TCS Daily


How Much Debt Is Too Much for Voters?

By Steven Malanga - March 31, 2010 12:00 AM

Recently two different polling firms separately asked voters in California and New York how their state governments should solve their current budget problems: through tax increases, spending cuts, or a combination of both. Neither poll gave voters another choice: more debt.

That's a serious omission considering how governments in America routinely deal with fiscal shortfalls. Shortly after the New York poll, for instance, the state's lieutenant governor, Richard Ravitch, proposed borrowing $2 billion to plug Albany's fiscal hole. Although such borrowing to cover operating expenses was once considered fiscal folly, even the ratings agencies merely yawned at the suggestion.

Other governments have been borrowing just as liberally to balance budgets (if you can even call that balancing), but in other ways. New Jersey and Illinois are among the states that either skipped payments into their pension systems last year or borrowed money to fund the system, which is sort of like taking out a cash advance on your credit card to make a deposit into your IRA. Since benefits guaranteed to employees are another form of debt, omitting payments or borrowing to make them increases indebtedness, which is no small matter in both cases. Illinois already has the highest percentage of unfunded pension liabilities of any state, while a recent analysis by the Citizens Budget Commission of states' debts compared to their economic resources rates Jersey as being in the worst financial shape in the country. What's a bit more borrowing when you are already a fiscal wreck?

Politicians go ahead with these schemes because they believe that when push comes to shove voters will prefer more debt to tax hikes or significant spending cuts. Ravitch responded to criticism of his plan with claims that any strategy to close the state's budget gap with spending cuts was "totally disconnected from reality" because voters weren't prepared to accept deep cuts. Obviously, by implication he thinks voters are prepared to accept more debt, even though New York is already $120 billion in hock and is one of six states the CBC report listed as in a debt "danger zone."

There's good reason for politicians to believe that debt really doesn't matter that much to voters. After all, even many economists seem sanguine about the exploding national deficit, which must be financed with debt. Recently, when Michael Kinsley, who hardly qualifies as a deficit hawk, penned a piece in the Atlantic about his growing fears that the deficit will lead to hyper-inflation, he took it on the chin from the likes of Paul Krugman.

But Kinsley was unimpressed with the explanations proffered by Krugman and others for why he shouldn't worry about the deficit. If the level of national debt is so inconsequential to our future, Kinsley wrote, "Why do we ever bother to show fiscal restraint? Why have taxes at all?..If $15 trillion in debt can be a freebie, why not $30 trillion or $60 trillion?" Good questions.

But the real puzzle is how many voters think exactly the way some economists think? Maybe government debt matters only enough so that voters expect politicians to pretend to be concerned about it, as the President recently did when he said the deficit "will saddle every child in America with an intolerable burden." But it doesn't really matter enough for the President to do something about it, clearly.

Once, we must have cared more. Many state constitutions, for instance, were written to require that politicians go to voters to get approval to issue debt. Over the years voters turned down enough debt issues so that pols, enabled by municipal finance experts at the big Wall Street firms, found ways around the borrowing limits. Among other things, they created independent borrowing authorities whose debt is not technically backed by taxpayers, but by appropriations from the legislature (as if legislatures have some significant source of revenues other than taxes). State courts went along with this detour around voters in places where judges seem to think that constitutions are like balloons that can be pumped up to fit any design, and it's worked well because voters who angrily turn down new debt obligations seem undisturbed by billions of dollars of debt issued without their approval. New York State, for instance, has just $3 billion in debt that had to be approved by voters, but about $60 billion in total bonded debt. If voters cared, or understood, 98 percent of New York's legislators wouldn't routinely get re-elected, as they do.

In fairness to voters, governments have also gotten good about hiding their true levels of debt with all sorts of maneuvers that are worthy of those three-card Monte experts who operate on street corners. States and cities borrow money and then stuff it into their pension funds to make them look better funded, then invest the borrowed money in the stock market and project unrealistically high returns that make it seem as if the debt can be paid back from investment gains alone. Buyers of bonds go along with these schemes because they figure that states and municipalities fall into the category of too big or too important to fail, though that idea will be sorely tested if we get widespread defaults that undermine the whole market.

When you account for all of the shenanigans that governments pull with their debt, including pension accounting which a private company could never get away with without someone going to jail, the real liabilities of state and local governments are probably twice as high as what public actuaries say they are. Would it matter to voters if they knew the real number? Or is any debt larger than a $1 trillion just too hard for voters to comprehend anyway?

Recently, after California floated a bond offering against the advice of its Treasurer, Sacramento Bee columnist Dan Walters tried to estimate the state's debt from all sources. The number he came up with was $600 billion. Sure, California is our biggest state, but $600 billion! How does anyone in the state legislature still have his job?

In the end, this is what politicians must rely on, that our debt at all levels of government has just gotten so high than another billion here or there doesn't seem like real money anymore. And if the housing crisis is any indication, there may only be one way of curing Americans from ever-increasing borrowing of one sort or another, and that's with a loud bang. I just can't imagine how much noise the government debt bubble will make when it explodes.


This article first appeared on RealClearMarkets.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the >Manhattan Institute

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124 Comments

Doesn't matter to voters
"There's good reason for politicians to believe that debt really doesn't matter that much to voters"

And why should they? When push comes to shove the voters will approve default over paying crushing debt loads.

But that will be the last stage of the process. First, they'll try to get some other fool(s) to bail them out, like California forcing Obama to choose between the ire of the rest of the nation for bailing out California or the ire of all those blue state voters in California if he doesn't.

Second, or simultaneously, voters will try to stick the tab to a 'despised minority' perceive to have the deep pockets to bail them out. Like 'rich people' and 'corporations' and 'tobacco companies' and 'car manufacturers', etc.

Of course, interspersed in all these 'first' and 'second' type steps will be the ongoing denial, papering over, etc. to downplay it all.

But if the first two aren't possible or aren't enough, they'll do what voters in Iceland have recently done: default. A lot of those voters are also the same borrowers of underwater mortgages and have done the math to bail on those for the exact same reasons.

And if they will do that regarding their homes, sticking it to some bondholder will barely register on the Guilt Index in their minds.

I don't know what is so hard about all this. There was no need to write this article with all those studies and analysis -- when my little sumnation wraps it all up succinctly. It should be pretty self-evident to any student of humanity, in my view.

But then again, it seemed pretty self-evident that voting for that idiot Obama was a big mistake also. Oh well.

I can just see the 'pro' arguments made in the ballot for the initiative before the voters: "If you don't pass this amendment to the state constitution to default on the bondholders, then all the school lunches will be cancelled, prostitution will have to be legalized to tax, we'll have to kill every American-Indian off in order to confiscate the casinos, every Californian will have to pay $XXX,XXX in taxes to pay JUST THE INTEREST on the debt, blah, blah, blah....but all that will go away if you just vote 'yes'...besides, Wall Street DECEIVED us into taking all that debt...blah, blah, blah"

After being bombarded with credit card debt default lawyer commercials every day, this will be a no-brainer.

The real question is: How STUPID are the lenders who continue to lend to these states? I'd say: very much so

What me worry......about debt?
The Californians expect the rest of America to bail them out.
Greece expects Germany to bail it out.
The new east European members expect Germany to subsidize them.
The Mexicans expected, and did get bailed out by the US in about 1995.
Roy expects the col. to subsidize him.
Weimar Germany thought the printing presses would bail them out, as Zimbabwe now does.

What do they call that system again that goes; "everybody tries to live at the expense of somebody else"?

Apparently Americans now are consoled with the thought that their children and grandchildren will pay for current profligacy.

Depends upon who is owed.
If you owe $10,000 the bank owns you.
If you owe $10B, you own the bank.

Neither a borrower nor a lender be
Good comment. The United States prints money and expects others to honor it. And they do! So far.

But there is one country that actually operates in the black-- China. They sell their products to the world, and pay from cash reserves for their purchases-- not from a line of credit.

Also there's one slight inaccuracy in your comment: "Roy expects the col. to subsidize him."

Actually Roy applied his ideas to the real world of business. And was able to retire without the need for subsidies. Nor with humongous debt to repay. You see, Roy also ran his business at a profit-- not a perpetual loss.

Otherwise a good comment, though.

Good.
How will the bank collect?

Collecting in Confederate money
They'll end up with a lot of IOUs-- but they will cut their losses.

At any rate the dollar won't end with a bang, but with a whimper. It will just start losing value as people consider it a lesser and lesser store of value relative to other currencies.

It's most likely to be replaced with special drawing rights (SDRs) issued by the IMF. Already the dollar is at a disadvantage, with more and more customers leaning toward SDRs.

"The idea is that the IMF should activate its dormant powers to issue Special Drawing Rights. These SDRs would expand their role over time, becoming a "widely-accepted means of payments".

"Mr Bloom said that any switch towards use of SDRs has direct implications for the currency markets. At the moment, 65pc of the world's $6.8 trillion stash of foreign reserves is held in dollars. But the dollar makes up just 42pc of the basket weighting of SDRs. So any SDR purchase under current rules must favour the euro, yen and sterling."

http://www.telegraph.co.uk/finance/economics/5050407/US-backing-for-world-currency-stuns-markets.html

So China will ultimately find their best move is to cut their losses, accept the devaluation of their savings in dollars, and move on. They are getting closer and closer to that point, in the estimation of many.

" The United States prints money and expects others to honor it"
yeah...we EXPORT phony money for real goods and services.

And Roy wants us to give all that up and WORK for our goodies from overseas. Wow!

SDRs? hahahahahah...they are even more worthless than Zimbabwean dollars are
"A Special Drawing Right (SDR) is the monetary unit of the reserve assets of the International Monetary Fund (IMF). The unit was created in 1969 in support of the Bretton Woods system of fixed exchange rates to alleviate the shortage of U.S. dollar and gold reserves in the expansion of international trade.[1] The SDR unit is defined as a weighted sum of contributions of four major currencies, reevaluated and adjusted every five years, and computed daily in terms of equivalent United States dollars. Special Drawing Rights are not a currency, but they represent potential claims on the currencies of the IMF members. SDRs obtain their reserve asset power from the commitments of the IMF member states to hold and honor them for payment of balances."

So, in effect, they are worth nothing except whatever the member nations can cough up when someone calls the 'claim' on their currencies.

At least they had to be tied to a gold price before.

So far so good
"Roy wants us to give all that up and WORK for our goodies from overseas. Wow!"

I don't expect we will voluntarily give up dollar hegemony, no. Why would we? It's free lunch forever.

I anticipate some day we will be MADE to give it up. Not to expect that would be to assume that the rest of the capitalist world is plain dumb. Which I think would be unwarranted.

I do appreciate your observation that as they have not yet found an affordable way of doing so, it follows that they will never find such a way. But I think the continuing erosion of their net worth, as expressed by dollars held, will some day force the issue.

SDRs
Obviously the idea will have to be revised and updated before it can do the task being asked of it. Providing enough capital to meet the needs of international commerce requires a lot of moolah, to fill that basket of currencies.

But the IMF, the obvious banker in such a scheme, is starting to take the idea really seriously. The thing is, going the way we're going is unsustainable. Even with interest rates now at perpetual rock bottom, we can foresee the day not far off when we're paying out a trillion dollars a year for other people to buy our debt. It'll be like paying off lottery winnings with more lottery tickets.

To just think it'll always be rosy like it is today would be unrealistic. Maybe it won't be SDRs-- but SOMETHING credible is going to have to ultimately replace the dollar. It just won't stretch that far.

They have not found an affordable way YET...
...means that until they do, don't hold you breath. Nothing more, nothing less.

After all, nothing is permanent in this world. Just ask the Mayans.

Until then, we should milk it for all it is worth.

The IMF is obsolete
It was created solely for bolstering the Bretton Woods Gold Standard and now that there is no Bretton Woods Gold Standard, it is a waste of bureaucracy.

The only way more dollars are created in this world is via debt issues, which in turn backs up the dollars. If all the debt the Fed held was paid off, all the dollars in circulation would likewise be pulled out of circulation. That is the rub with having a debt-based currency system.

Therefore, new debt has to be created in order to maintain and expand the money supply, as needed.

"but SOMETHING credible is going to have to ultimately replace the dollar"

Yeah. It's called GOLD.

I'm standing pat for now
"Until then, we should milk it for all it is worth."

I agree. In fact I have my own savings tied up nicely in dollar-denominated investments. We'll have some time in which we see The End coming.

But be careful not to be a follower. Once the ramparts are breached it'll be too late to do much about it but watch the stampede and weep.

BTW here's some interesting off-topic reading: Were Chimps the First Socialists?

http://www.newstatesman.com/199907120006

BTW, Roy...I found you a nice, juicy sob story about people expecting free and instant health care d
http://www.mcclatchydc.com/2010/04/06/91696/health-care-overhaul-spawns-mass.html

A victory to be proud of
Yup. For you and your kind it's a victory, that the original Single Payer approach, passed in the House, was watered down to become the Public Option-- which STILL wasn't supported by the president, even though a majority of the public were in favor of it.

So the whole thing got watered down a hundred more times, and rewritten to protect the interests of the health insurance industry (now able to bill the government for new customers) and the pharmaceutical industry (still able to set their own prices for lifegiving medicines and have the government pay for it all).

As a result, the HC industry will be greatly benefitting as different sections of the bill phase in. While for the average citizen there won't be that much to cheer.

And in fact the whole thing is so cumbersome and complex, few citizens even know what's in it, or when they will see it come to pass. (Although there are none among us who expected "free and instant health care", as you aver.)

Yes, a great victory. Your side absolutely has something it can be proud of. The public, as usual, will be seeing only marginal and symbolic benefits-- while paying the very real costs.

Yup
.

It is a victory
I wanted them to pass it, actually.

Because by doing so they probably slit their political throats in the process. Conservatives are mega-energized and the seniors are joining onto our bandwagon almost 3:1 now.

Not how the public sees it
Now that the bill's been passed, a majority of Americans favor it. Not a vast majority, but a majority nonetheless. See these poll numbers:

http://www.gallup.com/poll/126929/slim-margin-americans-support-healthcare-bill-passage.aspx

As for your comment "Conservatives are mega-energized and the seniors are joining onto our bandwagon almost 3:1 now.", surely you're aware that Republicans, today, are in a considerable minority. And your bat-brained segment on the fringes constitutes a minority even within that minority. Although a much-publicised one.

So it's not much cause for concern. Seniors, to the best of my understanding, are in favor of anything so long as it does not imperil their full access to socialistic, government mandated Medicare.

And since there's nothing in the plan to mess that up, I'm thinking that in time the seniors will allow themselves to accept greater access to health care for non-seniors as well. And go along.

But as you're now mega-energized, I'd suggest staying away from the caffeine for a while. Wait til your heart rate goes back down.

A return to the gold standard
Highly unlikely-- for the reason that the gold-poor countries would never accept domination by the gold-rich countries.

Nor will we see any wide adoption of the coffee-bean standard. Such a move would give undue prominence to Ethiopia and El Salvador, with their favorable coffee-to-citizen ratio.

You must have a lot of gold bars under your bed.

Consumption taxes
Consumption taxes, such as a VAT (basically a sales tax) or a carbon tax (on energy consumption) are by their nature regressive. They weigh most heavily on those who spend all their money... that is, on low income people.

Income taxes, on the other hand, tax money both spent and unspent. Thus they also hit people who have more money than they need to spend-- those with savings or investments. So we would say such taxes are relatively progressive.

Don't think of either one as being some sort of punishment. That's a common mistake when thinking of inequities in who shares the tax burden. The issue is, if you have to spend all your income to keep your family afloat, why should you be taxed disproportionate to someone who makes so much money he can afford to keep most of it unspent, thus free from taxation?

Anyway, when it comes to my opinions, everyone here likes to be a contrarian. So refute me. Tell me why people who make more money than they need to spend should be taxed less-- and escape taxation on the money they're able to accrue.

The common thinking is that when someone has so much money that they can gamble the excess in stocks, bonds and other speculative vehicles, they are contributing something of value toward the common good. That is, the money they take from the pot, instead of leaving it to be shared with others, is better employed in speculation than it would be, say, if it were wages awarded to the employees of the companies whose stocks they own.

So by this philosophy, if this money is better employed by being siphoned off and wagered on some issue of risk or of debt than it would be if given as wages to those who contribute the actual productivity, what exactly IS that greater good it goes toward?

The answer to that question lies at the heart of the capitalist philosophy. So is there a good answer?

The only people who matter are 'likely voters'
And Gallup rarely conducts their polling with them. Meanwhile, Rasmussen routinely does.

That is why the senior vote is very important to track. Most seniors are 'likely' or 'very likely' to vote.

Who cares what the wino on the street thinks.

"you're aware that Republicans, today, are in a considerable minority."

Did I mention the word 'Republican'? No. I mentioned 'Conservatives'. Just to elucidate further, that includes people who will vote with conservatives not because they are conservative but because they are hostile to the Dems de-facto expansion of government.

That and the fact that they haven't delivered the bacon that everyone really does worry about: jobs.

"I'm thinking that in time the seniors will allow themselves to accept greater access to health care for non-seniors as well. And go along."

Hahahahah. Keep thinking.

"And since there's nothing in the plan to mess that up"

UH, yes there is. The first raid on MediCare as part of the ObamaCare legislation hits in August. Provider (doctors) payments are to be cut 21%. A lot of doctors only take Medicare patients in just enough volume where it is worth it to them. Cutting what they get paid makes that a lousy ROI and they'll stop.

That is, unless Congress overrides it in some emergency funding bill. But if they do, the Reps will force them to explain why since they insisted to all of us that ObamaCare would do no such thing, as you keep believing it so.

gold standard currencies don't work that way
As I have been repeatedly been drilling into your brain for years now (to no effect), gold standard currencies don't need an ounce of gold in reserves at all in order to operate.

Only someone living on Planet Roy...
...would say:

"Income taxes, on the other hand, tax money both spent and unspent. Thus they also hit people who have more money than they need to spend-- those with savings or investments. So we would say such taxes are relatively progressive."

Really? Where does investment capital come from? What creates jobs? It's not 'demand'. There is all the demand in the world -- an abundant supply. But what creates jobs is investment capital and that doesn't grow on trees.

But hey! Let's make it even more difficult for investors to invest! Yeah! That's soooo smart!

How I'd respond in the polls
I don't think many winos on the street have been polled. Interviews are conducted with people who have cell phones or land lines. But I agree, likely voters are the only important demographic to follow.

So I took your advice and looked up the reaction to passage of the health bill, as told to Rasmussen:

http://www.rasmussenreports.com/public_content/politics/mood_of_america/right_direction_or_wrong_track

36% approval rating's pretty tepid. But it is up nine points from where it was before the bill passed (27%). So I think either there were some people who were pleased with passage-- OR (more likely) these were just people who like a winner, never mind the issue. That's much more in the American grain, to despise a weakling but revere a winner, regardless of the issues involved.

So where do I stand? Am I a loyal Democrat, who approves of the president regardless? I suspect you would think so, despite everything I've been writing here. In fact I'm one of those uncommitted, independent voters, who think the country's going down the wrong track. In fact I think things are almost as bad now as they were when Dubya was in the White House.

It's not just that they haven't done a damn thing about jobs, and then lied about it. It's the persistence in pursuing an unwinnable War on Terror-- the true sinkhole down which America's fortunes are being swallowed up. And, oh, it's everything. The guy's batting 1,000. Opening up our shores to drilling, for example. A worse president would be hard to find.

Finally, will new restrictions on Medicare payments result in doctors throwing their patients out in the cold? We'll have to wait and see. I'll ask around among doctors I know to see how they feel about it.

So you can just posit some gold?
I could play in that game. I'll see your umpty trillion dollars in imaginary gold and RAISE you another one kazillion pretend gold doubloons.

Sounds like liar's poker.

Instead, I'm thinking any return to the gold standard calls for payment by someone, at some time, in real ingots. And that means only those parties owning ingots will have any real money. My point stands.

A commonly believed falsehood
"Really? Where does investment capital come from? What creates jobs? It's not 'demand'. There is all the demand in the world -- an abundant supply. But what creates jobs is investment capital and that doesn't grow on trees."

There is NOT "all the demand in the world". Demand doesn't mean someone wants to buy something. Demand means they have the cash to make it happen. And with cash flow to the street so restricted (as it has been since 2007) demand has been greatly dampened. THAT is why all those people got laid off. They couldn't keep businesses open in the face of soft demand.

Whereas in fact we've been seeing a surfeit of investment capital. There's more rpofits out there on the streets than there are legitimate homes for it. That's why all those investors have been looking beyond the traditional stock and bond markets and buying into exotic air-ware-- derivatives and space based hedges. They've already bought up everything of any real, concrete value and they've still had trillions left to invest.

I'd be the first to recognize that we have a need for investment capital. But we also have a need for wages. The two money sinks should be filled in something like equal amount or the enterprise doesn't work right. And what we've been seeing over the past thirty years is all the income being generated by American business going toward dividends, capital gains and the like.

Not that I object to those admirable inventions in principle. Now that I'm retired, that's how I pick up my walking around money.

But much of that capitalist-directed income stream has to go back to ordinary workers-- the guys who make it all possible by their work. Don't pay them and they can't buy your stuff. Then the next thing you know you're not making any gains. And it all goes downhill. General Motors goes under and has to get bailed out, Circuit City bites the dust and forty other national retailers are out of business. Next goes the commercial real estate market. A lot of people hurting.

All because the capitalists acted like pigs. They got too greedy and starved the entire operation they were living off. It could have been done much smarter, by spreading a little more of the wealth around. Then we'd all be rolling in the high cotton.

Investment capital has indeed been "growing on trees". There's been so much of it going into the investment casino that every handful of years we've been having these recurrent meltdowns, where trillions in nominal investment value have just ceased to exist. You didn't hear about that?

Consumption taxes
"Consumption taxes, such as a VAT (basically a sales tax) or a carbon tax (on energy consumption) are by their nature regressive. They weigh most heavily on those who spend all their money... that is, on low income people."

That is correct, UNLESS you rebate the tax paid on expenditures up to the poverty level. Then the tax becomes progressive. Under such a system, as expenditures rise, the marginal rate rises.

BTW, the payroll tax is incredibly regressive. On consistency grounds, you should be objecting to that tax.

Great comments
It's a pleasure to read a sane and reasonable post here at TCS... in fact it's almost shocking!

"That is correct, UNLESS you rebate the tax paid on expenditures up to the poverty level. Then the tax becomes progressive."

Yes, a pass through for low incomes would be good. In fact the much touted "fair tax" approach, with one rate for all, would even be a good one, if the first $40K or so of income was exempted. As it is, unearned income gets taxed at a lower rate than wages and Warren Buffet's secretary, famously, has to pay Uncle at a higher rate than he does.

One problem we have is that somehow, someone has to pay for all this mess we've made to date. That is, if you're of the school that says we can't just borrow our way into the indefinite future, then we have a lot of overdue bills to be paid. And that means we need to expand the tax base greatly.

We did okay back in the 1950s. We paid down a humongous national debt, far larger in proportion to our GDP than what we're faced with today. That was achieved by taxing lower incomes lightly, middle incomes moderately and upper incomes severely.

The difference was, back then everyone was a grownup. We accepted that we had to tighten our belts in order to pay our debts. Today the political terrain is entirely different, and there's not the will to demand that our representatives get the job done. And, cowards to a man, Congress is not about to lead the way without being cattle prodded to responsibility.

Still, I think the best approach would be to roll taxes back to the rate they were the day George Bush took over. We were paying our debt down just fine. Then Dubya and the zealous gang of small-government wreckers showed up. And dismantled the system, to much applause.

"BTW, the payroll tax is incredibly regressive. On consistency grounds, you should be objecting to that tax."

I would NEVER argue for consistency per se. That's a hallmark of the people posting here, to strive for absolute logical rigor, to the point of insanity. To me, every aspect of our complex universe is distinct, different from all the rest. And so it needs be judged on its own merits.

The Payroll Tax is not a tax. It's the premiums we owe on the two insurance policies owned by the working classes. You'll notice that unearned income is exempt (and I don't really know why the moneyed classes object to it so much, as they don't have to pay into it).

Throughout my working life I paid this fairly onerous fee gladly, in the expectation that if I ever got to an advanced age (which I've done, thank you) I'd be mighty happy to have a guaranteed little monthly stipend and a decent medical policy to tide me over.

There's nothing that will bum your life trip any more than to reach the age of eighty and still have to show up at Home Depot every day, just to stand around greeting customers throughout the livelong instead of sitting at home reading good books. It's a waste of human spirit. Instead, I chose the handy, pay-as-you-go deferred income plan known as Social Security. And the prepaid health plan Medicare.

Were I the King, I'd wave my wand and tell all the complaining rabble that membership in the national social insurance plan was optional. That they could opt out once and never have to pay this premium again. The only stipulation would be, for the most obvious of reasons, that they couldn't just opt back in one day down the pike without paying in everything they would have owed during the years they didn't stay with the plan.

Sound fair enough? Here's another thing I would upon being crowned as King. I'd cancel our perpetual state of war, which has proven to be unaffordable as well as unpopular around the world, and save one hell of a lot of time, trouble, money, grief and blood. I'd just tell all those little pissant nations to govern themselves, and not to bother us.

gold...again, and again
Zyn is right in that the detractors of gold, on this forum it's Roy and Forest, don't even understand how a gold standard works. Alternatively, they do understand but since they can't swallow it, they try to trivialize it as with Roy's dumbasss coffee bean example.

Countries with no gold of their own, or coffee beans can still be viable on a gold standard, as England and other European counties used to be.

That's the beautiful thing about trading, you can get rich without any natural resources at all.

Transitioning to a gold based economy
"That's the beautiful thing about trading, you can get rich without any natural resources at all."

I know you'll be happy to explain it to us, yet again.

In this new 'golden' world the measure of all value is gold. Not just inaginary gold but actual lumps of metal. That has to be so, if your nominal gold is not to be exactly like our current, nominal dollar.

Country A has no gold but has lots of old debt lying around. That is, it owns "negative gold". So it can't just trade finished goods for someone else's gold, it has to first trade finished goods for nothing... nothing but a reduction in its debt.

That leaves Country A with nothing with which to pay its workers and investors, not to mention its CEOs. Therefore Country A will STOUTLY RESIST any transition to a global gold-based economy.

Which was my original point. I never said a gold standard could never work. I said we'd never be able to get from here to there-- because those countries with a negative gold balance would never accept it. They like our current debt-based system just fine.

In fact they owe their survival to it. Gold ain't going to happen.

The only gold 'standard'.
The only gold standard the government could be involved with is to verify the weight and purity of the gold, Ag, Cu, Pt, etc. that would be used as money.

No, just ignorance of economics on your part
"There is NOT "all the demand in the world". Demand doesn't mean someone wants to buy something. Demand means they have the cash to make it happen."

No. And that is your problem right there. Demand means demand, simple. How it is realized or even if it is realized is an non-issue as it doesn't change the fact that the demand exists.

And it has nothing to do with 'money', as you keep insisting.

"Whereas in fact we've been seeing a surfeit of investment capital. There's more rpofits out there on the streets than there are legitimate homes for it. That's why all those investors have been looking beyond the traditional stock and bond markets and buying into exotic air-ware-- derivatives and space based hedges. They've already bought up everything of any real, concrete value and they've still had trillions left to invest."

Uh, Roy..you spent the good part of two years insisting all those investments were 'wiped out'. So which is it?

" And with cash flow to the street so restricted (as it has been since 2007) demand has been greatly dampened. THAT is why all those people got laid off. They couldn't keep businesses open in the face of soft demand"

Yeah, so? You keep putting the cart before the horse, Roy? We are speaking of job creation, not job retention per se. What you just described is a symptom/effect of what is going on, not a cause.

When demand picks up again, capital has to be there to finance those job hires needed to fill it. Your little comment does nothing to address that but proves that you have no idea what you are talking about.

"I'd be the first to recognize that we have a need for investment capital. But we also have a need for wages. The two money sinks should be filled in something like equal amount or the enterprise doesn't work right."

That is like saying that conception should happen before ejaculation, Roy. If you believe that, then your title 'commonly believed falsehood' is right on the mark, after all.

"But much of that capitalist-directed income stream has to go back to ordinary workers-- the guys who make it all possible by their work."

No it doesn't. All that needs to go back is what the worker can command in the labor market for his work. Period. Any other idea is socialist command-and-control nonsense.

"And it all goes downhill. General Motors goes under and has to get bailed out, Circuit City bites the dust and forty other national retailers are out of business. Next goes the commercial real estate market. A lot of people hurting."

Yeah, that's how it is supposed to work. Capitalism doesn't work just by concentrating on the positive side (profits) but needs the negative (losses) just as much or even more. And, nobody lives in a risk free world. So when people screw up, they pay for it. Those who succeed, reap the rewards.

And don't give me that class warfare garbages about the little guy shouldn't have to pay for the 'sins' of the rich dude in the executive wing. The little guy took the risk that the firm might go belly up when he signed on, whether he was ignorant of that fact like you seem to think is aok for him to be or not.

"All because the capitalists acted like pigs. They got too greedy and starved the entire operation they were living off. It could have been done much smarter, by spreading a little more of the wealth around. Then we'd all be rolling in the high cotton."

Blah, blah, blah...the real world doesn't work that way, never has. Every attempt at doing so had tremendous comparative cost relative to not doing so that is well documented in the historical data.

Except on Planet Roy. Such data can be deliberately ignored.

"Investment capital has indeed been "growing on trees". There's been so much of it going into the investment casino that every handful of years we've been having these recurrent meltdowns, where trillions in nominal investment value have just ceased to exist. You didn't hear about that?"

Nope. It didn't grow on trees. It was earned through wealth producing activity. It is the result of allowing capitalism to flourish in the past. And, the aggregate total is not the issue. Availability of that capital is usually more important -- something you can't deny after all your rants about the little guy not getting his 'fair share'.

Thus, total capital is ALWAYS in short supply compared to total demand. This is all forms of capital: education, natural resources, labor, as well as cash.

Therefore, it is insane to have policies that deliberately pisses all over it under some fantasy assumptions (that you evidently hold yourself) that none of the above actually applies when it really does.

Roy thus proves he still doesn't get it
The gold exists, Roy. There's nothing imaginary about it.

The issuing monetary authority just doesn't need any of it held in actual reserves in order to link the currency's value to a gold price rule.

"Instead, I'm thinking any return to the gold standard calls for payment by someone, at some time, in real ingots. And that means only those parties owning ingots will have any real money. My point stands."

Yeah, you can keep thinking whatever you like on Planet Roy. But you keep mistaking that you can thus characterize the real world the same way just because you believe it so.

Hey Roy! I have some flying broomsticks like in the Harry Potter movies! They are real because I believe them to be!

Yup, like Hong Kong and Japan did.
And wow! They did it under a gold standard for the most part!

The detractors don't misunderstand what I tell them. They just can't acknowledge it as real because it shatters their ideological world view. In the case of Roy, it conflicts with his layman's view of how a socialist order should work.

In Forest's, it violates the dogma taught to him at the Wharton School.

And here is why...
"By 2020, according to the Congressional Budget Office, federal spending will equal 90 percent of the country's gross domestic product. So our politicians clearly have no intention of checking into spending rehab. They're counting on getting that euphoria with the VAT fix. If they do, the rest of us will be left with a dead economy."

From: http://www.washingtonexaminer.com/opinion/VAT-is-a-fix-for-spending-addicts-90278787.html

Yes...thus reinforcing in our society that some people should not pay taxes
...while they get to leech off the benefits of others to do so. 'Progressive' my a--.

Almost over 40% of American workers don't pay any income taxes at all. Some even get money back in the form of tax credits (welfare via tax returns).

So when they vote for politicians promising everything under the sun, why should they consider cost? They don't directly pay for it and most don't understand all the indirect costs they will pay instead.

So, those of us who do pay are just cash cows for the trailer trash mobs. And it will get worse.

At the very least poor people should pay some symbolic amount of income taxes...like a $100/yr or something.
Then they might start thinking about the spending their favorite ObamaCrat wants to create more of.

Yes...but 36% is a joke
Better than 27%, but not much. I think the Dems overall approval ratings are now 41%. The Reps: 42%.

So, ObamaCare sucks more in the public's eye than the idiots who passed it.

Uh...that is not something to credibly use to advance a pro-ObamaCare argument, Roy. Just saying.

"I know you'll be happy to explain it to us, yet again."
No you don't. It has been explained to you over and over again for years now by all kinds of people.

Comprehension is not your problem. I know you are smarter than that. Acceptance of it is.

"Country A has no gold but has lots of old debt lying around. That is, it owns "negative gold". So it can't just trade finished goods for someone else's gold, it has to first trade finished goods for nothing... nothing but a reduction in its debt."

No, because CREDIT and MONEY are too different things. One can exist w/o the other.

If you are speaking of balance of trade, yes. But how is that any different today except for one nation: The one that issues the world's reserve currency.

"That leaves Country A with nothing with which to pay its workers and investors, not to mention its CEOs. Therefore Country A will STOUTLY RESIST any transition to a global gold-based economy."

No, because in a market system, prices will adjust to reflect the changes in the money supply. In the 19th century, France reimposed a gold standard even though there was very little gold left in the nation. Three years later, France was flush with gold. Hmmm...amazing!

And, they don't get paid in gold, but in the money denominated to a declared price in terms of gold.

"Which was my original point. I never said a gold standard could never work."

Uh, yes you have. Repeatedly. Usually mixed in with a deliberately inaccurate description of how the gold system would work.

Only a nine point bounce
So you don't think it significant that Obama's approval ratings went up nine points once the bill was passed?

I'm not offering my own opinion-- I think the bill's **** poor. But it's slightly better than nothing. And it has demonstrably boosted Obama's ratings out there in America.

Still a fiat currency.
If gold certificates are not backed by gold assets, how is that money any different than a federal reserve note?

The miracle of gold
I didn't need you to explain it. I know how your version goes. I wanted Missypooh to give it a try. I could have cherished the moment.

So anyway, to return to my argument, let's look at that alternative universe where the United States is asked by the UN, the Group of Eight and the EU to return with them to the gold standard.

What do you think their answer will be?

"Which was my original point. I never said a gold standard could never work."

"Uh, yes you have. Repeatedly."

NO I HAVE NOT! Never! The world of money based on precious metals worked just fine-- from the time of Croesus up to the time the Brits closed the gold window. Which, interestingly, was at the eve of the Napoleonic Wars and later the Great War (aka WW One). That's 27 centuries, during which the only times a nation experienced inflation was when they watered the specie.

Although I'll note an instance where a penny ante kingdom was elevated to undue world prominence, in the case of Spain, when they stole the wealth of the Indies. That was an instance of gold aplenty, but not backed by any production. So gold alone is very far from being a perfect market corrective.

We're now at the midpoint in a long series of unwinnable wars of empire-- wars that take a lot of money we don't have. So if you disagree with my saying that we're unlikely to return to gold until we're finished burning all that money in the ovens of war production, I think the burden of proof is on you.

But dispense with your BS about what I'm alleged to have said. This kind of thing hurts your credibility, and is just a tactic designed to lead us away from an issue you can't control. The issue of whether a return to some sort of gold standard is LIKELY.

Give us a straight answer
You say "The issuing monetary authority just doesn't need any of it held in actual reserves in order to link the currency's value to a gold price rule."

So here's the US. And let's say, for the purpose of argument, that we've been called on our contention that one thousand of our dollars are worth one ounce of gold. Our creditors all tell us that's not so.

We can tell them to go to hell, that our opinion is that the dollar is pegged to some immaterial thing called 'gold price'. The only way they can get us to accept that our dollars are not worth that is to insist on payment on demand in bullion. That's the only way it can work. And if we run out of gold before we run out of debt, well...

"The gold standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver."

http://en.wikipedia.org/wiki/Gold_standard

Without actual, metallic backing, all you have is pieces of paper. That is, just what we have now.

Meretritious arguments
These are the most ridiculous arguments imaginable. I'll only waste my time on the first one.

Me: "There is NOT "all the demand in the world". Demand doesn't mean someone wants to buy something. Demand means they have the cash to make it happen."

You: "No. And that is your problem right there. Demand means demand, simple. How it is realized or even if it is realized is an non-issue as it doesn't change the fact that the demand exists.

"And it has nothing to do with 'money', as you keep insisting."

In economics the word 'demand' indicates someone has money, and is ready to buy a product or service. Or, as Investopedia puts it:

"Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy AT A CERTAIN PRICE [emphasis mine]; the relationship between price and quantity demanded is known as the demand relationship."

Certainly you understand that "at a certain price" refers to someone with either money in his pocket or a line of credit.

In the Sudan right now there are 4.3 million people suffering from moderate to advanced malnutrition. Guess how much demand for food that indicates?

Zero.

Should some NGO with funding decide to feed them, THAT would mean a great increase in demand. Because they have the money to pay for it.

Similarly, your other arguments are meretricious.

Sorry. I should clarify. That is, a. Attracting attention in a vulgar manner;
b. Plausible but false or insincere; specious: a meretricious argument.

Missyooh already explained it to you
You just didn't get it, either.

As usual.

"NO I HAVE NOT! Never!"

Not only have you, but then after that denial you write about four paragraphs where you proceed to do it again.

Life must be good on Planet Roy.

For one thing, they won't be gold certificates
gold certificates WERE backed by gold on demand (redeemability).

In the modern system, the price of gold will be monitored and the central bank will inject/withdraw enough of its printed money in circulation to maintain that price in the gold markets.

And that is all anyone cares about: That the price stays consistent and stable. That a price target of $500/oz is the same 50 years later.

If people want to actually 'redeem' for gold, they can do it the same way they can now: buy it. They will provide a vital feedback function in the market so the central bank can see what it needs to do. So more power to 'em.

And all of this I have repeatedly told you over and over again, so why ask the question at all?

You've gotten your straight answer for years, but just want to antagonize
"And let's say, for the purpose of argument, that we've been called on our contention that one thousand of our dollars are worth one ounce of gold. Our creditors all tell us that's not so"

For one thing, it won't be our creditors who tell us it is not so. It will be the market for gold. All those traders.

"We can tell them to go to hell, that our opinion is that the dollar is pegged to some immaterial thing called 'gold price'."

No, as you are very well aware.

"The only way they can get us to accept that our dollars are not worth that is to insist on payment on demand in bullion. That's the only way it can work.:

No.

The wikipedia article is total BS. It wasn't even reflective of how it worked when we were last on the gold standard.

If the gold market determines we have too many dollars in circulation, then the market price for gold in those dollars will rise. The FED would have to withdraw enough currency so the target price parity returns. This is how China usually manages its currency peg to the dollar like it does.

If the markets determines that there are too few dollars in circulation, then the gold price in those dollars will fall. The FED will be obliged to add more currency into the money supply until the price rises back up to the target price.

Thus the markets provide the feedback mechanism to tell the Fed what is going on as a result of its policies.

The Bank of England managed its currency that way from the 1840s onwards. So did the Fed, originally.

But, as the world didn't have a global gold market traded instantaneously on the internet back then, they had to use redemption as a MEANS to gain that feedback. They didn't have convertibility because people didn't trust the BoE, per se. Very few banknotes would ever be redeemed at all. BoE gold reserves were less than 10% and was adequate for cover whatever redemptions did occur. Again, they needed the redemption activity for the market feedback far more than people needed it to get gold.

"Without actual, metallic backing, all you have is pieces of paper. That is, just what we have now."

Yeah, so? That isn't the issue. The issue is price stability of whatever currency is used.

But that's what we have now
I see. The authors who contribute to Wikipedia are all wrong in their conventional, accepted wisdom. Only the great Zyndryl is correct. Uh huh.

But thanks at least for offering some content. This statement of yours actually makes a point:

"If the gold market determines we have too many dollars in circulation, then the market price for gold in those dollars will rise. The FED would have to withdraw enough currency so the target price parity returns. This is how China usually manages its currency peg to the dollar like it does."

That's just what we have now. The price of gold, expressed in the various currencies, floats. The first time it took a giant step we ended up with $400 being the price of an ounce. Now it's around $1100. And no one thinks it's a big deal.

Let's go back to my point. Do you think it likely that the USA is going to voluntarily enter into an agreement with the rest of the world that any time the dollar price rises above a certain mark, we must withdraw x amount of money from circulation?

I don't. I didn't back when I first made this comment and I don't now.

However I have another comment to make, about the wondrous world of gold trading. What about the price spread?

Today if you want to buy a gold brick it'll cost you something like $1162/oz. But suppose you have a gold brick, and want to sell it to buy something. What are they offering to buy it back for?

I see where one of the many gold buyers out there is offering to pay $52.73/oz for 24K, that is, .999 pure.

That doesn't sound like a very good deal to me. In fact it sounds like I'd be losing $1110 on the deal for every ounce I traded. Is this something your mighty mind has ever thought about?

What we need is a system restore
Resetting everything back to the way it was in 2000 would be a good first step. Of course we'd have to carefully explain to the boobs out there that the Global War on Terror, aka the Long War, was just something that was foisted on them to make them fearful and compliant. In reality, Islamist terrorists are a smal problem, akin to international crime syndicates. Mexican mafias, for example, take far more numbers of innocent victims.

Then we'd want to recall our troops from all those places they're not wanted. That would save quite a sum right there. And we'd want to reset the tax rates back to where they were when we were actually paying down our debt, from 1997 forward.

Remember when people were saying that someday we'd have the whole thing paid off? And that we'd then have the problem of NOT ENOUGH debt? Yup, that was not that long ago.

Then the wreckers got into office. And were quite effective in destroying government.

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