Investment versus speculation

by Doctor Science

William Holbrook Beard, The Bulls and Bears in the Market. I can't figure out if the bears in this close-up:

are looking for more money inside the bull they've eviscerated, or are angry because it turned out to be a hollow, bubble-y sort of bull.

In July Bill Domhoff, sociologist at UC Santa Cruz, posted An Investment Manager's View on the Top 1%, written by a long-time acquaintance who works in the business (and who wants to stay anonymous, not surprisingly). He emphasizes that there are two distinct sets in the "top 1%":

The Lower Half of the Top 1%

The 99th to 99.5th percentiles largely include physicians, attorneys, upper middle management, and small business people who have done well.

...Since the majority of those in this group actually earned their money from professions and smaller businesses, they generally don't participate in the benefits big money enjoys. ... Most of those in the bottom half of the top 1% lack power and global flexibility and are essentially well-compensated workhorses for the top 0.5%, just like the bottom 99%.

The top half of one percent, and especially the top tenth of one percent, are a different story:

The Upper Half of the Top 1%

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement but they are rare. Those in the top 0.5% have incomes over $500k if working and a net worth over $1.8M if retired. The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money than from personally selling goods or services or labor as do most in the bottom 99.5%. They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.

... Folks in the top 0.1% come from many backgrounds but it's infrequent to meet one whose wealth wasn't acquired through direct or indirect participation in the financial and banking industries. One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset. Another client, CEO of a medium-cap tech company, retired with a net worth in the $70M range. ... One client runs a division of a major international investment bank, net worth in the $30M range and most of the profits from his division flow directly or indirectly from the public sector, the taxpayer. Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company.

The important point here is that even the people who look like they've made their money from a business outside the financial industry -- the Bill Gates or Steve Jobs types -- really haven't. They've made their money from *stocks*, not from selling things or services.

It's not just the wealth from the stocks of their companies, either. This chart of income sources for the top hundredth of a percent

shows that dividends -- direct shares in profits -- have become much less important since the 1970s, while "wages" have become much more important. It looks as though these extremely wealthy people are working for their money, doesn't it?

Except that "wages" includes stock options and bonuses, which are often based on stock price performance. So wealthy people who aren't getting money from S-corporations, sole proprietorships, and partnerships are getting almost all their income from capital stock/ real estate gains, and from stock-indexed wages.

And the stock market isn't really for investment, it's for *speculation*. "Give them money and get a percent of the profits" is be investment, because you (the wealthy person) are tying your income to how much money the company actually takes in for doing things. "Buy low, sell high" is speculation, because how much money you get doesn't have to depend on anything the company actually sells or does -- all that matters is what potential buyers think, and their confidence that the stock will continue to be worth more in a market of people who think like them.

No wonder so many of our Very Serious Leaders keep saying "confidence" is of overwhelming importance, more important to businesspeople than things like "are there enough customers?" -- even though actual businesspeople are most concerned about lack of demand.

Speculation is driven by confidence, and the more large corporations are run by and for the interests of speculators, the more confidence -- instead of customers -- will seem to be truly necessary for business success. For gamblers, the Confidence Fairy seems real:

Fortune and her Wheel, from an illuminated manuscript of Boccaccio.

and marketing -- in the form of "if you believe in fairies, clap your hands" -- is the most crucial element for success.

In any case, it looks as though the wealthiest and most powerful people in our society, regardless of what line of work they claim to be in, are all really in finance and Wall Street. The rest of us are the 99.9%.

Comments

[Countme-In]

What's interesting in America since the real estate bust is the number of capacious 4000-square-foot Swedes standing empty at the insistence of Jaime Dimon, moldering on their foreclosed foundations, and growing cheaper by the day, while your average family of four who can't get a mortgage is now huddled into rented two-room Swedes with no storage space and a rise in the rent every six months.

Even the latter's aspirations to knock out a wall to make a suite of Swedes is thwarted by the small print in the lease agreement.

Sweet.

[Rob in CT]

I find parts of McKinney's proposal interesting. I strongly disagree with what looks like an extremely weak inheritance tax (unless that's a proposal in addition to our already weak estate tax, in which case it would be an improvement).

I don't think capping expenditure at 2011 levels for two years is a great idea, but I also doubt we're going to get much in the way of stimulus spending going forward, so it's not significantly worse than what I expect anyway.

FICA cut: oh, stimulus by tax-cut. Ok, I suppose, so long as we're assuming the funding shortfall for SS/Medicare will be made up via general fund/borrowing (in other words, I'm leary of defunding those programs deliberately and then turning around later and claiming they're hopelessly underfunded and thus must be cut).

#3 I simply don't know enough to intelligently discuss, but it *sounds* good.

#4 - fine by me.

#5 - I have no idea if it would work, but I don't mind it.

#6 - same as 5.

#7 - sounds interesting. Still leaves cap. gains as a separate tax structure, but introduces progressivity. Ok, I guess.

9 & 10 sound good, to the extent they can be written up properly and actually enforced (there would be MUCH wailing and gnashing of teeth from "industry leaders" and such if anything like that were attempted).

[Countme-In]

I was watching "Doctor Zhivago" the other night and marveling at the distinction without a difference between Zhivago's in-laws being forced at the hands of the humorless State to give up most of the square footage in their manse in Moscow for allocation (come to think of it, it reminded me of when the property managers and space allocators for one's private employer in America show up once again snapping their tape measures to further reduce the workers' cubicle space, while the petty czars in the corner offices sleigh off to their dachas every weekend) to the homeless and destitute and the real estate "market" of today's America wherein ample square-footage manses are left empty while some folks are left unallocated to fend in tiny cardboard box Swedes or pay rent equal to their former mortgages to cohabitate in your average two-room Swede, which may contain a space-saving Murphy Bed, but let's face it -- Jesus wasn't born in Ireland because they couldn't find three wise men or a virgin there either -- and as it was even He was born in a homeless manger, landlords being what they are throughout unrecorded history.

Some folks' extreme ideas of what constitutes Communism and Capitalism are like looking at a sex manual and being presented with two extremely uncomfortable methods of f*cking when all you really want is to relax into the missionary position with the help of a little small-s socialistic lubrication to ease the friction.

You drop Jaime Dimond's name in a thread comment and you sure as heck better answer the question: "So, what about Jaime Dimon?"

The other day, the CEO and victimhood poster-boy of J.P. Morgan said, in comments before his TARP colleagues (I favored TARP, because without it Jaime Dimon, DaveC, and and I would sleeping Stooges-style in a Murphy Bed in MckT's basement while the latter would be out in the middle of the night scarfin up firewood to keep us all warm) that he was being taxed at a 39.5% marginal tax rate at the Federal level.

What?

When even this guy Dimon lies or doesn't know what his present marginal tax rate is under current law (35%) in FOXNation, then what is the point of having civilized conversation about anything with these people.

Let's instead go at it with the cleansing edge of the machete for awhile to give the usual suspects time to take their minds off hating the swarthy Kenyan in the White House and to consult with their tax accountants long enough to learn the effing facts about their own tax burden, which so offends them at any rate, that it "feels" heavier than it really is.

If the high marginal rate was 2% today, Dimon would lick Eric Bolling's face and rend his Countess Mara tie while waxing victim-wise about HIS 3% burden.

And while they're at it, tell me once again how high marginal earners from the late 1930s to the early 1960s had their last earned dollar taxed at 91% (with steeply marginal rates on down the line) and the unionized and non-unionized economy, innovation, and wealth managed to grow hand in hand at famously rapid clips without the American industrial brain trust throwing off the shackles of such awful oppression and expatriating themselves to Occupy a safe deposit Swede in the Barbados, or Delaware.

Dimon's marginal rate will rise to 39.5% in 2013 unless martial law is declared by President Newt Romney in the nick of time, at which point Dimon will call it 42% with an eye toward zero.

[Countme-In]

MckT, how come you're not participating in the Republican Presidential primary debates? ;)

At least you take the trouble of stating some rational bullet points without referring to actual bullets to please the base.

Meanwhile, from Gingrich, for example, we get the big idea (it's very simple, in a very, very fundamental way) that unionized adult janitors in poor school districts should be fired from their jobs and have the work contracted out to their 12-year old children to teach both family members the value of the work ethic in America.

Presumably, as a result, the kids will put their noses to the grindstone located up Gingrich's fat and very fundamental fundament while their parents previously employed as custodians can take over their kids' crack habits to pass the time while the kids are at work making real money.

[Slartibartfast]

I don't honestly know how you'd allocate a source of tax revenue to deficit/debt reduction only unless you have a balanced budget. If you run your government like it's a wallet full of credit cards, it matters not that you're using some of your income solely to pay off debt if you're still racking up debt hand over fist.

So, I'm guessing that item 4 only is sensible if in conjunction with provisos to keep the rate of debt change nulled out over some time span using the rest of the budget.

[russell]

MckT, how come you're not participating in the Republican Presidential primary debates? ;)

At least you take the trouble of stating some rational bullet points without referring to actual bullets to please the base.

Seconded.

[Slartibartfast]

At least you take the trouble of stating some rational bullet points without referring to actual bullets to please the base.

People who do that should be put up against the wall and shot!

[McKinneyTexas]

Count and Russell--thanks, but I really am not a Republican, or what passes for being a Republican these days.

As for Neutron Gingrich, I am really at a loss for words. I am glad he is being attacked on the left, but if I were in command of the left, I would do whatever I could to promote his candidacy. Other than Bachman and Paul, he seems the easiest to defeat once people really get to know him. A little bit of Neut goes a long, long way.

I don't honestly know how you'd allocate a source of tax revenue to deficit/debt reduction only unless you have a balanced budget.

Fair point. Let me clarify: if spending were to be capped and the capped year's revenues still fell short of spending, you would use the tax dollars acquired through to the increase to 38% (or is it 39%) to pay that current deficit down. Now, the hope would be that getting corporations to actually pay 15% while stimulating, again hopefully, the economy with a two year FICA holiday, you would see sufficient revenue to run little or no deficit. The hope also, is that with a 15% corp rate, offshore hiring would be less desirable since we are going to capture the money anyway if the corp opts out. With a lower max bracket, one of the incentives (lower taxes) to go offshore is eliminated or significantly reduced, and the advantage of staying onshore, even with a higher labor cost, is reduced training and you can do more with less people here than "there." Plus, lower transportation costs. But, like any other damn proposal, it's theory and conjecture.

Count, if I had a basement, you could sleep there. We do have an extra bedroom. The max marginal rate, effectively, is 37.95% on earned income by people who are self-employed= 35% income tax, 2.95 medicare tax.

More Neut bullship--disclosing that I am on the bubble for some forms of torture lite in the theoretical ticking time bomb situation, his blanket statement that waterboarding simply is not torture still has me in knots. For that one brief moment in time, I did wish I was in the debate. "If it's not torture, let's waterboard your ass for 5 minutes, on video, and put it on YouTube. If you can withstand 5 minutes and are still willing to take that position, you win. In or out, Neut?"

[Phil]

keep in mind the progressive view is a minority view, as is the libertarian.

Are you sure about that? Got any cites? I do.

Cite 1:

Six in 10 Americans say the federal government should pursue policies to reduce the gap between the wealthy and less-well-off Americans, although fewer express support for the Occupy Wall Street movement that’s been protesting U.S. income inequality.

Sixty-one percent in this ABC News/Washington Post poll think the wealth gap is larger than it’s been historically. And despite longstanding public concerns about activist government, six in 10 also say the federal government should seek to reduce that differential.

Cite 2:

Two-thirds of likely voters say the American middle class is shrinking, and 55 percent believe income inequality has become a big problem for the country, according to this week’s The Hill Poll.

Only 14 percent of respondents said the middle class is growing and another 14 percent said it is staying the same, while an additional 19 percent said income inequality is somewhat of a problem for the United States. Only 21 percent said inequality was either not much of a problem or no problem at all . .

Close to 7 in 10 said the income tax system is either somewhat or very unfair — a finding that was supported among most ideological groups and income levels.

But voters are also far from convinced that a flat tax — like the one Texas Gov. RickPerry (R) proposed last week — was the solution to that problem.

A clear majority — 58 percent — said they favored a graduated income tax system, with only 35 percent backing the sort of flat tax that magazine publisher Steve Forbes pushed for during his 1996 presidential campaign.

Cite 3:

THIS WEEK'S TOPIC
Are the growing inequalities of wealth and income in the U.S. a problem?

10% No, we have upward mobility that other nations lack

25% Yes, that's why the Occupy Wall Street movement has caught on

19% No, free enterprise lifts everyone's standard of living

45% Yes, and with more than half of Congress among the rich 1 percent, it will continue

I could go on, but I'd like to see even a single cite from you on just what is and is not "minority opinion," because I suspect that you are deeply into "How could Nixon have won? Nobody I know voted for him!" territory.

[Phil]

BTW I have a sealed envelope here listing all the ways you're going to try to dismiss those poll results and what they mean, so tread carefully!

[McKinneyTexas]

Until such time that compelling evidence is brought to my attention, I will monitor Rev. Graham's progress in this area."

Phil, getting people to agree that income/wealth inequality is a problem isn't that difficult. They will say the same thing about, e.g., children born into single parent homes. Where the rub comes is selling what I take to be the progressive recipe for addressing the issue. I think gross disparity in wealth control is a problem, less so income, or could lead to a problem, so I would have said 'yes' if asked. That doesn't make me a progressive.

Which envelope had my answer? Smiley face.

[Countme-In]

Meanwhile:

http://money.msn.com/business-news/article.aspx?feed=AP&date=20111208&id=14602228

Obviously, the solution is to fire more unionized janitors in poor neighborhoods so they can spend quality time sitting around the kitchen table with their families making the tough budgetary decisions facing American Koch Brothers in today's tough, cash-flush economy.

Also, whatever we do, let's not approve ANYONE to head up the new Consumer Finance Bureau in case the out-of-work janitors plan to make financial choices, play the stock market and/or jeopardy with their unextended unemployment benefits with unintended consequences, like wishing they still had a job.

MckT: I know you are not what passes for a Republican these days (the filter having become so porous), but you're all we've ("we" being what passes for Marxists over at Redrum) got, so please don't go.

Thanks for the offer of the spare bedroom.

Where are DaveC. and your former file clerk going to sleep?

I am fundamentally a kidder.

In closing for the day, regarding Newt (and Dick Cheney, John Yoo, and George W. Bush), I have a friend with a first DUI conviction who will be prevented from entering Canada for up to ten years, but Newt and company are apparently welcome to visit that country at any time and water board their population with impunity.

OK, an alternate closing since Phil is quoting poll results. DailyKos cited a poll among what passes for likely Republican voters in Illinois, I think, who said they would rather have seen Obamacare abolished than to have Osama bin Laden hunted down and killed, probably because the fact that Obama gave the order to carry out Osama's demise is so confusing for them due to the similarity in names.

Wait, we hunted down Obama, well, good, it's about time that .......... I'm sorry? It was OSAMA we hunted down? Well, hasn't our government anything better to do?

The poll didn't ask if the likely Republican voters believed the four hijacked planes on 9/11 were commandeered by Donald Berwyn, the CBO, and the ghost of Franklin Delano Roosevelt, and for good reason.

Have a good rest of your week, folks.

[McKinneyTexas]

awesome. I fricking cut and paste a part of a report I am writing to a client. I am a total Gingrich.

[McKinneyTexas]

so please don't go.

Not a chance.

[Countme-In]

Iowa

[Phil]

Haha, I assumed that was a C&P error but wasn't going to call attention. (On a message board at which I'm a longtime commenter, someone once accidentally copied, into a thread about the Star Wars movies, something from a work email about the importance of getting individual utility meter data. The whole thread instantly transformed into a series of "Star Wars" quotes for "utility meter data" substituted in, and it's been a meme going on three years now.)

Where the rub comes is selling what I take to be the progressive recipe for addressing the issue.

Maybe, maybe not, but you're arguing by assertion here.

[McKinneyTexas]

but you're arguing by assertion here.

Maybe, maybe not. (rimshot?) Post-Nixon, i.e. my memory, the first major tilt left was McGovern. He got hammered. Thereafter, Clinton won, but after rolling out a more aggressive left'ish agenda than he explicitly campaigned on, the Dems lost the house for the first time since the 50's. A similar thing happened in '10. You're right--I assert that the details of the progressive agenda are a tough sell. But, I didn't come up with that out of thin air.

I am chuckling over the meter data/Star Wars thing and thinking the Count would be a superstar in that game. I am mortified at what I could have posted. Seriously, I really could have put my foot in it big time.

[Phil]

I was able to dig it up - in a thread called "The crimes of George Lucas," in response to someone mentioning his alleged destruction of the original, un-Special-Editioned negatives of the first three movies, this happened:

Please note that utility data for the entire campus is also included. This was the only data made available with the application, and in order to accurately estimate and verify savings, individual building meter data will need to be obtained from the campus.

^^^this, far and away. its one thing to churn out crappy product, lots of aging directors do that (hell, young ones too!), but deliberately screwing up your past work - so that NO ONE can ever enjoy it again, that's a whole other level of unforgivable.

Hilarity ensued:

"You've never heard of the Millennium Falcon? She's the ship that collected the individual building utility meter data in less than 12 parsecs."

"I love utility data!"

"I know."

[McKinneyTexas]

Still chuckling. Thx.

[Tony P.]

Later this evening, I promise myself the luxury of reading the whole thread, but for now I have a quick reaction to the fact that both McTx and Russell are concerned about the federal government's debt and therefore the federal government budget deficits of which the federal government's debt is made. My reaction is a question:

Why do YOU care how many trillions of dollars the federal government owes?

Seriously: how would your life, or mine, be any different if the federal government's debt got reduced 33% to $10T, or increased 33% to $20T in the next N years?

I know the axiomatic answer to this question: less debt is better than more debt, even if it's not my personal debt. What I mean by "axiomatic" is something like "I just plain feel better about it". The federal government's debt may not make a practical difference to your life or mine, but the mere awareness that the US federal government owes $15T could conceivably diminish your enjoyment of life in the same sense as the awareness that pigs have to die if I am to eat ham sandwiches diminishes mine.

Having or not having a ham sandwich is a practical thing. Having or not having a car or a house or the money to buy ham sandwiches is a practical thing. How many zeroes appear in some federal government ledger in red ink is not, in itself, a "practical" thing. It can have practical consequences -- and those practical consequences can be very different for different people.

You guys are practical people. So, leaving aside the "axiomatic" answer to my question just for the moment, what are your practical reasons for caring about the federal government's debt?

--TP

[russell]

what are your practical reasons for caring about the federal government's debt?

Debt service costs a lot of money.

[Tony P.]

Debt service costs a lot of money.

Yeah, but the alternative to servicing debt is to pay down the principal. That costs even more money.

--TP

[russell]

the alternative to servicing debt is to pay down the principal. That costs even more money.

Once. I.e., you pay it once, you're done.

I have no problem with the feds running in the red, and IMO the "balanced budget" stuff is crazy talk. I also don't think our current level of debt presents a critical threat danger to the nation *at this moment*.

It's just high, higher then it should be, IMVHO. If I'm not mistaken, it's something like 60% of GDP, which is historically very high, WWII excluded.

Retiring federal debt is not number one on my list of concerns, but it is on the list.

[McKinneyTexas]

Tony, eventually, if left unchecked, we will owe more than we can pay and the gov't will cease to function because it can't meet payroll and no one will sell or lend to it because it doesn't have the means to make good on the obligation.

Sure, the Fed can print money, rendering everyone's savings and investments worthless, but still accomplishing the same end result: the full faith and credit of the US means nothing. The global fallout of such a default, which is what it would be, is incalculable.

Put differently, no one will lend to the Feds forever. Like no one is buying up Greek bonds (except speculators paying way below what, if Greece were prudent, they were intended to be worth).

A competent economist with no ideology driving his/her analysis could be a lot more detailed and specific. But, it's not for nothing that so many intelligent people are looking at this issue with great concern.

[Slartibartfast]

If we were simply financing all of our own debt, I'd chalk this up to a fiat currency argument. But we're not. We sell quite a bit of our debt overseas, and once our debt gets to a certain point, buyers will begin to balk at investing in our Treasury bonds at the current rate of return, IMO. Which will drive the Treasury bond rate up, which will drive the cost of debt service up.

If you don't see that this can lead us in a direction that's highly undesirable, I don't think we can have this discussion.

[Ugh]

Slarti: once our debt gets to a certain point, buyers will begin to balk at investing in our Treasury bonds at the current rate of return, IMO. Which will drive the Treasury bond rate up, which will drive the cost of debt service up.

I think that's generally correct, though, I wonder... Right now the 10 year treasury rate is 2%, 20 year 2.75%, 30 year 3%. Lenders willing to take 3% for 30 years in a currency that the borrower controls!

So, I would suggest that perhaps something else is going on here. What that is I'm not sure, but historically low interest rates in the face of historically high debt levels (outside of WWII) certainly suggests there's more to this than your typical lender model of "negotiate a higher interest rate from someone who is already deeply in debt."

[hairshirthedonist]

It's funny, though, that our historically high debt is accompanied by oversubscribed bond auctions at historically low yields. It's also funny that, with all the money-printing going on as of late, inflation has been less than noteworthy.

Japan's economy has been stagnant for some time, but the particular problems we're always being warned about regarding national debts, namely inability to borrow at reasonable rates and runaway inflation, have yet to occur for them after decades of large deficits and large and growing debt.

But we can always wring our hands about these things despite the empiricism that should have us focusing on how we allocate real resources in the real economy. It's like we're trying to figure out how fast our car is going by looking at the temperature gague when there's a perfectly good speedometer right next to it. Even just looking out the window would be an improvement.

[Tony P.]

Tony, eventually, if left unchecked, we will owe more than we can pay and the gov't will cease to function ...

It's the meaning of "we" that I am trying to probe here, McKinney.

"The government is us", I sometimes remind people who rail against "the government". As a (d)emocrat, I truly believe in that notion. So "we" should all care about the government's finances because they are in the end "our" finances. And yes: too much debt on "our" balance sheet can have all sorts of ugly consequences eventually. (Though as ugh and hairshirt note, bond buyers seem to think "eventually" is over 30 years away.)

But I am a pragmatist as well as a (d)emocrat. You and I do not share "our" finances. You have your balance sheet and I have mine. We are not Communists, or even (c)ommunists, here.

You and I each have our own balance sheet; Russell has his; Uncle Sam has his. Each of those four balance sheets ultimately affects all the others, but not in the same way. If I go broke, it matters less to your balance sheet than if Uncle Sam goes broke. If Uncle Sam improves his balance sheet by cutting his spending, I might go broke sooner than you do; if Uncle Sam does it by raising tax rates you might go broke sooner than I do; if Uncle Sam does neither maybe you and Russell and I all go broke eventually.

I don't know about you, but my own financial well-being is strictly a function of my own balance sheet. Not yours, not Russell's, and not Uncle Sam's. Note that I said "financial well-being". There's more to well-being than money, but it's money we're talking about here.

So I come back to my original point: in practical (i.e. financial) terms, Uncle Sam's debt per se does not affect me. What does affect me is how much tax Uncle Sam collects from me (me, not you) and how much Uncle Sam spends on me (ditto). Would you say the same thing, in reverse, or not?

I hope it's clear, BTW, that I'm not trying to make this personal. "You" and "I" could be any two Americans.

--TP

[Sebastian]

"So, I would suggest that perhaps something else is going on here. What that is I'm not sure, but historically low interest rates in the face of historically high debt levels (outside of WWII) certainly suggests there's more to this than your typical lender model of "negotiate a higher interest rate from someone who is already deeply in debt.""

What is going on here is that lenders see us as the safest major government to lend to. It is a relative term not an absolute one. So long as the EU looks like it is going to be a basket case with governments intentionally shooting themselves in the foot (even more than us), people will lend to us. That probably won't last forever, though it may very well last quite a while.

As such it probably makes sense not to worry too much about the debt for now. Though it certainly would be stupid to use it as an excuse for a hog-wild, credit-fueled spending spree.

If we could get hard rules about limiting government spending during economic expansions, I'd suggest borrowing money to have an enormous stimulus now. But we of course can't get any such hard rules, so I'll live with "don't make things crazy by lowering taxes or keeping the money supply particularly tight".

But the answer to Tony P's question can be found in the bond markets of Greece and Italy. Everything was under control with the spreads until VERY SUDDENLY it wasn't. Countries with modest debt ratios don't have to panic when the very suddenly comes along. Countries with large debt are in serious trouble when it happens.

[Slartibartfast]

Ugh, I think that in the short term our debt is seen as safer, perhaps, than the debt of some other nations. But that's only in a relative sense of goodness. Maybe at some point, no one is going to want to buy debt. And then where will we be?

[hairshirthedonist]

Maybe at some point, no one is going to want to buy debt. And then where will we be?

What if the government simply spent what it spent, received whatever tax revenue it received, and left it at that? There is currently no functional need for issuing bonds. It's a vestige from the days of the gold standard.

[Ugh]

Slarti: Maybe at some point, no one is going to want to buy debt. And then where will we be?

Instead they will buy...? I mean, where is one going to stash $1 trillion that is currently being loaned to the US gov't on a yearly basis for use as it sees fit? Loan it to a bank? The stock market? Loan it to some other sovereign state? Which of those options provides the greatest likelihood that one will get one's principal/initial investment back on such a large sum these days?

I mean, I don't think I necessarily disagree with you or Sebastian on this point, but it seems to that the U.S. is on a fundamentally different level than, say, Italy (and certainly Greece). In that we have the world's largest GDP (by far), a large land mass, a stable democratic political situation, a large productive population (albeit at 9% unemployment currently), and relative geographic isolation (yes, the oceans really do protect us in a way that they do not protect, e.g., China or India).

No other country is large or stable enough to absorb this amount of free floating cash at such low rates, and I don't see that changing for a very long time.

[Tony P.]

Seb,

Your point about "suddenly" is a very good one. You (an individual, a corporation, a government) have been borrowing at 3-5% for years; your debt has grown from 30% of your annual income to 150% of your annual income; your lenders have watched you keep borrowing and building up debt but have kept lending you long-term money anyway; and then SUDDENLY they demand 15% or 30% interest on any new money you want to borrow. Who can tell what might cause that transition? Certainly, I can't. But I can imagine some possible triggers:

1) SUDDENLY, people with money to lend find stock investments, say, that promise 25-50% returns.

2) SUDDENLY, your annual income drops so a debt that used to be 100% of your income becomes 200% of your income overnight.

3) SUDDENLY, your lenders discover that your annual income all along has been about half what they thought it was.

4) SUDDENLY, your lenders discover each other and realize that your debt is twice what they individually thought it was.

I've been too busy to follow the Greek debt situation as closely as I should have, so I don't know if any of these three imaginable triggers are at issue there. Maybe #3 is the likeliest for Greece, something else for Italy, and something else entirely would cause a sudden transition for the US.

What I find hard to believe is that lender "psychology" changes overnight. If I'm willing to lend you $100K at 5% for 10 or 20 years because I know you make $100K/yr and you're 30 or 40 years old, I can imagine myself saying "Well, now that you're 50 years old, I'm only willing to lend you another $50K but for just 5 years, and only if you pay 15% interest." But I can't imagine myself being surprised that you just turned 50. I can't imagine myself offering you the old deal the day before your 50th birthday, and insisting on the new deal the day after. It seems to me that my terms would get slowly, not suddenly, stricter over time. (Unless, of course, something like one of the 4 triggers I mentioned came up as you were blowing out the birthday candles.)

Maybe I'm too rational to be a bond investor.

--TP

[Priest]

The problem with comparing the US debt load with Italy or Greece is that the US govt./Fed Reserve controls the currency. All dollar-denominated debt could be retired more or less immediately by the creation of more dollars. The govts. of Greece and Italy (and Spain & France, etc.) cannot create Euros, so the risk of default is greater.

[Sebastian]

It doesn't change overnight, but it changes MUCH faster than the government can adequately respond to. The Greece thing has been brewing for about three years. I suspect that the bond market kept believing that the European Bank/EU was going to take serious steps to deal with the mess for about 2 and a half of those years. And then when it became clear that they weren't going to do much, it suddenly fell apart.

I actually think that the Italian default is more likely at this point. Italy is running a surplus except for its debt repayment. Default would normally cause all sorts of problems, but the Germans seem intent on forcing Greece to go through all the pains of dealing with a default, without any of the benefits of having a devalued currency. That doesn't strike me as sustainable--at that point they might as well default and at least gain control of their own destiny again (which they can afford to pay with the tax receipts from their primary budget surplus). Greece never had that option, as it has an enormous budget deficit and thus relies on new loans to pay current bills.

"The problem with comparing the US debt load with Italy or Greece is that the US govt./Fed Reserve controls the currency. All dollar-denominated debt could be retired more or less immediately by the creation of more dollars. The govts. of Greece and Italy (and Spain & France, etc.) cannot create Euros, so the risk of default is greater."

This is one of those right but wrong explanations. Yes the US Treasury could just do that, but then it would be a real inflation monster (thumbnail guess more than 120% of GDP), and the rates of the next sale of Treasury debt would have to cover that expectation. So it would stop the 'debt' crisis by causing an actual inflation crisis (as opposed to the "oh noes, worry about 3% inflation" crap that we hear about now).

[Priest]

Seb:

Paying off all debt in a short time would generate unacceptable inflation, true. But local control of the money supply allows for less drastic influences on the economy. A larger number of dollars and the Fed announcing a target inflation rate of say 4-5% would give an incentive to the businesses currently sitting on large cash reserves to spend/invest, which should boost growth and therefore tax revenues, thereby improving the federal balance sheet.

Given that here in the real world the Fed is unwilling to take any steps to achieve the current inflation target (2%, I believe), I don't see that happening any time soon, but just because the tools aren't being used doesn't mean they don't exist. The individual euro countries don't even have the tools.

[Hartmut]

Let's be totally cynic. Maybe the US situation is different because the country is ruled by the plutocrats, so other countries' plutocrats know that they will always get their money (or they can effectively take part in the ruling themselves). Secondly the US are armed and dangerous, so putting pressure on would be risky. And at least one GOPster candidate for POTUS does not know that China has nukes (and should possibly be attacked before it gets any).
Thirdly (is that grammatically correct?), there is the threat of mutually assured financial destruction. If the US go down, all the world will go too. Those calling the shots in the US know that and are already to a degree banking (no pun intended) on it. 'Do as we say or we will blow up and take all of you with us!".

[Hartmut]

In addition to my comment above another cynic speculation. Maybe the greatest risk would be to try to reform the system, reducing the influence of the plutocrats in favor of the people. Since the mob is unreliable, the lenders may see that as a greater risk than the longterm unsustainable policies of today and pull the plug. We could already see an example of that in the case of Greece. The attempt of the Greek government to let the people decide* got immediately answered with threats of instant execution and had to be abandoned (iirc less than two days after floating the idea).

*I think that was more about blame-shifting and hide-saving than democratic ideals but it does not change the results.

[bobbyp]

Howlers:

Tony, eventually, if left unchecked, we will owe more than we can pay and the gov't will cease to function....

Absolutely false as the writer then went on to admit. So why so state?

We sell quite a bit of our debt overseas. Several things here. The % held by furriners is quite manageable. Our deliberate 'high dollar' policy exacerbates this problem. We (through the IMF) have historically punished governments who do not retain substantial dollar reserves. China deliberately pegs its currency low to subsidize its export machine. They HAVE TO buy our paper. Oh, and this little thing about our balance of trade.

This is one of those right but wrong explanations. Yes the US Treasury could just do that, but then it would be a real inflation monster

A rather bad ending to an otherwise reasonable post. This dreaded inflation would occur if there was some other dire exogenous shock to our productive capacity or if we were in a condition of full employment. Neither is on the immediate horizon.

HSH makes good points.

[bobbyp]

This is one of those right but wrong explanations.

Presumably then, under your theory, Spain (which was running public surpluses prior to the crisis) and Ireland (celebrated in hard currency quarters as undergoing a 'miracle' prior to the crisis)should not be suffering any problems right now, correct?

So, what did they do wrong?

[bobbyp]

For those of you concerned about our debt/GNP ratio (you especially, Russell), I ask you to read http://slackwire.blogspot.com/2011/08/history-of-debtgdp.html >this and post a comment or two.

I think hairshirt would enjoy it, too.

All the best, and Merry Christmas to you all.

[bobbyp]

Maybe I'm too rational to be a bond investor.

Actually, investors who can buy US Treasuries on margin have done quite well over the last two years on a total return basis. ;)

[russell]

So, what did they do wrong?

In Greece's case, they hired Goldman to manage their bond sales.

I keep waiting for somebody to wake up and figure out that GS is a criminal organization.

I appreciate Seb and McK's comments here, and I don't mind wearing the token lefty who's worried about debt hat, but to be honest I don't see anything like imminent disaster in current US debt levels.

It would be good to have a plan for buying it down over, say, the next twenty years. That's my concept.

We were actually sort of on track to do that until about ten years ago. Ooops.

Bobby, thanks for the link I will check it out.

[Countme-In]

Audio from NPR today. You'll need headphones if at work.

Very good way to keep this zombie thread lurching forward.

http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=143508437&m=143509329

[Sebastian]

"So, what did they do wrong?"

They were in the Euro.

[Hartmut]

"So, what did they do wrong?"
They were in the Euro.

It was also a mistake to let the Greeks partake in the first place. It was obvious from the start that their numbers were fishy. The only surprise was HOW fishy they were.

[bobbyp]

It would be good to have a plan for buying it down over, say, the next twenty years. That's my concept.

For you deficit hawks, consider: "The last time the US sovereign radically lowered the ratio of public debt to GDP was between 1946 (the all-time high for the Federal debt burden at 121.20 percent) and 1974 (its post-World War II low at 31.67 percent). Arithmetically, of the 89.53 percentage points reduction in the Federal debt burden, inflation accounted for 52.63pp and real GDP growth accounted for 55.86 pp. Federal surpluses accounted for minus 20.51pp."

[bobbyp]

"So, what did they do wrong?"

They were in the Euro.

Yes. Still are in fact.

They both no longer control their own currencies, and cannot undertake fiscal and monetary policies to counteract the worldwide economic bust that began in 2008. Instead, they are tied to the auterian German morality play that passes for 'serious thought' these days.

[bobbyp]

hmmm...

[Countme-In]

Why does this situation -- deliberately and speculatively heading directly into a storm, a stall at high altitudes, all signals malfunctioning or misinterpreted, and a frozen refusal to do the opposite of what is necessary ......

http://www.theatlantic.com/technology/archive/2011/05/air-france-447-what-the-black-box-tells-us/239598/

..... remind me of .....

[Countme-In]

.... THIS.

http://motherjones.com/kevin-drum/2011/12/what-me-worry

For a metaphorical aircraft describing the murderous, genocidal behavior on this side of the pond of the of what passes for Republicans in the U.S. Congress and in the Presidential primary, turn to the World War II Japanese Zero flown by an ideologue intent on destroying its target.

[Cheap Air Max]

It is borderline crazy that you can have something signed off by the relevant government agency and then get your ass sued off for the same agency later deciding that it was wrong.