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Author Topic: Zero danger posed by the long-term deficit?
Greg Davidson
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This position is more extreme than I believe reasonable, but it makes a potent argument:

quote:
EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It's not overstated. It's completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.

If you believe that long-term deficits are unusually dangerous, then you must acknowledge that the free market does not work (by the way, the dialogue is between Ezra Klein and Jamie Galbraith).
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Grant
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Ha! I don't know what to think about the people who insist that the market is "rational." The market is dictated by the buying and selling volume of human beings, who are usually nothing but irrational when it comes to money, the extent of the insanity being in direct proportion to how much money they are dealing with.
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Pyrtolin
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I posted a link to that in another thread. Even more relevant is the later point that Galbraith makes about what it means for government to be running at a surplus of a deficit. If it's running at a surplus it's taking money away from people; if it's running at a deficit it's giving money to people.

Unless people have too much money, government needs to always run at some degree of deficit to help ensure that there's enough money being introduced to at least match wealth production.

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G2
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quote:
Originally posted by Greg Davidson:
If you believe that long-term deficits are unusually dangerous, then you must acknowledge that the free market does not work (by the way, the dialogue is between Ezra Klein and Jamie Galbraith).

That is a non-sequiter. Deficit spending by the government is not a free market.

If you *do not* believe that long-term deficits are unusually dangerous, then look at Greece.

[ May 14, 2010, 12:22 PM: Message edited by: G2 ]

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JWatts
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quote:
Originally posted by Greg Davidson:
If you believe that long-term deficits are unusually dangerous, then you must acknowledge that the free market does not work (by the way, the dialogue is between Ezra Klein and Jamie Galbraith).

This is a scarily stupid comment from an economist. It misses the nuance of the issue and comes to a completely faulty conclusion.

First, If you believe that long-term deficits are unusually dangerous is an erroneous statement because it ignores the magnitude of the deficit.

A 0.25% long-term deficit will be negligible in any case where the underlying economy is growing at a higher rate (for example: 2%) However, if that same economy with a 2% growth rate has a long-term deficit of 8% it will be dangerous and if not corrected disastrous. (see Greece).

Secondly, the free market does work, but no market can be perfect without perfect information which is a physical impossibility. So of course it works, but no rational economist has ever claimed it's a perfect system.

A rational market will start increasing the risk surcharge in response to increasing perceived relative risks. So Greece and California must pay a higher interest rate on new bonds because their perceived relative risks have increased.

Meanwhile, other bonds (US Treasuries for example) may actually have a lowering of interest rates, because their relative risks to the rest of the market (California, Portugal, Ireland, Italy Greece, Spain, etc) have declined, even though the objective risk has actually gone up.

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cherrypoptart
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How is the interest paid for financing the debt not a waste of money?

Is it supposed to be a good thing for my hard earned tax dollars to pay interest to China on their investments?

And finally, is there any limit to the crazy things people are going to come up with to defend Obama's incredibly reckless binge of spending?

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cherrypoptart
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> JWatts

> First, If you believe that long-term deficits are unusually dangerous is an erroneous statement because it ignores the magnitude of the deficit.

Magnitude. The perfect word.

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LetterRip
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I'll point out that the market is a manic depressive - it is rarely rational - it is either irrationally exuberant or irrationally pessimistic and often both at the same time.

Also a lot of market actors are playing musical chairs - figuring that they can pick the right time to jump to a chair before a market correction even if they don't personally believe that the market is reflective of the economic ground truth.

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Greg Davidson
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quote:
That is a non-sequiter. Deficit spending by the government is not a free market.
I believe that your comment is either a non-sequitur, or requires an incredible amendment to the laws of economics.

If you are saying that when there is some activity affecting the market-place that is not based on the free market, then the free market will not operate, then your assertion would have profound implications for the economic theory behind free markets. This would render most, if not all, of the policy recommendations made based upon free market economics to be moot. Free market economists do not go that far; they would predict that financial markets will respond to government actions in order to profit maximize.

Which still leaves unexplained why the financial markets are not freaking out at the current level of long-range debts. And the example of Greece in no way refutes Galbraith's point. It's a pretty serious and fundamental challenge to those who are concerned about long term deficits (it's a more extreme position than I am comfortable with, but at the moment I cannot refute the logic)

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Pyrtolin
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quote:
Originally posted by cherrypoptart:
How is the interest paid for financing the debt not a waste of money?



To use a metaphor from the article- how are high scores a waste of points at a bowling alley?

The better question is "Why bother with debt, unless you want to use the interest rates as another way of pushing more money out into the economy?"

quote:
Is it supposed to be a good thing for my hard earned tax dollars to pay interest to China on their investments?
If we're running a general deficit, is it your tax dollars or future debt that's going to China? And in either case, is there some value in keeping China completely economically dependent on that flow or revenue from its investments?

quote:
And finally, is there any limit to the crazy things people are going to come up with to defend Obama's incredibly reckless binge of spending?
Given that we're still in a recession, the problem still stand that he's not spending nearly enough to get things rolling again
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vulture
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quote:
Originally posted by G2:
quote:
Originally posted by Greg Davidson:
If you believe that long-term deficits are unusually dangerous, then you must acknowledge that the free market does not work (by the way, the dialogue is between Ezra Klein and Jamie Galbraith).

That is a non-sequiter. Deficit spending by the government is not a free market.
That's a non-sequiter, isn't it? Sure government deficit spending is (arguably) a distortion of the free market, but the judgement of the individual actors in the market as to the long term effects of it aren't affected by that distortion. Or are you going to argue that deficit spending inherently prevents the market from reflecting the future effects of that spending? Otherwise you're just subtly switching definitions mid-sentence.

BTW does anyone else have any doubts at all about the assertion that the only possible negative effect of deficit spending is in future interest rates?

That having been said, it is pretty obvious that the market isn't rational. Or at least, on aggregate, the market is poor at judging the effects of deficit spending 10-20 years down the line.

JG, you'll notice, does the same switch of definitions mid stream that I think G2 did:

quote:

The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.

On one hand he's suggesting that the market isn't making rational decisions about the risk of lending to the government on a 20 year term, and then saying that policy that assumes (approximately) rational market behaviour on much different timescales and in greatly different areas are thereby invalidated.

And he's also glossing over the fact that I suspect most economists know damn well that rationality is only an approximate assumption. It just happens to be the only one that can be reliably determined (with a modicum of objectivity). Until you quantify irrationality fairly precisely, you can't model it. In the meantime, you assume rationality and work with those models with the caveat that you're aware that they are limited to areas where market behaviour is approximately rational, and strive to determine what those areas are.

(Random analogy. I worked in transport studies for a while. Virtually all models of traffic flow assume drivers with complete knowledge of the system and a fanatical desire to minimise their travel time. Both these assumptions are in fact demonstrably false. None the less, traffic models do in fact do a pretty good job of predicting traffic flows, good enough for the purposes of planning roads and traffic light timings etc. )

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Pyrtolin
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quote:
Originally posted by G2:
If you *do not* believe that long-term deficits are unusually dangerous, then look at Greece.

As was pointed out on another thread, Greece's deficits aren't it's problem. It's lack of domestic production is its problem. If it was producing more goods internally, never mind exporting goods, then the deficits would take care of themselves.
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Greg Davidson
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JWatts, if you believe his comment is "scarily stupid", then please refute his logic. As I have said, I am not comfortable with where he comes out, but I can't find a flaw in his current logic. And your counter argument is somewhat garbled:

quote:
Secondly, the free market does work, but no market can be perfect without perfect information which is a physical impossibility. So of course it works, but no rational economist has ever claimed it's a perfect system.
You assert that the market does "work" but not "perfectly". Without further elaboration, that could be a perfect rationale for any failed predictions of free market models (if the prediction is correct, it proves that the model works; if the prediction is incorrect, it's that the theory is right but the markets are "perfect").

The case in point here is that the rate on 20-year treasury bonds is 4%. This is a real-world fact, and it is based not on a momentary spike or on the behavior of a few individuals; it is the collective behavior of world financial markets. Either the free market is not appropriately weighing the risks of our current financial situation or those highly concerned with the long-term structural deficit are not appropriately weighing the risks.

Personally, I am more concerned with the long term structural deficit than the markets appear to be. I would anticipate that it will be necessary to raise the retirement age, and more aggressively target health care costs reductions (not to make the current plan be deficit neutral, but to dig for deeper savings). But all of you who agree with me must also acknowledge that the free market can be wrong in a significant way. This means that you don't get a free pass with a policy position because of an assertion that "the free market will find the best solution"; you will need to provide a plausible case why the flaws in the free market (that you yourselves acknowledge on this day) will not result in an inferior solution.

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drewmie
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PBS's Nova produced Mind Over Money on the very topic of how irrational we become when it comes to money.
quote:
Originally posted by vulture:
... None the less, traffic models do in fact do a pretty good job of predicting traffic flows, good enough for the purposes of planning roads and traffic light timings etc. )

Maybe some places, but here in Utah the traffic lights are stupid stupid stupid! Given the huge impact on an area's economy, I'll never understand why they don't program far smarter and more efficient traffic light systems.

P.S. - For the record, I consider the deficit and national debt to be the greatest long-term threat to our economy. For a long time, the American people have been choosing to sell their children's and grandchildren's futures to feed their own short-sighted greed.

[ May 14, 2010, 01:30 PM: Message edited by: drewmie ]

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DonaldD
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drewmie? My god, they're coming out of the woordwork [Smile]
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drewmie
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lol. Yep, I guess it's been a while. [Smile]
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G2
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quote:
Originally posted by Greg Davidson:
[Which still leaves unexplained why the financial markets are not freaking out at the current level of long-range debts

Obviously you aren't keeping up with current events. Check out the markets this week.
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G2
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quote:
Originally posted by Pyrtolin:
quote:
Originally posted by G2:
If you *do not* believe that long-term deficits are unusually dangerous, then look at Greece.

As was pointed out on another thread, Greece's deficits aren't it's problem. It's lack of domestic production is its problem.
As is pointed out on this thread, Greece's deficits are it's problem.
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Pyrtolin
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quote:
Originally posted by G2:
quote:
Originally posted by Pyrtolin:
quote:
Originally posted by G2:
If you *do not* believe that long-term deficits are unusually dangerous, then look at Greece.

As was pointed out on another thread, Greece's deficits aren't it's problem. It's lack of domestic production is its problem.
As is pointed out on this thread, Greece's deficits are it's problem.
And those deficits are the direct result of domestic production shortfalls. If it's domestic production was on par with its consumption, it would only be running normal deficits not huge ones to make up for the imports that it needs.
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G2
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quote:
Originally posted by vulture:
quote:
Originally posted by G2:
quote:
Originally posted by Greg Davidson:
If you believe that long-term deficits are unusually dangerous, then you must acknowledge that the free market does not work (by the way, the dialogue is between Ezra Klein and Jamie Galbraith).

That is a non-sequiter. Deficit spending by the government is not a free market.
That's a non-sequiter, isn't it?
No, G2 is saying that unrestrained government spending to the point of economic collapse is not a result of the free market. It's a result of an out of control, fiscally irresponsible government.


quote:
Originally posted by vulture:
Sure government deficit spending is (arguably) a distortion of the free market, but the judgement of the individual actors in the market as to the long term effects of it aren't affected by that distortion.

That is not accurate, individual actors in the market are very much affected by out of control sovereign debt and act accordingly. Look at today's economic news to see the truth in that. Seen the price of gold lately? Notice how people are dumping euros?
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G2
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quote:
Originally posted by Pyrtolin:
quote:
Originally posted by G2:
quote:
Originally posted by Pyrtolin:
quote:
Originally posted by G2:
If you *do not* believe that long-term deficits are unusually dangerous, then look at Greece.

As was pointed out on another thread, Greece's deficits aren't it's problem. It's lack of domestic production is its problem.
As is pointed out on this thread, Greece's deficits are it's problem.
And those deficits are the direct result of domestic production shortfalls. If it's domestic production was on par with its consumption, it would only be running normal deficits not huge ones to make up for the imports that it needs.
You seem to be confused ... G2 is talking about government spending, not a trade imbalance.
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JWatts
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quote:
Originally posted by Greg Davidson:
JWatts, if you believe his comment is "scarily stupid", then please refute his logic.

I did. Should I re-post it?

quote:

You assert that the market does "work" but not "perfectly".

Yes, do you dispute that? And which part?

I suggest you start with reading about Game Theory. It's very interesting and informative.

quote:
The case in point here is that the rate on 20-year treasury bonds is 4%. This is a real-world fact, and it is based not on a momentary spike or on the behavior of a few individuals; it is the collective behavior of world financial markets. Either the free market is not appropriately weighing the risks of our current financial situation or those highly concerned with the long-term structural deficit are not appropriately weighing the risks.
Or perhaps a 4% yield on a 20-year note is exactly the amount of money that the very highest bond bidders are willing to pay. They might be foolish to pay so much for a 20-year note, but it is their money after all.

quote:
I would anticipate that it will be necessary to raise the retirement age, and more aggressively target health care costs reductions
I firmly agree. The US will definitely have to raise it's 67 year retirement age further and probably cut benefits to the large amount of baby boomers who will retire at ages 62 to 65.

As I've stated numerous times in the past, the US doesn't have a health care problem it has a health care cost problem. You are correct we will have to aggressively target health care costs.

quote:
But all of you who agree with me must also acknowledge that the free market can be wrong in a significant way.
You would have to define what you mean by "significant way" for me to understand that better.

But as I posted above the "free market" can never precisely define values, because that would require perfect knowledge, which is a physical impossibility. (see Heisenberg uncertainty principle

Furthermore, the bond market doesn't operate in a free market anyway. The more correct term would be a Mixed Economy

quote:
you will need to provide a plausible case why the flaws in the free market (that you yourselves acknowledge on this day) will not result in an inferior solution.
I've never denied that "free market theory" has flaws. Inferior solution to what? Before you decide to replace the "free market" shouldn't you have some kind of replacement?

You do know that the theory of gravity is not perfect, either?

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Pyrtolin
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quote:
You seem to be confused ... G2 is talking about government spending, not a trade imbalance.
Then you need to remember where government revenue comes from. The spending, in and of itself is a non issue; if the money wasn't leaving the country to chase imports, it would be returning to the government to spend again through taxes on domestic production and wages. Cutting the spending won't help increase production, it will only make the people in Greece less able to afford the things they need, and thus put a further damper on future production.
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Pyrtolin
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Here's the full article Greg was talking about, for reference in context:

http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html

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vulture
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quote:
Originally posted by JWatts:

But as I posted above the "free market" can never precisely define values, because that would require perfect knowledge, which is a physical impossibility. (see Heisenberg uncertainty principle

Oi! No abusing of physical laws for dodgy metaphors. The Heisenberg uncertainty principle applies only to non-commuting measurement operators of physical properties of particles. It has nothing whatsoever to do with the accuracy or completeness of financial data. It may well be true (for all I know) that someone with complete knowledge of the financial system would render that information inaccurate by the mere fact of obtaining said information, but that's nothing to do with physics; it would just be a relatively superficial coincidence.

<dismounts from pet hobby horse>

We now return you to your regularly scheduled thread.

[ May 14, 2010, 05:22 PM: Message edited by: vulture ]

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Greg Davidson
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Your comment here really throws me for a loop:
quote:
Or perhaps a 4% yield on a 20-year note is exactly the amount of money that the very highest bond bidders are willing to pay.
If 4% really is exactly the right amount, that means that the risk of the long-term structural deficits is small and manageable. There's no other interpretation using market-based analysis. Historically, a 4% annual return over 20 years represents the market's judgment saying that we are not in an unusually risky period of time, instead, the time period between 2010 and 2030 is an average (or slightly less risky than average) period of time.

quote:
Originally posted by Greg Davidson:
[Which still leaves unexplained why the financial markets are not freaking out at the current level of long-range debts

Obviously you aren't keeping up with current events. Check out the markets this week.

This is a very weak counterargument because:
(1) It has nothing to do with what I was talking about, which is the rate on 20 year notes, which is the free markets best assumption about long term inflation.
(2) Obama's economic policies have not changed in the past week. If you look at the market response since those policies were announced/implemented, stock value has increased substantially. There was some ridiculous Fox News accusations when the stimulus package was first announced or approved that the afternoon's reduction in the stock market was somehow a signal of how the market felt about Obama's policies. Everyone who used that argument at the time but has subsequently ignored the fact that the market has gone up by over 50% from that time lacks intellectual integrity (or, they are not arguing what they are believing to be true, they are throwing out arguments without regard to consistent or the honest pursuit of truth).

Regarding game theory, thank you for the link, my education happened to include undergraduate and graduate level coursework in that subject area, that doesn't make my opinions correct, but I am familiar with the literature (including its strengths and weaknesses... incidentally, recent studies involving brain imaging actually prove what some critics of pure game theory have discussed for decades, when people consider certain types of choices in different ways, they utilize different parts of the brain, sometimes the centers of rational thought, sometimes the locations more associated with emotional or instinctive thought, but that's another thread...).

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JWatts
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quote:
Originally posted by Greg Davidson:
Your comment here really throws me for a loop:
quote:
Or perhaps a 4% yield on a 20-year note is exactly the amount of money that the very highest bond bidders are willing to pay.
If 4% really is exactly the right amount, that means that the risk of the long-term structural deficits is small and manageable. There's no other interpretation using market-based analysis.
I didn't say it was "exactly the right amount".

I think your over generalizing here. All a 4% yield means is that some investor, somewhere on the planet with a wad of cash was willing to bid Treasury notes up to that level.

There are many factors that effect that decision:
Risk, available investment Choices, Amount of capital inflow, etc.

China being such a net saver, acts to drive interest rates downward. The financial crisis in Europe drives investors to US T-Bonds as a safe haven. Etc. Indeed, the primary driver of US T-Bond yields may merely be that there are no better investments available. China might be a better long term bet, but they're a saver not a borrower.

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Daruma28
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my education happened to include undergraduate and graduate level coursework in that subject area

Too bad your expensive education didn't cover the long term role of fractional reserve lending, and fiat currency from central bankers as the primary drivers of the deficit...and how it drives inflation that steals money from us all.

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TommySama
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Mine does
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JWatts
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quote:
Originally posted by vulture:
quote:
Originally posted by JWatts:

But as I posted above the "free market" can never precisely define values, because that would require perfect knowledge, which is a physical impossibility. (see Heisenberg uncertainty principle

Oi! No abusing of physical laws for dodgy metaphors. The Heisenberg uncertainty principle applies only to non-commuting measurement operators of physical properties of particles. It has nothing whatsoever to do with the accuracy or completeness of financial data. It may well be true (for all I know) that someone with complete knowledge of the financial system would render that information inaccurate by the mere fact of obtaining said information, but that's nothing to do with physics; it would just be a relatively superficial coincidence.

<dismounts from pet hobby horse>

We now return you to your regularly scheduled thread.

[FootInMouth] Yes, your entirely correct that was a complete misuse of the term. My apologies.


I'll just go back to petting Shrodinger's Cat [Big Grin]

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Daruma28
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quote:
Originally posted by TommySama:
Mine does

I know. But than, you gave Austrian economics theory more than a cursory glance and dismissal. [LOL]
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Greg Davidson
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quote:
I didn't say it was "exactly the right amount".

I think your over generalizing here. All a 4% yield means is that some investor, somewhere on the planet with a wad of cash was willing to bid Treasury notes up to that level.

It means that the market currently clears at 4%; there are enough investors out there who are willing to fund a large amount of debt paying only a 4% return over 20 years. This is clear proof that the cumulative wisdom of the financial markets believe that we are in a relatively low risk position over the next two decades. Given that clear reality, there are two alternatives: either the free market is irrationally optimistic, or critics of the long-term structural deficit are unrealistically pessimistic.

As I said earlier, I am not entirely comfortable with the position indicated by this logic, but it is a very strong argument (I don't see a weakness in it).

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Greg Davidson
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quote:
my education happened to include undergraduate and graduate level coursework in that subject area

Too bad your expensive education didn't cover the long term role of fractional reserve lending, and fiat currency from central bankers as the primary drivers of the deficit...and how it drives inflation that steals money from us all.

Education does not make one right or wrong, a point I was clear about when identifying my credentials. In fact, there was an interesting book by economist David Colander who showed that if you asked 18 basic questions about economics to the faculty at the University of Chicago and of Yale, you would get the opposite answers from each of the schools. Newly minted PhD's from each school are fully trained, but they can't all be "right"
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Greg Davidson
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According to mainstream economics, inflation should not steal money away from anyone, because the impact of anticipated inflation should be reflected in the prices established in the market-place. Consequently, it would only be unanticipated changes in the rate of inflation that would "steal" value from anyone, and that works in both directions. If inflation is higher than expected, that "steals" money from creditors, but if inflation is lower than expected, it "steals" money from debtors.

And Daruma, given what appears to be our agreement that corporate influence may be too strong in America, we might also agree that those who tend to control corporations (in particular, creditors, those with financial power) will influence government and the Federal Reserve to adopt policies that disproportionately favor their interests. Consequently, when the trade-off comes between creditors and debtors, the balance has consistently been on the side of creditors.

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Daruma28
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According to mainstream economics, inflation should not steal money away from anyone, because the impact of anticipated inflation should be reflected in the prices established in the market-place.

Too bad that theory has been proven wrong.

If inflation is higher than expected, that "steals" money from creditors, but if inflation is lower than expected, it "steals" money from debtors.

Inflation steals from the one class of people the most - the responsible people who save. Whether it's higher or lower than "expected" it still stealthily devalues the money the responsible person saves.

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JWatts
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quote:
Originally posted by Greg Davidson:
Given that clear reality, there are two alternatives: either the free market is irrationally optimistic, or critics of the long-term structural deficit are unrealistically pessimistic.

I'm still not convinced you've set up a valid argument.

I believe that the US has a long-term structural deficit issue. That doesn't necessarily mean it will default on it's Bonds. Your implicit assumption is that the pessimists believe a default will ensue, but the US could easily manage to avoid default.

Look at the current Greece situation. It's in very bad shape, but it has not defaulted as of yet.

Instead, the most likely results I see are a significant curtailment of spending and an increase in overall taxes. We'll have to decrease our future standard of living to compensate for the higher standard of living we've enjoyed by borrowing money.

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Greg Davidson
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I am not sure I am comfortable with a large, long-term structural deficit, but Galbraith makes a compelling case that it is not spooking private industry.
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Greg Davidson
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quote:
Inflation steals from the one class of people the most - the responsible people who save.
Would you agree that implicit in your statement is that most people who are creditors have achieved that status through responsible behavior and through savings? And if they achieved creditor status through acting irresponsibility, then the situation would be different?

So if I were to point to people who, a decade ago, were pulling down an income of 150K per year working in Wall Street on housing bonds, and subsequently got involved in housingbond derivative funds, and pulled down tens of millions of dollar per year for 4-6 years, would you consider them responsible?

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Daruma28
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Greg,

...that most people who are creditors

...are not the savers.

They are the bankers, and EVERYONE else owes the bankers.

That is the entire point of understanding what really is fiat currency and fractional reserve banking.

NOTHING in this country gets done without first having someone borrow money from the central banking system -- including and especially the Government.

Not only does this system exponentially increase our debt over time (look at our ever escalating national debt), it also contributes to inflation because of the fractional reserve practice that essentially allows banks to "create" fiat currency out of thin air.

The 'multiplier effect' is essentially the effect of steadily increasing inflation. The more fiat currency that gets borrowed into existence, the less every other dollar already in existence is worth.

And it's no accident that inflation has devalued the dollar at a steady pace since the Federal Reserve Banking system was incorporated.

What cost 20.00 in 1913, now costs $439.66 today.

That's a 2098.3% rate of inflation change.

Why the U.S. Dollar Constantly Loses Value

quote:
Between 1783 and 1913, the U.S. dollar was a real store of wealth. Except during war-time periods, inflation within the U.S. was essentially zero. If you saved one dollar in 1800, a hundred years later you could still purchase approximately the same amount of goods with that dollar.
While that article details what exactly is fiat currency, it doesn't mention the dirty little words about WHY the monetary supply has expanded so much since than - fractional reserve lending.

[ May 15, 2010, 12:26 AM: Message edited by: Daruma28 ]

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Greg Davidson
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quote:
...that most people who are creditors

...are not the savers.

They are the bankers, and EVERYONE else owes the bankers.

What do those "savers" do with their money?
(a)they keep cash under their mattress
(b) they hold on to tangible assets (like gold, artwork, real estate)
(c)contract with other people who take their money today in exchange for a future stream of payments (either guaranteed, as with bonds or loans, or anticipated as with stock equity)

For (a) you are correct, but only an insignificant fraction of wealth is held in the form of cash. For (b), tangible assets generally rise in value with inflation (in addition they have considerable volatility, in times of panic they increase in relative value). Most wealth is in the form of (c), which makes holders of wealth into creditors - they are owed future payments based on lending their current wealth (also known as "capital" - this is the most fundamental definition of capitalism).

[ May 15, 2010, 01:09 AM: Message edited by: Greg Davidson ]

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