Tuesday, September 07, 2004

Addicted to debt

Everybody has something they are prone to liking too much for their own good.

For the government, debt falls very neatly into this category. Given the opportunity they just can't get enough of it.

For people in power only a short period of time, going deeper into debt is a win-win situation. The more they spend, the more popular they get, at the expense of people they aren't accountable to.

But all is not lost, right? The U.S. economy will grow faster, making the government finances healthier?

Wrong. For two big reasons: the war on terror and baby boombers.

These are two problems that can't be fixed and have huge costs associated with them.

Add to that modest economic growth not capable of generating the types of tax revenues enjoyed in past upturns and you get a very nasty surprise ahead.

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At the moment we are enjoying low interest rates, mainly because of low inflation. However, this has only made it easier for the government to get it's fix of debt without anyone noticing.

Until now.

Record government deficits have made headline news but they're still not that interesting to most people. That's mainly because it doesn't affect the majority of us.

This is going to change, fast.

The first thing we are going to notice is that the government's huge borrowing requirment isn't going to go away as quickly as it did in the past.

Then we are going to notice higher taxes and this is going to make things a lot worse.

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You know things have gotten really bad when the government starts raising taxes. It's something they are loath to do and usually end up regretting (i.e. they get the boot, first chance people get).

This is going to happen in the very near future. When it does people are going to blame the government and they should. Only thing is, it's not the present leaders they should pin the blame on but those from the past.

** Afterthought **

An absurd moment at today's testimony by Fed Chairman Alan Greenspan to the U.S. Senate had certain politicians lauding "His Excellency" for bringing with him the solutions to all the future debt problems: Pay as You Go.

This scheme, whereby the working population funds the retirement costs for the present elderly, is a very leaky boat.

The debate is a debate and not a problem with a unique solution. There are a number of solutions to the problem.

The first unambiguously positive step is to get people more active and eduacated about investing. Once people understand that they are responsible for their future wealth they can go ahead and ensure they have enough of it.

3 comments:

Krystel said...

Believe me you, I will read your blog religiously. I'm currently taking macroeconomics, am enjoying the hell out of it, and simply cannot get enough of it.

Your profile says that you work as a consultant. This might be a bit of an ignorant question, but what exactly does your job entail?

Iestyn said...

Can we clarify this a bit, for the uninitiated such as myself?

If everybody takes to investing as a hobby, how does this successfully replace pensions? The investment market is, naturally, an evolutionary arena, so to a simpleton such as myself this would suggest that no more than 50% of people can do well within it... and indeed, I would really expect it to end up like one of Dubya's tax breaks, with 95% of the success being enjoyed by 5% of the investors (how can a bricklayer with mnimal education and little capital compete with a seasoned stock broker who reads the FT every day and likely inherited a few million from (stock broker) daddy?).

So, given that... why does it not make sense for the government to artificially level the playing field and give the chumps at the bottom the leg up that, really (by mere dint of their being alive), they deserve?

Is it a matter of this not being a zero-sum game? Such that, if everyone plays enthusiastically then, yes, there will be seriously uneven distribution of wealth, BUT there will be quite a bit more wealth to go around. So 'poor' won't be that poor any more?

I'm speaking in simple terms, of course, and no doubt your answer won't be so simple or conclusive, which kinda highlights why I need some clarification here in the first place...

So I enjoy reading your blog, see? I really do!

Ram Jam said...

For examples of a government which allows tax breaks and a welfare programme designed to be the elixir of life, look no further than the beautiful Scandinavian country Sweden. And if you want to look at a country currently plagued by the pitfalls of tax breaks, and welfare programme designed to be the elixir of life, look no further than the beautiful Scandinavian..yeah you guessed it....Sweden. Jeeezuz! Are they paying for it or what?? The government hands out nearly US$2bln a year on payouts covering lost time at work by people who decide that being tired on a given morning exempts them from having to come into work!!!!...Tiredness?! See, this is what happens when a government takes to coddling its people with a welfare programme. As the British would say, people end up "taking the piss". Anyway, put that on your smorgasbord and try it with a bit of herring and boiled potato's.