No problem. Just raise taxes and close loopholes. then we will be back on a sane fiscal policy.
Which slows economic growth, increasing unemployment.
It doesn’t pertain to any election, I’m just trying to learn the implications for the average person of a country going bankrupt.
Just like it did in the '90s. Or the '50s. Raising taxes on a broadly defined class of the rich is going to affect the economy a lot less than a default, or even a hint of a default.
It isn’t the poor that own all those T-bills. Defaulting on the debt means refusing to pay the people who bought government debt, who are mostly Americans, and mostly aren’t poor.
True, but a default would also mean a big crash in spending, which would affect the poor most. Plus, I doubt the rich have significant parts of their portfolio in T-bills - not a good investment. On the other hand, the market would crash big time also. And they would be the biggest target for the angry mobs.
Fine. Then just start another technology bubble or post World War industrial boom.
Everyone talks about the 90s as if it was the decade of awesomeness. The tech bubble didn’t really start until around 1995. Prior to that, a lot of people in my generation thought we had a better than average chance of ending up like Michael Douglas in Falling Down.
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Just like it did in the '90s. Or the '50s. Raising taxes on a broadly defined class of the rich is going to affect the economy a lot less than a default, or even a hint of a default.
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Sure, if you can recreate the conditions in the '90s or the '50’s. Unless you think that raising taxes magically creates those conditions (and you might want to check the different definitions of what raising taxes were between the '50’s and the 90’s), then simply raising taxes is going to have the effect msmith537 stated…it’s going to slow growth and increase unemployment. If you were to attempt to do this right now, as gonzo seems to be suggesting is the magic bullet cure, then it would probably be a complete disaster that would result in the government actually bringing in less money in the long run, depending on how you went about it. I think a modest tax raise (say to pre-Bush levels, across the board), or a modest change in tax code would have a moderate effect, and while it might cause some short term issues, we’d probably be fine. What gonzo is probably thinking about (or what Le Jacquelope is continually advocating), however, would probably be pretty ugly.
I don’t believe that the US government is in any danger of going bankrupt at this time. If it did happen in a short time frame I expect that world wide economic collapse is a pretty good summary of what would transpire. Think Great Depression…and then maybe ramp it up a few more levels.
-XT
Contraire.
T-Bills are a very good investment … if you are looking at high security, near capital guaranteed investments e.g. trust funds etc. For that low risk you get low yields.
If you define “a good investment” as delivering high, or even just average returns, then you move up the security/risk profile ladder.
If US defaults the prevailing worlds #1 ranked security flirts with junk bond status. A bit like all those Latin American banana republics.
Even when it settles down there will be two seismic effects.
- US interest rates go up significantly across the board.
- US loses reserve currency status, and a significant proportion of US debt will no longer be USD denominated, and hence be payable by printing USD, without attendant weakening of USD FX rates and fuelling inflation.
How long can we count on remaining the reserve currency?
Government projections and budgeting seem to assume business as usual into the future.
It seems to me that China is being overlooked. What happens when they surpass America as the leading consumer nation?
Will they push to be recognized as the reserve currency?
And should they attain this status, how does this affect the US and the US dollars they hold?
These are questions that I think I will live to see the answers to. However I am nervous that the Fed isn’t looking that far down the road.
Stirling was reserve currency for a long while after the UK was the world’s leading consumer nation.
China might promote the yuan as reserve currency, though that’s bloody unlikely. The Chinese financial system is probably a generation away from by sophisticated, robust and independent enough for that status.
IMHO if/when the US loses reserve status it will to be a basket of currencies (USD/Euro/Yuan maybe Yen)
I’d be confident the US Fed has been modelling the question for years.
Agree to the collective currency basket.
Disagree with the last bit. Or rather, if it is being done, I have little faith in the decision makers listening to those running the scenarios.
The state of the economy and banking make me question the Fed’s ability to model anything.
FOREVER!!!
Chinese yuan? I don’t think so.
In terms of percentage of the world’s currency held in reserve:
US Dolar 62.2%
Euro 27.3%
Pound Sterling 4.3%
Japanese Yen 3.0%
Swiss Franc 0.1%
then everyone else
Just out of curiosity. If 84.5% of world reserves were US dollars in 1973, and now just over 62% are, what is the prevailing wisdom?
Will the percentage continue to decline?
If so what happens when/if the US dollar is not THE reserve currency?
Perhaps you could describe the impact of cutting spending by slashing budgets for road construction, education, health care, and energy?
What happens to economic growth when we have an increasing population of poorly educated, sick workers who can’t afford to heat their house because their cars are ruined by driving on dilapidated roads? Is that the kind of policy that turns our economy into some kind of industrial dynamo?
And now you get it.
Government spending and bugeting is what is known as a “wicked problem”. That is to say, it is unsolvable because the variables are often contradictory and complex. Raise taxes, you dampen economic growth and increase unemployment. Lower taxes and you decrease government’s ability to function and provide services (ultimately hurting economic growth).
Essentially, you have to hope that you boom your way out of the trouble (without creating a bubble that will pop during your term). That’s what Obama’s economics experts seem to be hoping for, based on Sam’s analysis of their numbers.
-XT
It’s like the old Jack Benny joke where he’s gets mugged and the robber says “Your money or your life!”
And Benny says “Let me think about it.”
Seriously, if the United States was on the edge of a default and complete economic collapse, do you really think we should be worrying that a tax increase might hypothetically slow economic growth?
It’s hardly a new concept. It was the basis for Reaganomics. Lower taxes, the economy will soar upwards, and the government will collect more money than it was when the tax rate was higher.
The problem was that the effect of tax rates on the overall economy was nowhere near what was predicted. Lowering them didn’t make the economy shoot up - and raising them wouldn’t make the economy collapse.
The bottom line is that the American economy is still huge and has a lot of untapped resilience in it. If we were really on the verge of bankruptcy, we would just tap into that reserve. We could pay off the entire national debt in five years if we wanted to.
The situation we have is that our problems are not serious enough for people to be willing to do what it would take to solve them. So we bicker over half-assed “solutions” that won’t rock the boat too much.
Of course. A rich person (or even a moderately well to do person) diversifies. Mrs. Heinz-Kerry has all her money in Pennsylvania munis not for the interest rate but to support governments. My father has all his money in California munis because he hates taxes. Not a good return, but on the other hand he didn’t lose anything in the crash.
In the context of Social Security T-bills are an excellent investment. As the sole component of a rich person’s portfolio, not so good unless there are out of the ordinary investment goals, such as radical risk-averseness.
The '90s tax increase preceded the tech bubble. I was in the middle of it.
The '50s tax rates (way too high, to be sure) were part of a social compact to repay the debut incurred by WW II, which was higher than anything we have today. But they are an existence proof that high taxes do not necessarily make for a broken economy.