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LuckyOne

Misery Loves Company ....

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http://noir.bloomberg.com/apps/news?pid=20601010&sid=aiFjnanrDWVk

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

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With mid term elections looming they will opt for the no-pain option regardless of the outcome. Republicans could regain Congress and then nothing will be done for the next two years. Not even window dressing.

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With mid term elections looming they will opt for the no-pain option regardless of the outcome. Republicans could regain Congress and then nothing will be done for the next two years. Not even window dressing.

Getting the correct exposures to Sterling, Euros, Dollars, other currencies, shares, bonds and commodities is a very tricky problem at the moment.

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Getting the correct exposures to Sterling, Euros, Dollars, other currencies, shares, bonds and commodities is a very tricky problem at the moment.

I am a strong advocate of diversification but based on expected returns, and you are right about the difficulty of choosing an allocation right now. It was so much easier ten years ago when REITs in the US were yielding up to 9% and growth stocks were about 5 times more expensive than value stocks (by price to book value). Right now it looks like bonds will get you about 1% real return which makes stocks look attractive, but the secular bear is far from over and they will probably get cheaper.

Problem is in a market meltdown everything goes down except bonds and the dollar so diversification can only help so much. I'd like to know what you think about some of the more "exotic" assets such as canadian oil trusts, timberland, and emerging market bonds (and property for that matter).

I would still like to think that a 3% real return is possible over the next 10 years but its going to be hard work. Just glad I was invested over the last 20 years - I would hate to think how any trying to play catch up on retirement savings is going to do from now on. And the pension funds with their requirements of 8% returns...well they are definitely toast.

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Thanks to the OP for posting. I found the article interesting and well supported until,

"once they wake up and realize the U.S. is in worse fiscal shape than Greece".

Then the article breaks down because there is no evidence based comparison between the US and Greece, which isn't that important I suppose because the comparison isn't that interesting anyway because comparing Greece to the USA is like comparing chalk and cheese, or more like comparing one piece of chalk to a whole classroom cupboard full of full boxes of chalk.

The helpful comparison would be between the USA and the EU.

That might give us some guidance as to where to place our bets.

Sadly we didn't get it from that article.

My own feeling is that the US is a better bet than the EU because the US has all the problems of the EU but is a better, more natural market, understands business more fundamentally, is more interested in making money and has a less threatened currency.

However, it's no more than a "feeling" as the absence of accessible fact based comparison doesn't give me the info to make a considered judgement call, which is just as well because I always get those things wrong.

So it's hey ho place your bets I suppose.

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pension funds with their requirements of 8% returns...well they are definitely toast.

What about if money printing --> high inflation --> interest rates back at 8%?

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What about if money printing --> high inflation --> interest rates back at 8%?

...in the 70's, 80's and 90's.... 8% was not regarded as high for IRs....most acceptable in most cases.... :rolleyes:

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I am a strong advocate of diversification but based on expected returns, and you are right about the difficulty of choosing an allocation right now. It was so much easier ten years ago when REITs in the US were yielding up to 9% and growth stocks were about 5 times more expensive than value stocks (by price to book value). Right now it looks like bonds will get you about 1% real return which makes stocks look attractive, but the secular bear is far from over and they will probably get cheaper.

Problem is in a market meltdown everything goes down except bonds and the dollar so diversification can only help so much. I'd like to know what you think about some of the more "exotic" assets such as canadian oil trusts, timberland, and emerging market bonds (and property for that matter).

I would still like to think that a 3% real return is possible over the next 10 years but its going to be hard work. Just glad I was invested over the last 20 years - I would hate to think how any trying to play catch up on retirement savings is going to do from now on. And the pension funds with their requirements of 8% returns...well they are definitely toast.

My basic philosophy is that the only way to manage assets is to an choose asset allocation and rebalance when they get out of kilter with a hard floor on the nominal value of bonds and physical number of units of commodities to ensure that you don't get rebalanced to oblivion. The research that I have read states that 95% of returns come from asset allocation and only 5% from the assets chosen within each class.

The additional scrutiny that I am placing on assets within each asset class are threefold really :

- I prefer countries with lower rather than higher total debt to GDP

- I prefer countries with stable or slowly declining average ages

- I am paying even more attention than normal to the credit rating (I don't have the time to do all of the credit work myself) of equities that I own

Canadian oil trusts are interesting. They are valued much more in terms of the PV of proven and probably reserves less remediation costs while the oil majors are valued in terms of the growth rate of reserves and the standard analyst value of oil which may be off market. This "arbitrage" allows the trusts to buy "cheap" mature reserves.

I have worked on a few forestry deals in the past. The hedging market wasn't that robust compared to crude, electricity and nat gas so they were less hedgeable so really a purer play on high quality paper demand, recycling technology and house building. I never got really comfortable with the area.

I like emerging markets for their growth (both economic and population) opportunities. They overshoot relative to developed markets on the way up and undershoot on the way down which makes timing important. It is also worthwile noting that the most liquid of them get sold more heavily when markets sell off as participants are often forced to sell what they can sell rather than what they want to sell. A high beta but interesting sector.

I am not sure that a 3% real return is going to be possible in the next decade or so. Negative real rates of return are the only way to implicitly cause a partial default on debt to help the economy (household, business and government) deleverage.

Finally, I do agree that the discount rate being applied to the actuarial value of future pension obligations is a bit of a joke. I wouldn't be surprised if we have gone past peak longevity though which will jelp dampen this effect a bit.

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  • 150 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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