End of the World As We Know It

[jtr1962]

Surprise, surprise... More anti suburb / pro-city rants by JTR.

I'm anti anything which isn't sustainable for the long haul. The very idea that everyone, including the lower income brackets, should own a home is what created both the real estate bubble ( and the subsequent crash ) and a lot of exurban sprawl. If enough people living in suburbs are willing and able to pay what they really cost, then they'll continue to exist. Problem is it's primarily only the upper income brackets who can afford to do that. The suburbs were in essence overbuilt relative to those who could truly afford them. Greenwich, CT isn't going anywhere any time soon, but I predict a lot of the housing tracts with mostly middle class families won't last beyond the decade. The good news is NYC and other places built a glut of so-called luxury housing during the boom times which is now sitting relatively empty. When the owners of these buildings realize they have no choice but to rent them out at rates affordable by the middle class ( or have them continue to sit empty ), then they'll be plenty of decent housing for all those displaced suburbanites. Since a lot them already work in the city, it'll mean a shorter commute for them.

 

[Pradeep]

http://www.npr.org/blogs/money/2010/01/podcast_to_walk_away_or_stay.html

A very illuminating listen. If you look at it as a business decision it's often a simple choice, now the problem is the banks have so much inventory sittinh unsold, they aren't moving fast at all in going thru the foreclosure process on yet more upside down houses.

It is entirely feasible that you could live in your house for 12 months or longer, no payments, rent free, before they get cracking. This will only get worse with time.

 

[CityK]

I LMAO with this humourous explanation of QE:

http://www.youtube.com/watch?v=PTUY16CkS-k

 

[Howell]

I LMAO with this humourous explanation of QE:

http://www.youtube.com/watch?v=PTUY16CkS-k

Very funny. Very sad.

 

[Stereodude]

I LMAO with this humourous explanation of QE:

http://www.youtube.com/watch?v=PTUY16CkS-k

Very funny, but sad at the same time.

 

[ddrueding]

Very funny. Very sad.

Ditto.

 

[flagreen]

Sometimes I think Ted Kaczynski had a good point.

 

[time]

Given that the US dollar is dropping like a stone (in exchange rate terms), does anyone have any insight (cue CityK)?

 

[Handruin]

Oil prices have been steadily rising.

 

[Stereodude]

Oil prices have been steadily rising.

They're pretty much the mirror inverse of the fall of the dollar.

 

[timwhit]

I hope the trend reverses, I'm going to Europe in July.

 

[time]

Ouch! I hope it doesn't put too much of a dampener on your trip. Any particular countries?

 

[timwhit]

Flights and hotels are already booked and paid for. Paris and Barcelona. 1 week in each city.

 

[Mercutio]

Given that the US dollar is dropping like a stone (in exchange rate terms), does anyone have any insight (cue CityK)?

Our debt probably looks a lot less appealing when foreign currencies trade less favorably, so in order to continue to borrow, so on that level devaluation is a good idea. Of course, current debt stakeholders are less happy about that, since that makes their investment worth less in real value, and they're theoretically less interested in purchasing additional obligations.

 

[BingBangBop]

It is my understanding that China (a major buyer of US treasuries) has recently (i.e. 2011) decided to limit its investment in those bonds causing a significant worry in the exchange markets for the US dollar. Lets face it that if the US can't find buyers for it debt that is potentially real big risk to the exchange rate. Beyond that, it would be a disaster to the exchange markets if the US govt choose to default on that debt as the tea-party/republicans are threatening to do to force policy change on the democrats.

 

[Stereodude]

Beyond that, it would be a disaster to the exchange markets if the US govt choose to default on that debt as the tea-party/republicans are threatening to do to force policy change on the democrats.

If the US doesn't raise the debt ceiling they won't automatically default. It just means they can't borrow anymore money. They will still be able to service the debt with tax revenues. And, it will force the gov't to do some real spending cuts. Not the sham imaginary ones they did a few weeks ago.

 

[BingBangBop]

It is not a question what happens domestically if the debt ceiling is capped. What I was addressing was the effect on the international monetary exchange markets. Even the potential threat is a massive increase in risk from an economy that is historically considered very stable compared to other countries. That is going to make the US dollar a risky investment compared to normal, which decreases demand thus its value drops relative to other currencies. That is what we are dealing with right now -- the potential increase in risk.

The US has had a massive negative trade imbalance for as long as I've been alive. That produces a very large-scale natural force dragging the US dollar down. We as a nation dump dollars on the world market like it is candy. Those dollars are then used by the nations that get them to buy US companies and treasuries. If the normal recipients choose not to buy our treasuries, or invest in US companies because of this increased risk there will be a very large surplus of US dollars which will make the current drop look like taking one step down a stairway as compared to falling off the empire state building.

At the moment there is some potential for some risk and people are reacting to it. The debt ceiling gets capped and we stop operating in our normal way that the world is used to, that risk becomes real. The reaction won't be pretty.

 

[Stereodude]

A trade imbalance is not automatically a bad thing. It means your trading partners end up with a pile of your money and are likely to invest it back into your country because they need to so something with it other than swim in it in a vault like Scrooge McDuck.

Printing money with reckless abandon ie: Quantitative Easing, and runaway spending on the other hand are not a good recipe for maintaining the value of your currency.

 

[Stereodude]

Removed Double Post (I really only hit submit once).

 

[BingBangBop]

You are correct a trade balance is not inherently a bad thing if they sell you back your money by buying our companies and treasuries. Other than the fact that you are selling off America so that eventually we won't be owning anything but rather just working our collective asses off to make the true owners rich.

However, you screw with the debt make people think that a default may be imminent and they will not be investing the money back. Instead those dollars will be true surplus that no one wants causing the bottom to drop out of the American dollar. No one wants to have lots of dollars with the risk that that might happen to those dollars making them basically worthless. Why do you think that China stopped buying treasuries at the start of the previous debt limit discussions?

 

[time]

'Quantitative Easing' is reducing your debt far more than anything half-wit politicians can find to hack off the government's budget. A falling US dollar helps you service the debt (because it's typically in US dollars). Greece is unable to do these things, which is why it's in limbo.

Ideologues tend to lose track of the fact that government (public) debt is only part of the problem.

The concern is the rate of change. The speed seems to be increasing, which could affect confidence, which could result in wholesale withdrawal of support. Spot markets are touchy things, look how dramatically the price of oil can change due to a relatively small change in supply or risk.

Suddenly lopping hundreds of billions off public spending would destroy your country. No economy can cope with such a rapid change. And anything that is cut will have unintended consequences, so you have to trim cautiously.

Personally, I feel (without any academic basis) that your biggest problem will be a general breakdown in law and order. Removing money from the economy means you're taking it away from individual citizens, and the distribution of wealth suggests that life will become unsustainable for at least the bottom 20% of the population. And the US already has insanely high incarceration rates, which in itself is yet another drain on the public purse.

 

[Howell]

Keep up the QE and you run the risk of inflation. And it is simple hubris to think that a group of men can track and predict what the economy is going to need. You don't need to be an ideolog to see this.

 

[Stereodude]

'Quantitative Easing' is reducing your debt far more than anything half-wit politicians can find to hack off the government's budget. A falling US dollar helps you service the debt (because it's typically in US dollars). Greece is unable to do these things, which is why it's in limbo.

Which is great if you live in a banana republic or Zimbabwe. The rest of us don't want our retirement / savings undermined by quantitative easing (intentional gov't sponsored inflation) by a bunch of idiots with no clue how to be fiscally responsible and no sense of obligation not to bankrupt the country. Quantitative easing isn't a viable way to reduce your debt either unless you plan on never running a deficit again since everyone will think twice before lending you money again.

Suddenly lopping hundreds of billions off public spending would destroy your country. No economy can cope with such a rapid change. And anything that is cut will have unintended consequences, so you have to trim cautiously.

I'm not so sure about that. We could cut 10% per year off the budget until we were back on mid 90's spending levels and hardly anyone would miss it. We could completely eliminate some gov't agencies / departments and the average citizen wouldn't miss them either. The idiot politicians increased spending rapidly with reckless abandon, spending could be cut rapidly just as easily. And frankly speaking, a 10% across the board spending cut isn't really rapid.

Sure, there will be some pain, but sitting back and doing nothing isn't an option. You fix the spending or in a few years you won't have a budget because there won't be a US of A. The current path is completely and utterly bankrupt. Both morally and fiscally.

 

[Handruin]

Remember when...

 

[ddrueding]

Other than health care, what cost has grown rapidly since we had a surplus (mid-90s?). Granted, not paying for a bunch of wars was a huge chunk as well, but at least that could go away.

 

[time]

Inflation is your friend when you're in this situation - the enemy is deflation. In simple terms, if prices double, your debt halves.

Try looking up some economic history and see if you can find any instance that the US government has managed to suck that much money (2.5% of GDP) out of the economy in one go. Here's a hint, read up on the Great Depression.

Not saying you should spend money profligately, but 10% over 4 years will disembowel the country, and by extension, the world economy.

It's also worth comparing US expenditure with other developed countries. The standout difference is obviously military expenditure. Apart from that, you spend less than average on most other things. The reason that there is a budget shortfall is that your overall taxation is much too low.

To spell it out, you're currently about a trillion dollars short each year (although that may be a high point). What agencies/departments are you going to eliminate to cover that? The FBI? The army, marine corp, airforce, navy, etc? Shut NASA completely? Take away people's pensions/health benefits?

By all means stop unnecessary waste (some of what I've read is amazing), but slash and burn at this point in time is exactly the worst thing that you could possibly do (that's not true, you could cut taxes as well). There'll probably be a civil war first, but the only sure way to avoid the cliff is to increase taxation. And to avoid crushing of demand, the rich will have to give the most: anathema to Americans.

I hope you'll take this in the spirit I intended, i.e. logical debate. I'm not casting aspersions on anyone's political preferences, just trying to get people to think about basic economics.

 

[Howell]

Inflation is nobody's friend. It costs everyone more to buy everything. Is China holding treasuries any worse than China collecting and holding wads of devalued cash until the cash has value again?
Inflation may have a useful downside for some people but those people won't be the ones who need the help when it happens. Strategic inflation is as bad a concept as strategic blood letting.

 

[Howell]

time, I'm glad you know the definition of inflation. Now think about the implications of daily life if price goes up by even 10%. It will trickle back to the very loans you are getting help paying off as your neighbor has to take out a higher value loan (comparatively) to buy the same thing as before.

Ps. I'm not offended. So far I find your patronization cute.

 

[Stereodude]

Inflation is your friend when you're in this situation - the enemy is deflation. In simple terms, if prices double, your debt halves.

No it's not. It works in a banana republic where the populace doesn't have money saved and personal wealth. The gov't should not be intentionally inflating the currency (effectively stealing wealth from the citizens) in order to cover up it's incompetence.

It's also worth comparing US expenditure with other developed countries. The standout difference is obviously military expenditure. Apart from that, you spend less than average on most other things. The reason that there is a budget shortfall is that your overall taxation is much too low.

It's also worth noting that the US provide the defensive military for most of the world too. The reason Europe could go play their socialist games since WWII is because they weren't paying for their own defense, the US has. On top of that, they've all figured out that their social programs are still unsustainable and are in the process of gutting them to reign in spending. But, in the US we're ignoring all the precedents around the world, all the proof it doesn't work, and are putting the pedal to the metal.

To spell it out, you're currently about a trillion dollars short each year (although that may be a high point). What agencies/departments are you going to eliminate to cover that? The FBI? The army, marine corp, airforce, navy, etc? Shut NASA completely? Take away people's pensions/health benefits?

How about we eliminate the Department of Education? Eliminate the IRS and simplify the tax code. Eliminate the EPA and lets states set their own regulations. The list goes on and on. The idea that the gov't can't get along with less money is morally bankrupt. We're spending the money of people who haven't even been born. This isn't just a fiscal argument, this is a moral argument.

By all means stop unnecessary waste (some of what I've read is amazing), but slash and burn at this point in time is exactly the worst thing that you could possibly do (that's not true, you could cut taxes as well). There'll probably be a civil war first, but the only sure way to avoid the cliff is to increase taxation. And to avoid crushing of demand, the rich will have to give the most: anathema to Americans.

The rich already pay the vast majority of taxes in the US. Almost 50% of "taypayers" pay no federal income tax. Even if you confiscated (not taxed) all the wealth of everyone who has over 1 million dollars of wealth, which keep in mind you can only do once, you still couldn't cover the current budget deficit for 1 year. You can't raise taxes enough to fund the current level of spending. The US doesn't have a revenue problem. It has a spending problem. The US federal gov't revenues are at near all time highs. Look at the history of the budgets, revenue, and spending in the US. No matter how much money you give the gov't they will only spend more. They never cut spending or say they've got enough money.

We're already careening toward the edge of the Grand Canyon. Raising taxes or trying to increase gov't revenue is like trying to fill in the Grand Canyon with dirt so we can drive right across it instead of simply applying the brakes and turning away.

 

[Stereodude]

Inflation is nobody's friend. It costs everyone more to buy everything. Is China holding treasuries any worse than China collecting and holding wads of devalued cash until the cash has value again?
Inflation may have a useful downside for some people but those people won't be the ones who need the help when it happens. Strategic inflation is as bad a concept as strategic blood letting.

:idea: Perhaps Time can name for us one country that has fallen apart / gone to war / been taken over by a dictator / etc as a result of deflation.

 

[time]

Why thank you. I don't get many compliments, so I'll happily take your backhanded one.

China's "treasuries", as you call them, are losing value every day. I'm pretty sure they're not happy. But a lot of people would say they deserve it for starting a currency war in the first place.

Inflation affects everything, not just the prices of houses (which are on a different planet at the best of times). The reason economists get their knickers in a knot about inflation is because it also involves higher wage demands, not just higher prices for goods and services. So it's a spiral, the price of everything increases.

You're looking at it from an individual's perspective, I was making the point from a national perspective regarding asset prices, but you can still see the basic truth if you try. Let's take housing as an example anyway and be damned.

If I buy a house for $250,000 with a mortgage of $200,000, then is inflation my friend or enemy?

If house prices inflate at 10% per annum, then after 5 years my house is worth $400,000. But my debt is still only $200,000 (less after repayments, but let's keep it simple). My equity has risen from $50,000 to $200,000.

In other words, my net worth is now 4 times higher. If the same inflation rate applied to everything, then I'd have more outgoings, but also more income, so I'd be a pretty self-satisfied citizen.

But what if deflation was the order of the day?

If house prices deflate at 10% per annum, then after 5 years my house is worth less than $150,000. Unfortunately, I still owe the bank $200,000, so I'm technically bankrupt. My other expenses have fallen, but I've also had to take a pay cut (or lost my job altogether), so I'm pretty f*cking miserable.

Don't misunderstand, this is just a simplified metaphor, albeit a surprisingly recognizable one. And I'm only talking about dire situations where your national debts have been written in your own currency. Then, inflation dilutes the debt as a portion of your GDP. Deflation, on the other hand, reduces your ability to service the debt.

 

[Stereodude]

You're looking at it from an individual's perspective, I was making the point from a national perspective regarding asset prices, but you can still see the basic truth if you try. Let's take housing as an example anyway and be damned.

If I buy a house for $250,000 with a mortgage of $200,000, then is inflation my friend or enemy?

If house prices inflate at 10% per annum, then after 5 years my house is worth $400,000. But my debt is still only $200,000 (less after repayments, but let's keep it simple). My equity has risen from $50,000 to $200,000.

In other words, my net worth is now 4 times higher. If the same inflation rate applied to everything, then I'd have more outgoings, but also more income, so I'd be a pretty self-satisfied citizen.

I'll play... The problem is it's all smoke and mirrors. Did your wages also go up 10% a year? Even if they did (very unlikely) it's still hardly in your favor when you look at the big picture. Your $250k house is now worth ~$403k, but that house you want to upgrade to isn't $325k anymore like it was 5 years ago. It's now ~$523k. And the $200k you had saved in your 401k even though it gained 8% per year in real terms and is now worth ~$294k and has about 10% less buying power after 5 years because you would need $322k to have the same buying power $200k did 5 years ago. A net loss. And because of the rampant inflation banks have cranked interest rates way up and no one can afford to get a mortgage to buy your old house even though you've increased your equity.

So, you have less buying power with your salary because it hasn't kept up with inflation, you've made some big imaginary gains on your house that you can't realize because there are no buyers, your retirement savings have less buying power than they did 5 years ago and everything costs more. As a result you've had to get a HELOC and tap that increased equity in your house to afford everything that's now more expensive and you're surely sitting pretty for when the bubble bursts housing prices correct and you're upside down on your house.

You're right, this is so much better than the deflation model. :scratch:

 

[Handruin]

In addition to the above...not everyone owns a house or can afford to own a house. Any idea what percentage of people rent vs own?

 

[time]

Lots of points, I'll just pick this one for now:

Even if you confiscated (not taxed) all the wealth of everyone who has over 1 million dollars of wealth, which keep in mind you can only do once, you still couldn't cover the current budget deficit for 1 year. You can't raise taxes enough to fund the current level of spending.

Estimates of how many millionaires there are vary, mainly turning on a definition of what defines one. Including a principal residence, I don't think there's any doubt that the number exceeds 20 million in the US. This Bloomberg article appears to exclude the house and plumps for 5% of the population, or 5.5 million households. Their sources say that this group of people control 56% of the country's wealth, and the Federal Reserve reports that US household wealth is $57 trillion.

So if it was evenly distributed, they'd each have to cough up 3% of their wealth to cover the deficit. Given that at least 35% of the country's wealth is owned by just 1% of the population, I'm sure they could chip in a bit more to ease the pressure on their less fortunate millionaire peers.

A theoretical exercise, but at least the numbers aren't imaginary.

 

[Stereodude]

Estimates of how many millionaires there are vary, mainly turning on a definition of what defines one. Including a principal residence, I don't think there's any doubt that the number exceeds 20 million in the US. This Bloomberg article appears to exclude the house and plumps for 5% of the population, or 5.5 million households. Their sources say that this group of people control 56% of the country's wealth, and the Federal Reserve reports that US household wealth is $57 trillion.

So if it was evenly distributed, they'd each have to cough up 3% of their wealth to cover the deficit. Given that at least 35% of the country's wealth is owned by just 1% of the population, I'm sure they could chip in a bit more to ease the pressure on their less fortunate millionaire peers.

A theoretical exercise, but at least the numbers aren't imaginary.

Sorry, I meant income, not wealth (which you can still only do once). However, that not withstanding I'd love to hear your argument explaining the morality of seizing the assets of the "rich" to bankroll out of control gov't spending.

Second, your numbers don't add up. The article you linked to says 5.5 million households (~5% of the population) have at least $1 million dollars in assets. Those 5.5 million households control 56% of the countries wealth. The countries wealth is estimated $56.8 trillion. So, supposedly 5% of the households have ~$31.8 trillion in assets. The projected budget deficit for 2011 is $1.65 trillion. So, you'd have to confiscate ~5.2% of the assets of those households with > $1 million in assets just to break even for 2011. But what about 2012, 2013, etc? How many times can you keep going back to those people and take their assets before they're nothing left to take? Every year you'll be going back for a bigger chunk of their assets because the asset pool is shrinking. That a viable long term strategy? How many of those households with assets >$1 million are going to stay around in the US and have their wealth confiscated every year? Further that doesn't address the debt. Who is going to pay that off?

The US Federal gov't is an incredibly poor steward of the tax payers money. Allow them to take more is not the solution. No matter how much they take they'll always want and spend more.

Frankly, the US needs an amendment to the Constitution capping gov't spending at a percentage of GDP and a ban on witholding.

 

[ddrueding]

I'd be perfectly happy capping spending WRT GDP. That certainly simplifies the debate. I'd also be happy to pay my share to kill off the national debt entirely, provided they required every budget going forward to be balanced.

 

[Howell]

@time I'm glad you enjoyed the irony.

I don't have time to do much more now but one thing I was trying to differentiate is that inflation may help you pay your bank note whether it be a mortgage, car, or business loan(middle class) but it makes it harder for anyone to pay for stuff who's income does not keep pace with inflation. Down at the bottom of the income spectrum are people who do not work and who's income is paid by tax payers. If their income is adjusted for inflation (as opposed to just printing more money and giving it away causing more inflation) then there will be an even greater burden on those tax payers who's income did not keep pace with inflation. And suddenly my $10 pocket gift to a random homeless looks a mite more trite as well.

 

[Stereodude]

I'd be perfectly happy capping spending WRT GDP. That certainly simplifies the debate.

I should have added a balanced budget with the spending capped at a percentage of GDP. Forcing a balanced budget isn't enough because the geniuses will just keep spending more.

This should explain it pretty well:

I'd also be happy to pay my share to kill off the national debt entirely, provided they required every budget going forward to be balanced.

I wouldn't. They got us into the mess. They can get us out of it while being forced to keep spending in check and balancing the budget.

 

[sechs]

Check that Reagan bump!

 

[ddrueding]

Check that Reagan bump!

And the Clinton dent