A couple of issues I see:vnatale wrote: ↑Tue Mar 24, 2020 9:40 pmOn the next page he is loudly singing to THIS choir (of one!)…
The Folly of Avoidance
Normally in a book of this sort you would find a discussion of how you can shield yourself from the certain-to-occur disaster. Some authors would advise you to buy gold, others to invest in foreign currencies, and still others to engage in a diversified strategy involving common stocks, bonds, and currencies across the globe, along with various commodities.
You will find no such recommendations here, for the simple reason that none of these strategies will prove effective to protect your wealth if our society does not change course. If you are one of the few who has the ability to pull on the levers of power in government, you might be able to become a pick-and-shovel seller in a sea of ever-increasing and unstable pyramid schemes. But unless you can amass billions and disperse it all over the world—and have the means to get to any of those locations on a moment’s notice and abandon those assets in places inhospitable to you—it won’t matter.
The issues we face as a nation are not limited to the United States. Since the dollar is currently the world’s reserve currency, if we hit the wall in the United States, economic repercussions around the world will be extremely severe. Becoming an expatriate may appear alluring, but it is fraught with danger; foreign nations are likely to become extraordinarily hostile to Americans, should we cause their economies to collapse as a result of our foibles. Large amounts of money can buy security, but do you really wish to live behind a barbed-wire fence and 10-foot-high concrete wall for the rest of your life? Travel to Jamaica and drive a few kilometers away from the tourist traps where cruise lines come into port, and you will see exactly what sort of fortress-style structure you will have to construct to be reasonably secure.
Likewise, if you follow the advice of many to buy gold, and the dollar collapses, you might believe you have successfully sheltered your wealth. Nothing could be further from the truth. While the government is unlikely to again attempt confiscating gold as it did in the 1930s, it is trivial to slap a 95 percent capital gains tax on the metal and demand that you document your purchase price for tax purposes. If the government takes such an action, your stash of $10,000 per ounce of gold turns into $500 in your pocket. The choice to deal in the black market will exist, but the risk of going to prison for tax evasion is hardly an attractive option.
For this reason, what you will find here are policy paths forward for our nation. These suggestions will not be painless for anyone in the Unites States, and there are powerful financial interests that align against all of them. They are designed to return the financial markets to a place that functions as a means of clearing payments while matching buyers and sellers, stripping the ability of various interests to blow Ponzi-style bubbles. They will require recognition of the insolvency of major financial institutions and government programs that have in fact been bankrupt for years but are trading on the premise of ever-increasing amounts of debt.
The core of where our economy is today and where we have traveled from has come about due to the Wimpy syndrome. We began by eating a single hamburger today that we promised to pay for next Tuesday. But then next Tuesday came, and we didn’t have the money to pay for both the previously eaten hamburger and a new one for our empty belly. So we borrowed once again, and again.
All of this has pulled forward demand but has not led to actual prosperity. It has instead led to financial harm, as all borrowing comes with interest attached. The car we would have bought three years from now if we had saved was instead purchased today. Had we saved and waited the three years, our insurance bill would have been half of what it was, and there would have been no car payment. Yes, our car for those two or three years would have been scratched up and consumed a bit more gas, but it would have gotten us to work, and we would have spent the interest payments ourselves instead of giving that money to the banks.
The cell phone we bought on credit would have been purchased six months later, and we would have less expensive cellular service as well. We would have paid $600 for our cellular service over the last year instead of $1,200.
The college our kids are attending today wouldn’t have come with a crushing cost that is impossible for any young adult to work their way through, consigning them to massive amounts of debt if they can’t get an academic scholarship. The dorms would still be cinder-block buildings, there’d be a TV down the hall in a common room, and the awful food would be served cafeteria-style. But our sons and daughters could flip pizzas part-time to attend school, and they would still be learning calculus, computer programming, physics, or the practice of law.
Our houses wouldn’t have ever cost $500,000 in a middle-class neighborhood. They would have cost $150,000 instead. Sure, they wouldn’t have fancy granite countertops, measure 2,500 square feet, and be adorned with Viking professional kitchen appliances, but you’d be able to afford to buy one on a common $50,000 household income with one parent staying home and raising the kids. We’d probably have fewer teen pregnancies, gangbangers, and other miscreants for good measure, simply because someone would be there when Junior got home from school to make sure he did his homework.
We wouldn’t have stolen the Social Security taxes in the 1980s and beyond. We could have decided in the 1980s to instead put each person’s earnings into an account with their name on it. A true trustee arrangement, which many people think we have for Social Security but in fact never existed, could have been put in place. To do that would have required an actual zero inflation target that was enforced, and when the first signs of the leverage explosion showed up in the late 1970s and early 1980s, along with deterioration in the GDP/debt imbalance, that was the time to do it.
But we did none of these things. We chose to promise to pay tomorrow for the hamburger we insisted on eating today. We elected people to Congress who sang a great song about balanced budgets and fiscal responsibility. But as soon as they were elected, they did nothing but borrow and spend money we did not have. To make matters worse, they nodded pleasantly while the Federal Reserve and our banks abused the monetary authority vested in Congress by the Constitution.
Now the bill for more than 30 years of our economic, fiscal, and monetary foolishness is on the table, and the waiter is tapping his foot.
Our history is one of serially blowing bubbles in an attempt to evade the consequences of the previous collapse. In 1980, there was $4.4 trillion in total debt outstanding in the United States. In 1990, that figure reached $13 trillion, triple the 1980 figure. In 2000, systemic debt reached $25.8 trillion, double the 1990 amount. And in 2010, we reached $52 trillion, yet another double.1
One, Karl Denninger seems to have a real axe to grind in blaming the skyrocketing cost of higher education on "fancy facilities" and "amenities" as he has mentioned this quite a few times. I'm not sure that his theory is actually borne out by the facts; see https://www.theatlantic.com/education/a ... ca/569884/ and https://www.insidehighered.com/news/201 ... st-college.
Two, when he mentions Social Security being diverted into individual accounts with each person's name on it I only hope he was referring to a portion of the increased FICA taxes after the Greenspan Commission in the early 80s (IIRC about 1/4 of those tax increases went to provide current benefits and the other 3/4s were used to buildup the Social Security Trust Fund) that went into the SSTF and not ALL of the increases (again, some of the increase went to pay current benefits) or even worse, ALL of the non-Medicare portion of the FICA taxes, period. Given that Social Security is still an essentially Pay-Go system how did he expect to pay benefits for current retirees now (or current retirees back in the 1980s) if every bit of the SS portion of FICA taxes got diverted to private accounts? One of the following three things is true: He is lying to us and trying to pull the wool over our eyes, he doesn't understand actuarial science (or even basic math), or he should've been much clearer in saying that only the portion of the FICA tax increases from the early 80s onwards that DIDN'T need to be used to pay current benefits (and certainly not ALL of the FICA tax!) should've been diverted to private accounts.
Three, it wasn't all (or even mostly) the fault of easily and cheaply available mortgage credit that drove the price of housing up; 30-year mortgages have been available since the 1930s, zero-down loans for veterans since 1944, low-down payment loans for non-veterans via the FHA since the late 1940s, and low-down or even zero-down loans via private PMI in certain forms since 1957...oh, and Mortgage rates were pretty low from the late 1940s to the early 70s and housing prices weren't nuts then.
Four, the explosion of debt since the late 70s and early 80s that he bemoans was aided/abetted/caused/enabled by several things:
On the Federal level, the supply-side belief that "tax cuts pay for themselves" and that therefore we can cut taxes again and again and never cut spending...even when it becomes obvious beyond a reasonable doubt that almost all tax cuts don't even come close to paying for themselves nor do they lead to higher economic growth.
On the corporate level, the ending of the near-prohibition of share buybacks (so it's now perfectly legally OK to leverage your company up by borrowing money to buy your own stock back), the heavier use of incentive-based executive compensation like options (so now execs have all the incentive in the world to leverage up to juice earnings per share) combined with MUCH lower tax rates on high incomes (if Uncle Sam is going to get 90% of every dollar you make over a few million you have a lot less incentive to leverage up to try and boost your company's earnings because you won't see a huge bump in after-tax income even if it does work as planned), debt-based leveraged buyouts of one public company of another (almost unheard of before the late 70s) and private equity companies doing the same thing taking companies private and loading them up with debt to pay for doing so (again, only became common in the last 30-35 years....before then, there were countervailing forces--like regulators, and unions, and just plain social disapproval--that would've looked dimly on a "load up the company with debt to pay for the buyout, pay ourselves a huge recapitalization dividend to celebrate, and then if the economy softens and the company can't pay the interest on the debt and goes into bankruptcy and has to lay people off...well, too bad; we've got ours already so f*ck everyone else" strategy by an LBO operator or private equity firm),
On the individual level, the loosening of usury laws, the toughening of bankruptcy laws, 40+ years of stagnant real wages for lower-class and middle-class earners, and healthcare/education/housing costs rising more in line with nominal GDP growth rather than just with inflation (which wouldn't have been so bad if average median wages had kept up with GDP growth and productivity growth...but they haven't by a long shot) is far more responsible for rising household debt burdens (and the fact that one breadwinner can no longer support a household) than the "I've got to have it now" mentality that Mr. Denninger seems to want to pinpoint as the main culprit.
Fifth and finally, I'm not even going to get into what his idea of a zero inflation target would do except to say that maybe Mr. Denninger needs to crack a macroeconomics textbook to study what "downward nominal wage rigidity" and "price stickiness" are and see how a zero inflation target would make those a lot worse issues than they already are.