Feb

2

FDRThe pension problem in this country is a time bomb that is set to go and will likely either cripple the nation or be one of the final straws that breaks our back. Remember, pensions are backed up by the PBGC..

James Lackey writes:

I fear to quote history as a non-expert here and never ever want to imply predictions… the devalue-ists vs. the deflationists battles have always been apart of post crash, post war debate. Here we have choice of soup–the depression expert vs. the non computer using inflation expert with an American idol caught in an argument on how to restore past glory. With the people caught in the panic and demanding answers.

After Baldwin talked Churchill back to the Gold Standard they all realized prices were too high, so they had to subsidize (bail out).

Before FDR devalued, he cut govie pay and military pensions.

Pick your author on how good bad either path is/was…

Not sure if tea party baggers know how volatile these adjustments can be when the markets solve problems. Hey, wait, yeah they do. It's the NASDAQ.

Stefan Jovanovich writes:

I don't think American history offers many clues to what will happen next for jobs and incomes because there are no precedents for a country where half of the income went to teachers, government employees and people whose private sector jobs exist only because of regulations (lawyers, accountants). I don't offer that as a political statement, only an observation that we no longer have a situation where Keynesian deficits can produce more demand by creating government jobs whose workers buy things with their paychecks. We already have that economy now, and the multipliers from government borrowing and spending are now 0 or less than 0, not positive.

In terms of the dollar and its future value measured against other national currencies, I think you are right to draw lessons from the 1920s and 1930s; because that was the last time that ALL the world's trading nations devalued their currencies against gold and against each other. But that offers no clue as to how far the United States and others will go in taxing and restricting investment capital flows. The Great Depression became great because all the countries shifted to mercantilist currency and trade policies at the same time. As much as trade flows have fallen because of the GFC, the decline is nothing compared to the death spiral that occurred between 1930 to 1933.

Vincent Andres comments:

(Unfortunately) I completely share Scott's opinion.

Our states (we) have generously accorded overvalued pensions based on optimistic/erroneous previsions, (and this resembles _very closely_ to the subprime problem, where today's distribution of houses was based on tomorrow's expectations about their prices.) We thought we were able to build our present houses and our pensions by picking in the future, in the future of our kids, because as everyboby knew, trees were able to grow up to the sky.

The recurrence (in the mathematical sense) was build on the recurrence, but now we see the recurrence changing direction, trees are not growing up indefinitely; what will we do with our promised houses, promised health, promised pensions ? all those things paid by picking money in a infinitely rich future.

There are many excuses for those miscalculations (and not having know a war is probably the biggest excuse) which really made those systems function exactly as a Ponzi scheme. Today's worry is that we are unfortunately at the point where the Ponzi scheme explodes.

We live in interesting times–I also completely agree, on the other hand, looking a bit on the history side, this is not as dramatic as a WWIII.

In France (at least) WWI has seen its young generation slaughtered, while the elder were far less concerned (at least they were not slaughtered).

I wonder if our young generation would accept such a sacrifice? Such endebment for our houses, our healths and our pensions. (Maybe the massive mind-destroying we applied on our children will help them to not understand what we have done? Those days, our French government, like every 2 or 3 years is picking from Pierre's pensions to reverse to Paul's pensions (Pierre is in the private sector and Paul is in the public sector as for each reversal)  just around 5/6 billions, nothing to become nervous, and, in fact, nobody seems annoyed, so, as far as today, it seems to work fine). But even those reversal, really –theft–, will not indefinitely be enough. One can only be amazed when one sees that, on one hand, farmers are committing suicide, silently, without revolt, while in the same country, state employees are retiring at 50, having spend 20% of their life striking and with such miserable results. How is such a thing possible? What mental ascendancy is at work to obtain such passivity/resignation, unconsciousness of the horrible injustice of the situation?

… Yes, the coming period will probably be interesting. My hope is also that things will happen with a minimum of violence, but, in a form or another, I doubt our irresponsible generation will escape the hour of truth.


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  1. Edward Lam on February 4, 2010 9:53 am

    I sort of agree with everyone. I just thought I would add some stats on tax to the conversation. According to a book by Kotlikoff (generational accounting, 1989), which I recommend and seems sadly to have been forgotten:

    for a person born in the 1900s, the average total tax as a percentage of total income that they would pay over their lifetime was 20%; for someone born in the 1930s the total tax was 28%; for someone born in the 1950s the total tax is around 31%. I know from bitter experience total tax rates where I am (U.K.) are around 40-50% even for someone on moderate pay. Kotlikoff himself estimated that those born in the 1990s might end up paying 60-70% of income on tax just to balance books - and this was pre-credit-crunch. We are rapidly approaching the risk of 90% of income, on average, being paid to the government.

    Will the young take this? Will I? I think it is very different from asking people to go to war against aggressors (i.e. WWII) or for your country. In this case the expropriation is being conducted by older generations of younger ones. At some stage one would expect retaliation, the least violent of which would be merciless cuts to welfare spending or emigration.

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