 2 decades of sub par growth? Koo has an elegant theory and an accounting identity that backs his explanation of the recession, his policy suggestions are, IMHO, not at all proven to be either be a success or even the best that could be done.
I think fred above has hit the nail on the head, “It’s astounding that people can’t grasp the simple concept that wealth (as opposed to money) does not grow on trees. ” – one CANNOT deficit spend and print money when productive uses for those deficits and printed money is not found. And since government cannot enforce productive uses for its deficits and printed money (for the most part), this a policy that is bound to fail.
And I haven’t even started discussing the social impact of a government deficit and printed money bailout every time there is a deep recession….those will be enormous and lead a nation into a never ending abyss of sloth, with the citizenry who will get used to the idea that the govt will bail them out every time an asset bubble pops, so why bother “working”?
What would I do (not that I have any influence!) – a mix of some Austrian destruction combined with some very specifically targeted and limited deficit spending/printing – a payroll tax holiday or a govt sponsored work for pay scheme that is run by efficient entities or some such thing. Sure, Dems will lose in 2010 and Obama in 2012, but it will set the nation on a path to a more sustainable growth and avoid the social issue that I touched upon above. Markets will also crash as the easy money scheme disappears, but debt will be destroyed along with it and a new beginning will be established.
Chances of this (or anything remotely like this) happening – near zero! Unless forced by the bond/currency markets.
” I don’t think tax cuts are the path to prosperity. They are another short-term form of stimulus. What we need is regulatory reform and an implosion of this banking sector that has strangled this economy for the last 10 years “
I would stipulate that the massive growth of the banking sector is an inevitable result of growth in government. As government becomes ever more intrusive, the most profitable endeavor, particularly in the financial sector, becomes lobbying the government for advantage in the distribution of government’s massive stake in the economy. It’s like Willie Sutton; the banks seek government influence because that’s where the money is.
As the intermediaries of our entire financial system, bankers have a lot to offer politicians/regulators who are willing to listen. While the government has grown faster over the last 40 years, the private sector has grown slower and real income growth has stagnated. The government responded by lowering interest rates continuously over 30 years, stimulating asset bubbles and excessive debt creation, which in turn served to maintain consumption at higher levels than would have otherwise existed. Bankers with their financial innovations have been the catalyst that spurred the explosive growth in credit and financial markets. All they required was their cut off the top, part of which they refunded in the form of campaign contributions. The growth in government and finance go hand in hand.
This form of corruption is as old as civilization and it will never be ameliorated by making government more powerful. We do need strict anti-trust enforcement, stronger capital requirements, and break-ups of the large banks. But increasing the overall load of taxes and regulation will just make the problem worse, IMO.
“Just look at the last 12 months as investors pile back into risky assets with little fundamental reason to back such investments. We are simply sewing the seeds for the next great bust.”
what more fundamental reason do you need other than the blood was in the streets and the fed was blowing at your back? i just hope i make enough to pass onto my kids because i know it will be alot tougher for them…
Clearly, the FIRE economy has grown too big, too reckless and too powerful. It works to profit itself (which in an of itself isn’t a bad thing but it is bad when it does so at the expense of the country and the working class). I see nothing much happening here though…some sound bites on Volcker rule (which promptly gets diluted in the Senate) etc.
And surprise surprise, even the common man hasn’t learnt a lesson – savings rate down, spending up even as income declines!! I guess people have become conditioned to spending away and the 2008 crisis was just a temporary shock.
The country is doomed when you have the common man who doesn’t understand the problems he faces but is ever willing to spend away, and the politicians (who were never of any good anyway) pay lip service to change and instead keep status quo in place.
US doesn’t realize it yet, but it is in a secular decline and the debt fueled spending binge is becoming harder and harder to sustain. Not that Europe is any better or that China, which has its own bubble is a good situation either!
I am an investment guy, and I find little of real value in risk assets (or even the supposedly “riskless” assets!!). Waiting to short evertyhing…I could wait a while because we have the weight of the supposedly infinite US govt B/S behind this bubble, but with the credit transmission mechanism broken, I doubt that this bubble will be sustained for the nearly 4 years (2003 – 2007) that the housing bubble ran its course.
United States imports approximately $27 billion a month in oil. That’s over $300 billion a year sent overseas. (At $70 a barrel). If that money stayed internally it would be quite a stimulus. We have the oil, we just need the commitment.