[Winstonm]

Here is an interesting article: http://research.stlouisfed.org/publication...7/Kotlikoff.pdf


This research indicates the U.S. has a conservatively figured fiscal gap of 65+ trillion dollars, that to pay current obligations it will take a permanent doubling of both the private income tax and the corporate income tax, and the beginning of this onslaught is only 3 years away when the first of the baby boomers become eligible for social security benefits.

The article suggests that politicians do not have the resolve to face this fiscal irresponsibility and their response most likely will be to print more money, leading to a real chance of hyperinflation.

I am neither an economist nor a mathematician, so I would be interested in hearing views of the bright minds on this website.

Thanks

[DrTodd13]

I don't think you need to be an economist or a mathematician to understand this problem. Either the obligations are drastically cut, taxes are raised, or retirement age is raised or some combination of the three. 65 trillion is about in-line with numbers I've been hearing for some time. There is no good solution. It is going to be painful. We're now seeing the fruits of the a couple generations of people who have been raised to believe that government exists to take care of them and so they didn't fund their own retirement, health care and all. Printing money is a classic governmental solution that doesn't work. There is a lag between when money is printed and prices rise as a result so printing money will seem to work for a short while but it is a house of cards. Prices will keep rising as more money is printed. Then they will try price controls on health care and price controls always have the effect of limiting supply. So, it may be free but you'll have to wait years to get treated and probably die while you're waiting.

[Gerben42]

65 trillion is just a number, to put it into a perspective it's 6 x 10^13 dollars, divided by 3 x 10^8 Americans. This gives you: $200,000 per American citizen! A huge amount of money!

So what is the problem. The pension scheme works like this. When you are working, you pay money into a pot and pay for the pensioners and when you stop working, the working class puts money into the pot for you and pays for you. Great idea. Now where did I see this before...

I get a letter in the mail that says: get rich now! Just send this letter to 5 other people and send $1 to the guy 3 ranks up in the list. If everyone does this for the cost of $1 you get 5 x 5 x 5 = $125!

Also a great scheme. Both work on the same principle: By participating you rely on the fact that when it's time to make the money there are enough participants to make it worthwile.

For a long time there have been more working age people than pensioners. Now it gets turned around and the scheme collapses.

[helene_t]

Comparing a pension scheme to a pyramide game .... interesting idea. I never thought about it this way.

[Echognome]

I don't understand why this is a new issue. Social security reform has been debated for quite awhile. I personally believe they will need to raise the retirement age. But this is nothing new! And the sky is not falling.

[hotShot]

When the bithrate started to drop in the second half of the sixies, experts started to discuss how to solve the problem.
Most politicians are unwilling to solve problems that could reduce their chances to be reelected now and if the benefits of their efforts will not come prior to the next election. (Someone else might benefit form their doing.)
This is why they wait until a problem hits them like a baseball bat, in the following phase of disorientation they pick the most popular suggestion (which is often not the best) and hope that this is good enough to ensure their wealth. Public welfare is something than only few politician have on their mind.

[kgr]

Winstonm, on Jul 16 2006, 11:12 PM, said:

The article suggests that politicians do not have the resolve to face this fiscal irresponsibility and their response most likely will be to print more money, leading to a real chance of hyperinflation.

This would suggest buying put options on USD or buying gold?

[Winstonm]

kgr, on Jul 17 2006, 05:24 PM, said:

Winstonm, on Jul 16 2006, 11:12 PM, said:

The article suggests that politicians do not have the resolve to face this fiscal irresponsibility and their response most likely will be to print more money, leading to a real chance of hyperinflation.

This would suggest buying put options on USD or buying gold?

Warren Buffet says he has a huge amount riding on shorted dollars. Who can argue with this man? His position is for the long term - I believe he is looking at a 5-10 year time frame and he has stated he is willing to risk a ton in fluctuations while waiting it out.

[hrothgar]

Winstonm, on Jul 18 2006, 01:51 AM, said:

kgr, on Jul 17 2006, 05:24 PM, said:

Winstonm, on Jul 16 2006, 11:12 PM, said:

The article suggests that politicians do not have the resolve to face this fiscal irresponsibility and their response most likely will be to print more money, leading to a real chance of hyperinflation.

This would suggest buying put options on USD or buying gold?

Warren Buffet says he has a huge amount riding on shorted dollars. Who can argue with this man? His position is for the long term - I believe he is looking at a 5-10 year time frame and he has stated he is willing to risk a ton in fluctuations while waiting it out.

One quick comment:

Its a lot less risky to go long on Euros (or Yuan or some basket) than shorting the dollar.

Buffet doesn't have to worry about the same types of liquidity concerns that you or I might...

[Winstonm]

Quote

Buffet doesn't have to worry about the same types of liquidity concerns that you or I might...

Ain't that the truth?

I did find it interesting that the original article I mentioned was prepared by the Federal Reserve and not some "the sky is falling" web nitwit. And as it stated, there are some ways to escape the crumbling sky - but it seems Buffet is betting that our politicians once again take the easy way out and eventually devalue the dollar.

BTW, you don't have any gold fillings in your teeth you're not using, do you?

[mike777]

Buffet is not just short short dollars, he is betting on the dollar declining. You can win this bet in many ways besides shorting dollars.

He thinks the massive trade deficits will cause us to inflate our way out of the mess.
As he notes someone has to hold dollars and our Tres. securities.
He argues that the USA continues to consume much more than we make.
As long as people will accept our paper for their goods and services, no problem.


The counter argument is:
1) that the USA will grow its way out in the long run
2) currency speculation in the short run is tough to win at
3) Security concerns will drive up the demand for the $.

It is possible to be right and lose at this game.

[hrothgar]

Winstonm, on Jul 18 2006, 02:06 AM, said:

Quote

Buffet doesn't have to worry about the same types of liquidity concerns that you or I might...

Ain't that the truth?

I did find it interesting that the original article I mentioned was prepared by the Federal Reserve and not some "the sky is falling" web nitwit. And as it stated, there are some ways to escape the crumbling sky - but it seems Buffet is betting that our politicians once again take the easy way out and eventually devalue the dollar.

BTW, you don't have any gold fillings in your teeth you're not using, do you?

Did Buffet give any reason for his position?

I agree that the dollar is likely to fall significantly, however, I don't think that this will be caused by printing lots of money. (I think that its far more likely that the dollar will lose its position as the only reserve currency. Alternatively, the Chinese might stop pumping so much money into our economy)

[Winstonm]

Quote

Did Buffet give any reason for his position?

I apologize but am ignorant on those facts and wish I knew more.

[Winstonm]

Here is what I have read and my take, for what it is worth.

The U.S. due to its fiscal gap is bankrupt or nearly so.

To correct this fiscal gap and become solvent the U.S. would have to:
1) Permenently raise taxes - ain't gonna happen.
2) Permently reduce social security and medicare by 2/3 - ain't gonna happen.
3) Reduce government spending - REALLY ain't gonna happen.

The only other solution is to have China permanently finance U.S. debt - and after we refused to allow them to buy corporations in this country, I'm sure they are eager to finance us more - only until they can find a better investment.

The last solution is to pay with reduced dollars - I would think that Buffet sees this as the most likely scenario, which is why he stated his was a long term short position.

I do not have the liquidity of Buffet, so my views are more short term for now. Looking at the Treasury Department Yield Curve websit, I have seen that the curve is narrow and it appears investors see more risk for inflation over the next 6 months to 2 years than in the 10-20 year range. Extrapolating that for me means inflationary pressures, escalating interest rates, and a potential recession with the next 2-6 quarters, meaning stock prices should plummet.

The problems inherent in the fiscal gap are tied to the ages of the baby boomers, and as such have a starting range of 3 years from now on up to about 15 years - quite a long range investment plan unless one can tie up substantial capital for 7-10 years.

[Echognome]

Winstonm, on Jul 17 2006, 11:06 PM, said:

I did find it interesting that the original article I mentioned was prepared by the Federal Reserve and not some "the sky is falling" web nitwit.

I'm not going to sit here and call the guy a crackpot. He's clearly writing on some authority. But I will say that the Federal Reserve journals are more for working papers and papers prepared by people that work there. I wouldn't put the journal in say the top 20 or maybe even 50 economics journals. It doesn't mean it's bad, but namely that it's not likely to have received the same editorial and peer review that an article in one of the top journals would have received.