bostonbubble.com

[Guest]

I've been thinking about the proposed $3 trillion stimulus plan and was wondering how I can explain to others how expensive it is. There are plenty of people who seem to be claiming that it isn't a problem and that we can borrow much more than that if we wanted to.

Let's start with $7.5 trillion (~$1.5 trillion stimuls + guarantees in 2008, $3 trillion from bill, $1 trillion over next 3 years). Let's assume that this debt was borrowed on average at the bargain rate of 3%. If we assume that we never pay off this debt and instead just keep reissuing debt at this rate, then we can conservatively figure that every year taxpayers will have to pay $225 billion in interest, or 1.5% of GDP ($15 trillion). That means that every year you must work at least 5 full days just to make payments on this debt. If we pay it back evenly over 30 years, then every year we must pay $250 billion, or 3% of GDP. Now you have to work about 11 days. Unlike other taxes, you'll get nothing for these days. Another way to think about it is that the an American worker must dedicate 1 full year of his working career just to pay off this debt.

It gets worse though. At some point investors will start demanding at least inflation and even higher. Not all the debt is long term debt so rates will likely climb for at least some of it. If inflation hits hard - and I think it will - then we could be looking at more than 1 full year of work. The rate is about historical inflation right now but if we reissue debt at higher rates then we can no longer ignore the exponential effect of the interest. We kick the can down the road long enough and we could easily be talking years of labor.

Does this analysis sound reasonable?

[balor123]

Hmm I'm not sure I posted this in the right place. Feel free to move it. Also, I was apparently logged out when I wrote the post.

[admin]

[john p]

The part of your analysis that is most concerning to me is the wildcard that we are enjoying borrowing at low rates and those low rates might not always be available to us so if we're addicted to borrowing, that addiction turns ugly when those rates do go up with inflation.

To compound that slightly, when the baby boom retires we'll have fewer workers that will have to tow that freight.

One of the things of the bailout that isn't covered and is a big, big concern is that just as we got that huge subprime wave last year, banks are skittish to lend because of this new wave of Alt-A's. That's a big part of why banks aren't lending, they need the cushion to absorb the shock of the Alt-A's.

[john p]

Oh, one other point, is the transition. If we stupidly over borrow to dillute our debt, we're piling the debt on thicker so even though it dillutes, the aggregate grows as well, and if that veils more pork, more fat in government spending we're even less healthy to motor out of it.

We need to be getting more physically fit with respect to spending, while understanding that if we become too productive our dollar gains in strength and it magnifies our debt. I wonder which is better, going soft and pudgy or hardening up is better.

[balor123]

[balor123]

[Mark]

You sould also do an analysis of the other side. What is the "cost" if we don't do a bailout? How many days/years will each american have to work to make up the losy productivity, etc? It think it will be helpful to compare the two.

[balor123]

[GenXer]

Lets assume I have 100 people. There are two ways I can make them spend money:
1) I can give every one of them 100 bucks
2) I can give 25 of them a few thousand bucks so that they can start a business and hire 50 others to work for them, while everybody else gets nothing

Which one would stimulate the economy more?

It doesn't have to be this extreme, but the idea is simple. Socialism NEVER created any wealth, and always depended on those who actually create wealth. At some point, socialism will cannibalize the society to the point where we'll either turn into a rathole or we have another revolution.

The effect of the porkulus bill is multifold:
1) Create a super-majority of voters who keep voting themselves 'raises', paid for by those who work, while they themselves do no work (a car, a house, a job for nothing)
2) Support inefficient federal and state governments and the unions which feed off of them - this keeps unions in power, and our money is spent to support corruption and inefficiency
3) Give everybody something, while giving nothing to those of us who are productive and enterpreneurial, especially small businesses
4) Reward big corporations which will profit from this, but which don't do nearly enough for the economy (they are only a small fraction).
5) Reward big banks and financial institutions for destroying the economy by making big bets while ignoring the high risks, which will only enable the same problems to strike again sometime in the future, because banks learned the easy way that they will not be allowed to fail

If this is not a recipe of a future disaster, what is?

[john p]

I think that it is like those charity organizations. If you give to a charity, you hope 80-90 percent go to the recipients. In many instances, these non profits have leaders that make an awful lot of money and only like 10 percent make it to those that people donate to.

We used to have private sector parasites drinking the blood because they were the plumbing that wealth flowed through and they absorbed lots of it. Now the public sector wants to be the plumbing and absorb our wealth. They make these sacred cow arguments about the children and the veterans and anything that pulls on your heart strings, but in the end their policies will just line other well connected people's wallets and only a small percentage will make it to the people that we care about. In most cases it is better to give the money directly to the people and keep the parasites hands off of it. This is why Republicans like tax cuts because it gives the money directly to the people and the politicans can't take a cut.

If I were in charge, I'd do strategic tax deductions to stimulate the behavior that would lever the stimulus. For instance, I would offer a tax deduction for the purchase of a car that got 30 miles to the gallon or better. I would offer an income tax deduction for any first time buyer's cash portion of a down payment for real estate up to a certain amount i.e. $50k (meaning if you make $100k and you put down $50k cash as a down payment you can deduct $50k from your $100k salary in addition to any other deductions. Beyond that, I'd change some rules around to make sure that people weren't using the real estate mortgage interest tax deduction to buy luxury items like boats via HELOC's. You've all heard my ideas about trimming government spending...

Lastly, I'd do an analysis of what specifically we're buying from China and give tax breaks to companies in the US that compete with them. I think that our whole fashion industry has us changing our looks every six months, but if we had simplier tastes, I wonder if we could mass produce certain clothing cheaper here. Maybe Ford, Chrysler, and GM pool their efforts together and they put out just a few cars that are as durable as the old WWII Jeeps and reliable as the VW Bugs and they just take the next decade worth of sales?

[balor123]

At a high level, I'd put policies in place which reduce cost of living and keep it that way and increase the value of American goods and services, like fundamental research and lending for new businesses. Lowering cost of living will bring some jobs back naturally but unless we are willing to accept economic slavery like they have in China we'll never get them back. Instead, we should focus on our strengths. Our economy, especially the Boston e, has become a cost of living economy and while China doesn't ask much for their labor, they don't take overpriced houses, high taxes, lack of competition, etc. in America in exchange for it.

I don't consider myself a Republican but it sounds like everyone on this board has become one recently

[Guest]

does it even matter anymore--- we this country was a business or individual we would go bankrupt..
http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm

[john p]

Unfortunately, we have plenty of people here in Massachusetts that have 3rd World skills living in a 1st World Nation and they think they should be able to live large and in charge. In prior generations, poor people understood that they were poor and didn't ask for handouts, they motored their way out of poverty through hard work.

http://www.bostonherald.com/news/opinion/op_ed/view/2009_02_12_Hapless_have_hands_out

From what I know about Obama, I wonder if he totally snowed the liberals about getting out of Iraq in 09 to win the Primary, snowed the deadbeats with promises of handouts, etc. etc. I just think the guy wanted the job and he'll just fall back on what he trusts, which seems to be the Ivy League academics. It's the same crowd, in fact we've most likely got the same crew as if we had Hillary. I may have been taking Obama for his word as a candidate and maybe I got caught up in the content of what he said instead of just seeing it for b.s. that he needed to say to be elected.

The big problem I think many on this blog are contending with is that we know Barney Frank was on the wrong side of a lot of decisions and we're seeing now that if the police officer who is assigned to investigating commited the crime, you're going to see a lot of scapegoating and if the Press is complicit the rest of us just sit back and wonder why the truth makes us angry and if it is better to escape into delusion or speak truth to power.

[john p]

As far as that Debt article. That's the whole deal really. My feeling is that this is my theory of everyone break the rules, and let the deformation become the baseline and we have currency debasement to break the rules again. This constant resetting of debt and value of currency is bizarre as what really matters is to what return do lenders want back their money. If a country doesn't want to pay back a debt they can just debase their currency.