govt deficits = ‘non govt’ savings:

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

>   
>   (email exchange)
>   
>   On Fri, Jun 11, 2010 at 3:57 AM, wrote:
>   
>   What’s interesting about this to me is Slovakia. The Capital, Bratislava,
>   is 45 minutes from Vienna by car, and they’re third on the list! Ever
>   hear bad things about Slovakia? FLAT TAX of 19 percent for several years
>   now and more and more industry growing there. Great restaurants, clubs,
>   and more so quality of life has greatly increased. Magna has several
>   facilities there as do VW etc etc.
>   

Yes, it’s a ‘race to the bottom’ with whoever has the lowest taxes winning business from other EU nations, eventually forcing them to do same.

This is what’s happened to US States, with the States with the lowest tax rates and benefits getting businesses from other States. The problem is that means that States have to spend the least on education and public services to win business, in a race to the bottom.

It’s a fallacy of composition in action. If you stand up at a football game you see better, but soon everyone is standing up so nothing’s gained and no one can sit down (in the case of the football game at least until the front row sits down).

One of the public purposes of the federal govt is to set min standards that prevent races to the bottom

World’s Millionaires Increase by 14%, Boston Consulting Reports

By Alexis Leondis

June 10 (Bloomberg) —The global millionaires’ club expanded by about 14 percent in 2009 with Singapore leading the way, The Boston Consulting Group said.

The number of millionaire households increased to 11.2 million, according to the study released yesterday by the Boston-based firm. Singapore posted a 35 percent gain, followed by Malaysia, Slovakia and China. In 2008, the number of millionaire households fell about 14 percent to 9.8 million.

“Given the severity and magnitude of the crisis, I’m surprised at how fast global wealth has come back,” Bruce Holley, a senior partner in the firm’s New York office and topic expert for wealth management and private banking for the U.S., said in a telephone interview before the report was released.

Global wealth rose by 11.5 percent after falling 10 percent in 2008, as assets under management increased to $111.5 trillion, close to the annual study’s record $111.6 trillion in 2007. North America, defined as the U.S. and Canada, had the greatest gain in assets at $4.6 trillion to $35.1 trillion. The U.S. also had the most millionaire households at 4.72 million, the survey said, while Europe remained the wealthiest region, with $37.1 trillion.

Current numbers may differ from those in last year’s report because of currency fluctuations and newer available data, said Peter Damisch, a BCG partner and a co-author of the report. The study looked at 62 countries representing more than 98 percent of global gross domestic product.

Wealth Recovery

The recovery in wealth last year was a result of resurgent financial markets and increased savings, the report said. The Standard & Poor’s 500 Index rose 20 percent in 2009 and the U.S. savings rate averaged 4.2 percent compared with 2.6 percent a year earlier.

Global wealth dropped in 2008 for the first time since the survey’s 2001 inception as the credit crisis sent stock indexes tumbling and slashed the value of real-estate holdings, hedge- fund and private-equity investments.

Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, exclusive of real estate and property such as art. Wealth became more concentrated with millionaire households controlling 38 percent of the world’s assets compared with 36 percent a year earlier, the study said.

Singapore also had the highest proportion of millionaire households at 11.4 percent, followed by Hong Kong and Switzerland. The fourth, fifth and sixth spots were in the Middle East — Kuwait, Qatar and the United Arab Emirates. The U.S. was seventh-highest at 4.1 percent.

Growth Rate

The amount of offshore wealth, defined as assets housed in a country other than the investor’s legal residence, increased to $7.4 trillion after declining to $6.8 trillion in 2008 as global regulators pressured countries such as Switzerland to cut down on bank secrecy. Switzerland remained the largest offshore center, with about 27 percent, or $2 trillion, of assets, the report said.

Global wealth will increase at an average annual rate of almost 6 percent from yearend 2009 through 2014, which is higher than the 4.8 percent annual growth rate from yearend 2004 through 2009, the study said. Wealth in the Asia-Pacific region, excluding Japan, is expected to rise almost double the global rate. Last year’s survey said total wealth wouldn’t return to pre-recession levels until 2013.

‘Still Feel Burned’

The report’s authors also looked at the performance of 114 wealth management firms worldwide and found revenue declined by an average of 7.3 percent as assets under management increased an average of 14.3 percent. Reasons for decreased revenue include fewer transactions, tougher price negotiations and a shift to lower-risk asset classes and investments that are liquid and simple, the study said.

Investors feel frustrated and distrustful following the market events beginning in 2008, despite the increase in wealth, Holley said.

“People still feel burned,” said Holley. “I think the numbers in the report suggest a much rosier experience than how people actually feel.”

79 Responses

  1. I am hearing the dreaded word, “tariff,” more from enraged workers. The race to the bottom is going to get interesting as the middle class feels more and more threatened. People are beginning to recall Ross Perot’s prediction of a “giant sucking sound” that was coming from loss of jobs by exporting them. I don’t know that workers are just going to roll over, even though labor organization is at a low. People do vote their pocketbooks and pay checks.

    1. Tom, that is the defining problem of the past 40 years, first with Japan, and more so now, with China. Even if the trade deficit was zero, jobs would still be exported as China’s economy is more labor intensive.

      MMT claims that a trade deficit is a benefit. Hard sell.

      1. BX12, I am actually a strong proponent of globalization based (in principle) on free markets, free trade, and free capital flow, while also taking reality and practicality into account. In the long run, there will be great leveling, and that will be for the benefit of humanity. However, on the way, there are going to be fits and lurches, practically speaking, and some interests are going to be gored. Now, the jostle is on to prevent one’s own interests from being on the receiving end. The wealthy are bent on preserving their wealth, and the powerful are bent on preserving and extending their power. That is turning out to be at the expense of the middle class of the developed the world — the majority of voters in those countries.

        I am reasonably sure that when faced with political reality as things unfold, any party that wants to capture the center, where the middle class sits, is going to be forced to adopt protectionism. While this is not something I advocate, if politicians cannot find another way around the problem of leveling too quickly for the majority of voters, they will have no choice but to erect barriers of some sort.

        The push now is for governments to solve their deficit and debt “problem” by exporting their way out. That, of course, is an accounting impossibility, since not everyone can run a trade surplus simultaneously. Moreover, there is no such thing as a general devaluation. Ergo, trade barriers are coming, like it or not, unless politicians find another out that placates a middle class that sees its lifestyle collapsing and the American dream fading for their children. They will blame government.

      2. Imports are a benefit, the trade deficit is just the accounting record..

        We just have to transfer enough fiscal balances to our citizen consumers so our citizens have the balances to exchange with the Chinese for real products. The Chinese apparently value the balances more than their real goods, we just need to take them up on their offer. Resp,

      3. Imports are a benefit to whom?

        When you use the word “benefit” you are implicitly defining a social welfare function. That social welfare function, in order to be legitimate, should have two characteristics:

        1. it must be diminishing with incomes, so that a transfer of consumption from the poor to the rich decreases social welfare, and therefore taking 1 unit of consumption away from the middle class, and providing 1.2 units of consumption to the wealthy, while increasing aggregate consumption, is a net harm.

        2. It must be forward looking, taking into account not only what is consumed today, but what will be consumed in the future.

        According to 1. and 2. net imports, if they arise out of wage arbitrage, are a net harm, and net imports, if they arise out moving up the value chain for the majority of the population, are a net benefit.

        It’s clear which case is applicable to the U.S.

  2. Another nice piece on people living rent free as they wait for banks to
    foreclose on them. “buy season tickets to Disneyland…take a Carnival cruise to Mexico…” They quote James Galbraith as saying that banks are benefit from this phenomena because they don’t have to recognize losses. This makes sense to me as mortgage bonds with 2nd mortgages often are wiped out in foreclosures and the big 4 banks are holding half of these mortgage bonds.

    1. I am very skeptical of Galbraith’s claim. Delinquent loans generally have to be written off or at least marked to fair value within 180 days. The reason homeowners are able to get away with living rent-free for so long is that the foreclosure process has been bottlenecked by the shear volume of foreclosures and also by the federal and state governments pressuring banks to slow down and explore doing loan modifications first.

      Dean Baker’s quote is completely disingenuous by the way. Changing the FHA program to make strategic defaulters ineligible for a government-subsidized loans in the future is hardly interference with private contracts. In fact, it makes perfectly good economic sense. Why would you want to extend a loan to somebody who has already demonstrated the willingness to walk away at the first sign of being underwater?

      And no, it is not good for the economy for people to be allowed to live in a home rent-free. It is a huge distortion. It is better to move them out into a lower-cost rental and move new people in who can afford it, and who furthermore will maintain the home properly.

      1. Neither is it good for an economy to let banks and finacial institutions operate in a “regulation” free environment that existed the past decade. Talk about DISTORTIONS!

        I’m glad some people are saying no. How many companies continue to hold bad debt or dont walk away from some of their obligations when they have economic stress.?

        I find it interesting how many companies expect their customers to exhibit qualities they themselves dont hold.

      2. Please give me an example of a regulation that would have helped had it been in place for the past decade.

        With non-recourse mortgage loans (which the vast majority of delinquent loans are NOT by the way), homeowners are obviously entitled to walk away from the loan and the home any time they want. My problem is with the fact that in many cases, these people are also getting to live rent-free in that home for years.

        Companies are amoral entities, which will generally make decisions out of pure financial self-interest. Lenders design loan terms to companies taking that fact into account.

        In any case, strategic default decisions are fine with me as long as the homeowners face all of the logical consequences of such decisions:
        risk of a lawsuit if the loan was a recourse loan; damage to their credit rating; and being forced to actually move out of the home or pay rent.

      3. Please give me an example of a regulation that would have helped had it been in place for the past decade. I would echo Warren’s proposal: no secondary mortgage market. If a loan is made, you have to keep it on your books.

      4. Yes, that would have prevented a lot of the madness, but it is too draconian and not realistic in any event. Also, you lose the optimization that happens when mortgage loans are matched up with investors who want to own them (the whole idea of having secondary markets in any product).

        A better solution would be to somehow get rid of the rating agencies (i.e. the Nationally Recogizned Statistical Rating Organizations). Investors became too complacent in relying on them and didn’t do their own homework. Without “nationally recognized” (meaning government implicitly recognized) AAA ratings, it would have been impossible for the MBS underwriters to spin straw into gold.

      5. One regulation that would have helped is keeping investment banks and commercial banks doing separate things. Investment banks should not get the benefits that commercial banks do of a Public Private Partnership. Another would have been to actually treat CDS as insurance and regulate them as such. Allowing debt insurance to be in some cases 5 or 10x the underlying value of the debt was extremely destabilizing.

        Companies dont get to hide behind amoral entities anymore. They want to be treated as people in regards to campaign financing, they have the same responsibilities of the people.
        You cant just get treated like a person when its convenient for you to do so.

      6. I disagree that either of your suggestions would have helped at all. It was never necessary for an investment bank to have a commerical bank to fund itself. Goldman and Lehman were able to leverage themselves to enormous levels, and they didn’t have commercial banks. Merrill was able to fund $60B of super-senior CDOs with no problem whatsoever, until it became apparent that the stuff was worth less than 20 cents on the dollar. And Merrill had only a tiny commercial bank which had little to do with the investment banking side.

        And mortgage originators like Countrywide and American Home Mortgage weren’t banks. You didn’t need to be. Warehousing funding was plentiful.

        As for the CDS market, regulating CDS as insurance makes no sense. CDS is not insurance. It is merely a short position in a synthetic bond. And the problem wasn’t caused by the perverse technical possibility of manipulation of the underlying bond market via CDS. The instances of this happening are rather rare.

        I agree that regulatory haircuts should be as high on CDS as on the underlying bonds (for both short and long positions), and that might have helped, but that wouldn’t have happened if CDS was regulated as insurance. The bond insurers (AIG, FGIC, AMBAC, MBI, even FSA) are in big trouble and caused a lot of the problem, and yet they were regulated. Take a look at the mortgage insurance market. That was a total disaster too, with at least one firm blowing up big time (Triad) and several on the brink (Radian, PMI).

      7. ESM

        Isnt it true though that banks have access to the various liquidity operations at the fed that the investment banks didnt have AT ONE TIME. Banks are considered a public entity and get a certain amount of support, they cant just crash, they can be wound down. Investment houses DID NOT have this support til the last 10+ yrs I thought. (maybe I misunderstood). Banks were also restricted from participating in many of the things they played with during the aughts as well I thought. You are right, that these may not have prevented a bubble form forming and bursting BUT the contagion would not have spread to the rest of the credit markets and froze things leading to the huge job losses.

        My point about the CDS is simply this. If you have a bet where you can collect 10 million form a 1 million default, might you not have an interest in seeing the 1 million default? If enough people have this interest is it not likely that contracts intended to fail might not be created by entities who have the wherewith all to do so. There is a reason I cannot insure my $250,000 house for 1 million of fire insurance.

      8. Investment banks did not have any type of direct access to the Fed until March 2008 (the Monday after Bear Stearns failed and was taken over by JP Morgan). I don’t remember the details, but it was then that the Fed started a slew of programs to provide direct lending to investment banks, which unfortunately was not enought to stave off Lehman’s collapse six months later.

        I’m not sure what banks were doing in the ’00s that they weren’t always allowed to do. I think that the only regulatory reform of any consequence in the last ten years was Sarbanes-Oxley, which was a typically ineffective response by Congress to the Enron debacle. This increased the accounting burden on public companies tremendously, but certainly didn’t encourage riskier behavior.

        Your point about CDS is a good one, but the risk is actually greater in the other direction. It is far more likely that somebody sells $10MM of default protection and then prevents the reference credit from defaulting on $1MM of loans, thereby insuring that the premiums are earned free an clear. There are several instances of something like that happening. Remember, just as with a futures contract, there is always a long and a short in a CDS contract. Both sides can game the contract. And of course the same thing happens with futures – when it does, we call it a short squeeze. And you don’t even need to futz with the reference credit or the underlying deliverable in order to game the system. Since the CDS is not tethered to reality by short-term arbitrage, a large enough player can push the price of CDS to any level he wants, especially in a thinly traded market. This has a real world impact because there is almost always daily margining based on mark-to-market between the counterparties.

        Still, none of these shenanigans happened in a significant amount during the financial crisis.

      9. ESM

        “Still, none of these shenanigans happened in a significant amount during the financial crisis”

        I have read many of your comments for months and you are definitely an informed and intelligent commenter but I need some EVIDENCE of what you contend above. I’ve seen too many people over the last 18 months talk about exactly the type of stuff I referenced being operative. I also dont think it takes much of this activity to freeze markets and instill doubt. Remember this is mostly a balance sheet event. Once the “numbers” reached a certain point creditors got scared.
        Part of the problem is lack of transparency of these companies. No one is able to go in and look at the nature and amount of these “contracts”. It may be worse than we imagine. A few insiders have talked about practices here and there but the full scope is (for obvious reasons) not being disclosed by those who have the information.

        So…………………..we wait, and wonder, and speculate and act irrationally (or is rational to fear the worse)

      10. Well, I can’t give you hard evidence, but I will say this. Throughout most of the crisis, starting in summer 2007 and ending year-end 2008, I felt as you seem to do that there was at the least an irrational panic that had taken hold in the market and at worst a coordinated effort by short sellers to undermine certain financial institutions (financial institutions obviously being very vulnerable to a “run”).

        I no longer think that. The perfomance of $6T of mortgage loans has been so bad that I now think the market’s panic was quite appropriate, and the short sellers were prescient rather than manipulative. Do I think that it was inevitable that things would get as bad as they did? No – the government really dropped the ball, and that was not inevitable. Stimulus should have been much bigger and happened much earlier, and as Warren has pointed out many times, the financial rescue should have been done from the bottom up (i.e. cash in retail hands) rather than the top down (cash in banks’ hands).

        But the rot in the system was real. The government’s inadequate response allowed the rot to get much worse, but market manipulation had little to do with it.

        Now, derivatives (specifically CDOs) and financial engineering definitely facilitated the buildup of the rot in the first place, but ultimately I think this was a bubble and bubbles happen because of human nature and the madness of crowds. Although I don’t agree with Greenspan that it is impossible to spot a bubble until after it bursts, I do believe that it is a fool’s errand to try to legislate or regulate away bubbles. I wouldn’t trust even the smartest financiers in the world to come up with a regulatory scheme that makes bubbles impossible. I certainly don’t trust Congress.

      11. I’ve never meant to imply that the entire debacle was simply an irrational overreaction or that the entire thing was engineered. Yet I have no doubts that there were ways that guys like Goldman could in fact sell/buy KNOWN poor MBSs, insure/buy insurance on KNOWN poor MBSs and then go short/long on the contract with a high degree of assurance which way it was going to go simply because they packaged it themselves. They have/had that capability and they certainly had the incentive.

        The entire thing didnt have to be engineered, only a small percentage was needed to push it over the edge. No one there hoped for this type of event (I hope) but they were arrogant and stupid enough to believe they actually had figured this stuff out. They believed they had their risk covered. This was pure hubris.

      12. “Now, derivatives (specifically CDOs) and financial engineering definitely facilitated the buildup of the rot in the first place, but ultimately I think this was a bubble and bubbles happen because of human nature and the madness of crowds.”

        There is nothing accidental or fatalistic about the bubble and crisis that ensued. The limited liability of shareholders is at the source of search for increased risk at the expense of other stakeholders or society. More so for banks for which high levels of leverage are tolerated while benefiting from implicit or explicit guarantees.

        Corporate welfare is institutionalized by limited liability. Bring back unlimited liability, partnerships rather than incorporation, and the sub-primes and BP crises will not be repeated.

      13. Engineering is the discipline, art and profession of acquiring and applying technical, scientific, and mathematical knowledge to design and implement materials, structures, machines, devices, systems, and processes that safely realize a desired objective or invention.

        The American Engineers’ Council for Professional Development (ECPD, the predecessor of ABET[1]) has defined engineering as follows:

        [T]he creative application of scientific principles to design or develop structures, machines, apparatus, or manufacturing processes, or works utilizing them singly or in combination; or to construct or operate the same with full cognizance of their design; or to forecast their behavior under specific operating conditions; all as respects an intended function, economics of operation and safety to life and property.[2][3][4]

        Wikipedia

        The processes and systems were and continue to be poorly engineered, probably partially unintentionally through inadvertence and partially intentionally by interested parties. In both cases, it is culpable — either negligence by professionals or outright predation.

      14. BX 12Corporate welfare is institutionalized by limited liability. Bring back unlimited liability, partnerships rather than incorporation, and the sub-primes and BP crises will not be repeated.

        Exactly. This is really the only way to produce real and lastingl reform. Otherwise, it will just be more “ledger-demain” behind the (corporate) veil.

      15. “Corporate welfare is institutionalized by limited liability. Bring back unlimited liability, partnerships rather than incorporation, and the sub-primes and BP crises will not be repeated.”

        You guys want to throw out the baby with the bath water. The ability to form limited liability companies is a cornerstone of our capitalist economy. It encourages entrepreneurship and (good) risk-taking.

        And besides, the subprime meltdown did not have to be such a big disaster. If the government had acted properly, the popping of one of the biggest bubbles of all time would have been just a blip. No need to completely rethink capitalism when the severity of this crisis is the fault of the government failing to understand Mosler’s Law.

        As for BP, that is not a good example. BP is big enough that limited liability from the corporate structure did not play a role in its decision making at all (although perhaps the $75MM cap on liability for damages established by Federal law did). BP has already lost over $80B in market capitalization, and there’s no way this disaster will cost anywhere near that. And once again the government is exacerbating the situation. Overlapping bureaucracies have impeded the implementation of certain mitigation techniques (e.g. deployment of booms, use of certain chemical dispersants, controlled burning of surface oil, allowing deployment of oil-slick fighting ships from foreign countries). And, finally, why isn’t the government even considering using a nuclear weapon to cauterize the leak?

        ESM’s Law: There is no oil leak so deep that a sufficiently large nuclear weapon can’t deal with it.

      16. ESM’s Law: There is no oil leak so deep that a sufficiently large nuclear weapon can’t deal with it.

        Sure… And I suppose you’ll take full, unlimited responsibility if it goes wrong? Which would entail, what, resuscitating contaminated fish? Rebuilding a 1:1 model of the Gulf in Canada?

        Oliver’s Law: The world doesn’t need more people who want to save it, it needs less people who want to destroy it.

      17. ESM is correct. LLC has overall been good, and neither financial crises nor BP is good reason to end it.

        OLIVER: I think BP spill is overhyped right now. Obama needs something to cover up the fact that he’s still on his knees in front of his friend Goldman Sachs. In 5 yr, I am sure people will feel environment damage from this the same way they felt environmental dmanage from 1994.

        Zanon’s Law: Sanctimony is endless

      18. Bx12 sez (and others agree):

        “Corporate welfare is institutionalized by limited liability. Bring back unlimited liability, partnerships rather than incorporation, and the sub-primes and BP crises will not be repeated.”

        Should we bring back debtors prisons too? When an individual or partnership fails what will we do then? If liability is limited for the individual (and net wealth is ultimately a limit on liability) then creative lawyers and business men will find a way to recreate limited liability without the corporation. I’m already imagining BP hiring an employee (oops contracting with an independent contractor) for $50k ($500k?) a year to do nothing but absorb bankruptcy risk of their offshore drilling business. This is foolishness.

        The problem wasn’t BP’s limited liability. As ESM pointed out, BP probably believed their losses were capped by the $75 million threshold, not shareholder equity. If they though all shareholder equity was on the line It was the governement that ‘regulated’ them that failed.

        It is the fatal conceit to believe that government can hire a civil servant for $125k a year (plus generous pension and HC) and have him regulate a trillion dollar industry. When a regulator (or a Congressman, or a Senator, or a President) makes decisions that can affect the bottom line of millions of people by a combined billions of dollars, it is the height of naivete to think those dollars will not influence that regulator (or Congressman, or Senator or President).

        Is anyone surprised that the people at the National Mineral Service (or whatever it’s called) were compromised by the industry they regulated? Is anyone surprised that the SEC was compromised by the industry it regulated? Will anyone be surprised when the next failure of government regulation happens?

        Or will it all be different this time?

      19. Of course, one can’t expect regulation to work. Only incentives/disincentives do that effectively and efficiently. That’s why we need to rip off the corporate veil and institute personal accountability in banking and finance, which is otherwise a cesspool, the effluent of which government has to periodically dredge.

        Debtors’ prisons? In case you have been following the news, people are already being put in jail in several states, MN leading the pack, and the banks are already jacking up the rhetoric about strategic default on the consumers’ part being corrosive. And draconian bankruptcy laws are already in place.

      20. Toms Hickey:

        Want about personal responsibility in Government?

        Can we charge Dodd $1T? Greenspan? Bernanke? Bush? Obama?

        The corporate worlds has about 1000x the accountability of the public sector. If you want to more closely bring together power and responsibility, which I am very much in favor of, please look at public sector first.

        1000 years ago power and accountability were unified. it has been on downward slope for centuries now, and particulalry in US.

        it is not able for your mind to comprehend what you are truly seeking here.

        I am not fan of debtor prison, but MN example is case where law allows people who ignore court summon (bankrupcy court in this case) to be jailed for contempt.

        Tells me Tom Hickey — do you think that people who ignore court summons should be held in contempt? if so, should law have recourse against individual?

        of course you do, i do to, but this is example of unintended consequence.

      21. Toms Hickey:

        Here is a hint, but understanding it would make your parrot brain explode. Tells me, what is biggest oil company in world, and please tell me whether you think it is responsible or irresponsible etc.

      22. Zanon, I completely agree that the public sector is corrupt and needs a housecleaning. I have also been saying that without getting the money out of politics, e.g., campaign finance and lobbying, as well as shutting the revolving door, nothing substantial will change. The apparatus of government has effectively been captured by interests, and this applies to both parties.

      23. There’s nothing wrong with LLC. The fault is the government’s for not sufficiently regulating firms on the one hand, and not imposing taxes that address externalities on the other.

      24. “ESM Reply:
        June 15th, 2010 at 4:35 am

        You guys want to throw out the baby with the bath water. The ability to form limited liability companies is a cornerstone of our capitalist economy. It encourages entrepreneurship and (good) risk-taking.”

        Yes, the baby in Eraserhead (the movie).

      25. Last I heard, Saudi Aramco was the world’s largest. Responsible? That’s a joke. As Warren has pointed out, they control the price. Moreover, the ownership is in the hands of the Saudi royal family, which is not known for being “responsible.”

      26. Toms Hickey:

        You are so clueless about responsibility! Unsurprising for someone who is “radical” and responds to question of “tea or coffee” with “dollar hegemony!”

        Yes, Aramco is largest oil company, and yes it is owned by House of Saud, who also, incidentally, own all of saudi arabia. It is old Monarch model.

        Now, I hates the Sauds having spent time in their foul country but from resposibility perspective, this is ideal setup. If Sauds run Aramco badly, and it ruins their land, it is ruining THEIR land! They are INFINITELY liable and cannot hide behind bankrupcy or LLC. They own ALL ASSETS. There are no special interest, there is no regulatory capture, there is politics. It is all in family top to bottom.

        Look at US situation. You have BP “investors” who know nothing of operation and cannot fire chief executive, you have regulators who get retirement pension the same whether they are on meth and have sexual relation with oil people or not, and you have barak Obama who makes money on book deal no matter what he does or does not do with oil and is more focused on tax payer money to connected people like al gore to pay chinese to make stupid windmill that kill bird and cannot be put up anyway. And you have people who live on Gulf whose land and livelihood is ruin. Who can make any decision? Who bear consequence? It is total fragment of authority and responsibility. this is why it is quite obvious insane.

        Saudi, whom I hate, has perfect align incentive. They have run their country economically quite well, although standards are in toilet worldwide these days.

        I fail to see how they being marginal producer has any bearing on this question of limited or unlimited liability producing reasonable governance

      27. Zanon, I don’t see that being at all comparable to fiduciary responsibility in finance. Moreover, the Saudis are not exactly free to do as they please either. The US keeps them in power. If they overstep, they are toast, as Saddam found and Ahmadinejad soon will, too, if he keeps it up. Ahmadinejad  would be gone now if McCain had prevailed. The Saudi royal family is in a much more precarious position.

      28. Toms Hickey:

        You are not correct about US keeping house of Saud in power. They could of course displace them, like they did Saddam, but house of Saud is quite good at staying in power all by themselves.

        Here is my point. In House of Saud, despite their many flaws, you have perfect unity of authority and responsibiity. It’s like Florida and Gulf of mexico was owned by one guy. He also owns BP. And he also has hotels up and down coast owned by him on relative. And he is also regulator. If anything goes wrong, he takes both economic hit has his oil company and land and hotels lose monies, and social hit, as he gets nagged by relatives at Friday lunch. Every externality is internalized. Liability is unlimited. Since it is family business, planning should be for long term, not just next quarter. There is no tbtf as you will just be bailing out yourself. It is, from incentive perspetive, far better than rather weak “fidicuiary responsibility” or LLC. You get responsible governance from unity of authority and responsibility Toms Hickey, not its fragmentation.

      29. “house of Saud is quite good at staying in power all by themselves…..you have perfect unity of authority and responsibiity”

        No, it’s a Ponzi scheme. The population is generously subsidized. The royal family, thanks to the practice of polygamy, is exponentially increasing in size and the merest blood relative to the king is entitled to several hundred thousand dollars/year. And to some it’s not enough and they’ve already started ransacking legit businesses.

      30. Zanan: “You get responsible governance from unity of authority and responsibility Toms Hickey, not its fragmentation.”

        O good, let’s make the US a monarchy like Saudi Arabia. Actually, didn’t W say that a dictatorship works much better?

        In comparing countries to firms with fiduciary responsibility, you are adding apples and oranges.

      31. Bx12: There are far worst run countries in the world that Saud. And far worse Government who have been in power for longer.

        You confuse quality of Govt with longevity

        Toms Hickey: Hah! I knew your mind would not be able to deal. You have confused me with someone who likes Saudi though, yet another thing I cannot helps you with

      32. Between

        “And far worse Government who have been in power for longer.”

        and

        “You confuse quality of Govt with longevity”

        are you not contradicting yourself?

  3. BX12:
    There is a serious problem with the MMT position on trade (”trade deficit is a benefit”). While a trade deficit does provide a lot of (cheap)stuff for consumers this is only generally beneficial if there is full employment.

    In the absence of full employment many people who lose their jobs, often pretty good jobs in manufacturing, face a serious decline in their standard of living. They may remain unemployed for a considerable length of time and run down whatever assets they possess or they may only be able to find poorly paid jobs with few benefits.
    The on-the-ground reality people face is hard so the sell is hard too, as you note.

    1. Yes I agree about whether its a benefit or not.

      From the looks of it, the identity

      G – T = S – I + M – X

      seems to suggest that the government can fund any deficit. True – the government has no financial constraint and it is possible for the central bank can set the yield curve. However it has to be looked carefully. An initial stimulus increases private sector saving and consumption and hence demand. A further stimulus may increase imports. True the government indirectly funds it. In the extreme case, all stimulus goes to the external world before full employment is reached.

      There are millions of future paths consistent with the relationship.

      Of course one may argue that the government can run a job guarantee. However, it may or may not help. The worker class is heterogeneous as far as their wage bill are concerned. It may happen that more people are falling into the JG scheme as the government continues to provide stimulus. There are workers who don’t earn much but still higher than the minimum wage level and it may not be possible for them to work at the minimum wage.

      Depending on production capacity of the economy, there are different kind of limits on the fiscal stance. The United States has a great production capacity and may not really have a price rise problem for very wide ranges of fiscal expansion. However before the prices rise, the imports will rise, constraining demand. Producers may find themselves with extra inventories because of higher imports and will cut down the production in the next cycle leading to a downward pressure in aggregate demand. Meanwhile the foreign dollar holding would have bought corporate bonds, mortgage backed securities and equities and a lot of dollars would flow into the foreign sector rather than to the US household.

      There is no escape for the US. Of course, a huge fiscal expansion is needed, but at the same time, the external sector also has to be taken into account.

      A high public debt/gdp ratio is hence problematic. Not because of any solvency issue and not because of price rise really. Of course “high” doesn’t mean that 100% is high. If the debt/gdp ratios don’t diverge, its okay. It also doesn’t mean that the US shouldn’t be doing any fiscal expansion because its urgently needed.

      The other way is for all countries to do a fiscal expansion and take public debt/gdp ratios to a higher but stable level in a coordinated manner. So even though the numbers are higher than historic values its okay.

      1. This is why I have been arguing about the need for disaggregation, and for looking at production and median wage shares. Basically you need to peel apart what is happening in the private sector, determine how to fix it, and then do your best to fix it.

        Government stimulus spending should be used — must be used — to maintain demand, but only as anesthesia while the patient undergoes surgery. The surgery is to suppress top incomes and boost lower incomes, to suppress the asset holdings of good folk such as our host and to boost the asset holdings of the middle class which, at the end of the day, is deeply in hock to Warren. Such a move will be traumatic, and so external income boosts to the private sector can help in the adjustment, but as a palliative.

        If you do not perform the surgery, then you will find that you need to supply greater and greater amounts of income to the private sector just to keep employment where it is. There is never “enough” assets — people always want more. As long as they can get more than they *should* — more than is consistent with sustainable endogenous demand — then they will continue to demand more and more, and they will continue to get more and more, and the situation will get more and more unstable. The end game is some form of collapse — not because the government is financially unsound, but because the economy is.

      2. Re RSJ at 3:41:
        I agree with your proposal for redistribution, although I would feel sorry for Warren and perhaps offer to buy him a beer!
        However, with respect to the economy becoming unsound, I’m not so sure. If you are able to induce the top, say 10%, to spend all of their ever increasing income share and save nothing, then the bottom 90% could eke out a meager living as servants to the top 10%.

        Economically it would be stable and if you are able to sufficiently confuse the bottom 90% the political situation would be stable as well. I would argue that the U.S. is already well down that road. If the top 10% don’t quite spend enough then the federal government could deficit spend to make it up.

        Ramanan at 2:31: I think that Michael Hudson’s super-imperialism analysis covers off your angle. The U.S. can run up an unlimited foreign imbalance since only purchases of treasury securities or real assets of little significance are allowed with the dollars the foreigners receive. In effect the U.S. has carte blanche to import as much as it wants, truly without limit, without ever having to pay the piper. Amazingly China has given away $2 trillion worth of stuff this way.

        I do wonder if the recent move to allow worker militancy to succeed in getting higher wages in China is not part of a plan to generate more domestic demand. If so the U.S. can expect a drop in its standard of living as the cheap Chinese import tap is slowly turned off. Perhaps that will mean more jobs in the US?

      3. the gov has to have a criteria for the level of taxation.

        we know it’s not to collect revenue per se

        how about full employment/price stability?

        and getting it right is a work in progress.

        there is no ‘set it and forget it’

      4. Keith — completely agree.

        Warren — completely agree! It’s never “set it and forget it”.

        But full/employment and price stability is not enough of a criteria. Counter-cyclical fiscal policy is great — but what is the base?

        In other words, in the Eisenhower era, we had 90% top marginal rates and high corporate tax rates. As you know, savings does not fund investment, so there was plenty of funds available for capital investment, and the capital stock as well as incomes grew quickly.

        Even then, we had recessions and bouts of unemployment and this was treated with fiscal policy.

        So it is not a question of whether fiscal policy should be counter-cyclical, but whether across the business cycle, the set of tax policies and regulations are such that top wage earners cannot seize an outside share of incomes for themselves. The playing field across the business cycle is important, as well as counter-cyclical adjustments.

      5. Keith,

        I am not sure if there is any rule that the foreigners can purchase only Treasuries with the reserves. May be true about the central banks.

        The table L.107 of the Z.1 accounts doesn’t suggest any such thing.

        Not only do foreigners have access to dollars through the current account, but also through the capital account. A lot of German investors issued ABCP and bought agency debt, mortgaged backed securities, CDOs etc. That is even worse – there is an ouflow of income to foreigners through the financial markets as well.

  4. Its probably more accurate to say a “trade deficit CAN be a great benefit if the govt in charge understands how to use it to their electorates advantage”. Clearly, with our gold standard thinking and unwillingness to run deficits high enough to reach full employment, we are not using the trade deficit to OUR benefit (but just a select few who reap HUGE benefits).

    1. “run deficits high enough to reach full employment”

      The only way I’d subscribed to that is if pushed the level of labor competency up. Intel and Google are run by Chinese, Indian or Russian immigrants. Someday it might pay off to look at the education or incentive system and wonder why science and technology technicians or engineers can’t be home bred. But even if you address that problem now, it’s not going to pay off for another 10 years, at least.

      1. BX12, in the open letter to Obama thread, I have posted some info how over 200,000 detroit households have had power taken away from their homes. The power company is using infrared military drone airplane technology to find and punish these people. They are also lobbying the government to make it a felony to steal electricity. How is little johnny in detroit or johnny’s dad supposed to educate themselves to a new skill/career if they have no lights to read by? No computers? No air conditioning to fight off the heat/cold? No hot water to wash clothes and such? It is amazing to me in the richest country ever in existence, we have disconnected 200K+ households from the energy grid in one city alone – and this technology is going to be used to hunt down and disconnect more citizens in 60 more cities in the near future. We are borg, we should not be cutting off our fellow borg eh from the collective? What is gained by reducing the living standards of millions of people from first world stargate atlantis luxury living to third world survival? I thought Obama was for the people. I like you BX12 can’t understand why the detroit people could not have been educated to do the jobs that indians and russians and chinese do in our country now. Certainly the leaders at the top saw what was coming no? How does forcing them into criminal activity make things better?

    1. Could Krugman have used another model other than this:
      (S – I) = (G – T) + (X – M)
      To be able to draw this conclusion:
      “Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being, running those budget and current account deficits.”

      And btw who wrote this editorial for them

      http://www.nytimes.com/2010/06/10/opinion/10thu1.html?hp

      and refused to put their name on it? It certainly wasnt a staff writer.

      Krugman needs to come out of the closet.
      Resp,

      1. “Yes, threatening an anti-dumping duty would be a big step, and might pose some risks”

        Or how about an ecological duty on Chinese imports, to keep the playing field level? With its hands dripping off of oil, wouldn’t that be a real kick ass?

      2. Bx, that tariff may be too provocative, but it would be a step in a better direction than current policy. We’ve let them run the current account deficit back up to $40B/mo., we could start with a bold/polite $40B/mo FICA tax rebate to all US workers to compensate and consider more via an expanded EITC to compenste to those who have had a reduction in their incomes due to outsourcing of their previous jobs to the ‘dumpers’.

        If we dont start taking bold measures like this or equivalent, and like Krugman says instead take seriously the griping China does about our ‘twin deficits’, then we are Greece and China is Germany, it would be like our incompetent leaders have signed us up for a voluntary two country ‘EMU’ at that point. Resp,

      3. Matt, Michael Pettis and Andy Xie are warning China that serious US push back is coming their way as America enters a very fractious election cycle, with China being viewed as implicated (rightly or wrongly) as a cause of US economic problems. They are advising China not to test the US, or the US will slam them as a matter of domestic political expediency. This would not be good for either of them in the long run, but in the short run, worse for China because the US is still the gorilla in the room.

      4. Through a Google alert on Pettis, I just found that Mish Shedlock has a post on this today that’s pretty interesting here. Mish sees US push back and maybe tariffs coming.

      5. Bx, hang in there, Nissan has the Leaf coming out this year (No gas!,100 mi/charge) and Toyota the plug-in hybrids. Im tracking gas consumption down by about 25M gal/day from 400M to 375M, and am observing most consumer choices being made to move to much better mpg vehicles at the next time for a new vehicle purchase. Weve got the trend moving in the right direction.

        BTW, US should use fiscal to do a ‘Moe Green’ offer to Toyota to buy out their Intellectual Property rights on their 2-mode hybrid and then Open Source it to the entire US auto industry. I operate in a very congested traffic area and often witness huge backups, 3 or 4 lanes solid with bumper to bumper, no one moving, AND ALL ENGINES RUNNING of course. Those OPEC sobs must just be laughing at us all the way to the bank when they look at this as I do!…we are governed by corrupt morons. Resp,

      6. “and am observing most consumer choices being made to move to much better mpg vehicles at the next time for a new vehicle purchase. Weve got the trend moving in the right direction.”

        One area where supply creates its own demand is roads. The electricity used by electric cars is generated from fossil fuels. In populated areas it is not moving in the right direction that electric cars are taking over, it’s just helping perpetuate a bad system, at the expense of the much sounder alternative, PT. Add to that economies of scales and locally produced jobs to build the new infrastructure. One cost that is often overlooked is that of land use, here gain, PT wins by a wide margin (don’t have the number off the top of my head, but an order of magnitude smaller).

  5. The trade deficit has to be dealt with, its like Disraeli said… the castle is not safe if the cottage is unhappy. It may be economically wise to let the current accounts deficit go to the moon (we’re getting real stuff in exchange for IOUs, ha ha), but its devastating import-competitive industries (manufacturers for the most part) and the lives of their employees. The most economically efficient way to deal with this is Buffett’s “Import Certificate” plan.

    The tariff rate is set by market price and pass to exporters (and indirectly to import-competitive industries), so the money stays in the non-govt sector. Alternately, and this may be required to stay clear of WTO violations, the govt. collects the tariff by auction and rebates it as a payroll tax deduction (perhaps more efficient to pass it through to states to lower their sales tax. Besides we’re already axing the payroll tax :o). Either method, the total dollar value of imports is limited by the total dollar value of exports (or exports + X% as the IC market is phased in). Balanced trade via a synthetic exchange rate, good times. As good global citizens, the US can offer technical assistance to any country that wishes to establish its own Import Certificate program (oh, which would happen to be worthless in countries running a trade surplus).

    I’d set up an IC market in tandem with a Vickrey gross markup warrants market. Might as well tackle the trade deficit and inflation in one fell swoop. You’ll want them trading on a single exchange– I dunno, CBOT or Intercontinental Exchange, Tsy can could use the Chicago or Atlanta Fed as its fiscal agent whenever its necessary to step in to buy or sell ICs and markup warrants to deal with economic conditions and/or hammer Goldman Sachs for doing some crooked. :o)

  6. Someday it might pay off to look at the education or incentive system and wonder why science and technology technicians or engineers can’t be home bred

    Let’s just say scientists and engineers don’t have an American Medical Association watching their back to keep out foreign competition and leave it at that.

    RSJ, Check out Art Laffer’s new book, Return to Prosperity. His flat tax proposal (12.5% income/ 12.5% VAT) includes the taxation of unrealized capital gains which even averaged over 5 years and indexed for inflation (as Laffer proposes), raises far more revenue than the present estate tax and capital gains tax currently bring in combined. Considering that the very wealthy primarily increase their net worth via accrued capital gains, even taxing at at the current low capital gains rate, you’d raise more money than a stiff hike in progressive income tax rates.

    1. Beowulf,

      I’m not a fan of Laffer, nor of taxing unrealized gains. What Laffer doesn’t get is that an important purpose of taxation is to oppose the natural tendency of the market to eat the hand that feeds it — i.e. median incomes. It’s not a question of raising revenue — federal revenues run about 20% of GDP, and this was the case when rates were 90% or when they are 35%. But when rates were 90%, we weren’t as demand constrained as we are now.

      What I think would be more constructive would be for any total compensation in excess of, say, 250,000 to be taxable income for corporations. That, and high marginal rates will put a stop to much of the cannibalization. Do that and eliminate payroll taxes for those earning less than 50,000, and cut payroll taxes by 1/3 for all other income groups. This would be a baseline shift, in addition to any counter-cyclical spending.

      None of this is to raise revenue, but to discourage certain compensation structures and encourage others. With the right compensation structures, the private sector would generate more demand endogenously.

    2. “Let’s just say scientists and engineers don’t have an American Medical Association watching their back to keep out foreign competition and leave it at that.”

      nor an American Bar Association…

  7. Yes, I’d agree that w don’t need to to hike taxes to raise revenue either now or in the future, any change in tax policy should be used to shift tax burdens. Related to this, I’ve been reading up about Bill Vickrey the last couple of weeks, what a delightful man! The world is a better place with him having been in it.
    http://www.baltimorechronicle.com/maverick.html

    Anyway, Vickrey’s four urgent tax reform proposals are taxation of accrued capital gains, elimination of tax-exempt interest, taxation of life insurance buildup, and taxation of undistributed corporate profits… Vickrey viewed changes in the tax treatment of capital gains as the most important income tax reform:

    “Nothing short of full taxation of such gains, including those accrued at the death of the taxpayer, can be accepted as an adequate solution. Any less than this means a continuation of a wide open avenue of tax avoidance that completely frustrates any attempt at equitable progression of the tax burden and seriously interferes with the efficient functioning of the economy.” (p.5 of pdf)
    http://www.stanford.edu/~boskin/Publications/Vickrey.pdf

  8. Unbelievable. 11.2 millionaire households…and debt-servitude, poverty and hopelessness for several billion people. You guys have lost your moral compasses—if in fact you ever had one. You accept the existence of a rapacious global financial system that takes from WHOMEVER it can in order to enrich the center. You tout consumption and a money-as-debt system because it makes YOU rich. Meanwhile, a huge preponderance of the world’s citizens live in a neo-fedual world in which cate-system like conditions create hardship for the billions of peons and debt slaves. I’m going to go puke now.

    1. caste, not cate

      And…lest I sound too over-the-top (Hasving just spend two hours reading about the Gulf Oil Spill and having family in New Orleans), let me say this:

      The fundamental reality guiding the creation of wealth, as described in the article upon which we are all commenting, is that we exist in a world in which wealth is more-often than not created through exploitation and theft and fraud and gambling, etc. etc. I wonder: Why is it wealth that we seek? On some what I would consider fairly reasonable level, aren’t we interested in developing communties—the communities in which we live—where schools are good and where food is abundant and where shelter is sound and well-constructed and affordable, and where the members of the community take responsibility foe caring for one-another??? What does the accumulation of WEALTH [sic] have to do with this?

    2. Dan,

      Let me try to alleviate your nausea by pointing out a couple of things:

      1) The accumulation of wealth is NOT a zero-sum game, not even close. J. K. Rowling’s billion dollars of wealth did not come at the expense of poor people. Quite the contrary — she created multiple billions of dollars worth of wealth and kept only about 10-15% for herself. There is not a fixed amount of wealth that needs to be distributed in some fair way. There is an ever-increasing amount of wealth, and setting up a system where people are able to keep a significant fraction of the wealth they create (i.e. capitalism) is the best way we know of to maximize the production of new wealth.

      2) Wealth and/or income do not matter per se in the allocation of real resources. All that matters is consumption. Warren Buffett’s tens of billions of accumulated wealth do not harm anybody because he has no intention of consuming even a small fraction of that amount during his lifetime. Last I heard, he still lives in a 4-bedroom house and drives an old Lincoln. If you look at consumption inequality (which I claim is all that really matters), I think you’ll find it is much smaller than wealth or income inequality.

      3) The extreme poverty we see in parts of the third world has nothing to do with the wealth of Western countries, or even a lack of charitable giving to alleviate such poverty. It is a direct consequence of poor governance in those areas. Tens of millions of people die each year because of lack of access to clean water. In theory, these people could be saved for much less than $1 per day per capita. Who wouldn’t want to pay that? The problem is that giving that amount of money or even 10x or 100x that amount will not get the job done. The money is just stolen or wasted at the local level. It is not the multi-national corporations which keep people in poverty around the globe. It is the lack of rule of law, and the good governance required to maintain it.

      1. The point is priorities. When the goal of economic activity is growth and wealth accumulation instead of prosperity, something is amiss. It’s not the accumulation of wealth that is the problem, it’s the mindset that organizes the global economy and policy around goals that so skewed toward the benefit of a very small number.

        Moreover, it is not so much the money, it is the distribution of real resources based on the fiction of private property as totem, wealth as a fetish, and slef-interest as a god, with corresponding taboos like “redistribution.”

        Yes, it’s the moral compass. This might be excusable if this were somehow necessary, but it is not. We can do better as a species that has evolved a cortex. The knowledge and ability are there, the will is not. This is a moral failing.

      2. “Warren Buffett’s tens of billions of accumulated wealth do not harm anybody because he has no intention of consuming even a small fraction of that amount during his lifetime. Last I heard, he still lives in a 4-bedroom house and drives an old Lincoln. If you look at consumption inequality (which I claim is all that really matters), I think you’ll find it is much smaller than wealth or income inequality.”

        Buffet’s Billions are assets, meaning that they are debts that the rest of society owes him. When Buffet chooses not to consume, but his debtors must still pay, the result is a general glut of goods, deflation, and economic stagnation.

        So you are committing fallacies of composition if you do not recognize that one person’s asset is another man’s liability. When those with assets do not consume, then only those with liabilities can. That can go on for a little while, but in the end it results in a waste of resources. We see that waste as idle labor, unsold inventory, and excess capacity.

        As you say, the only “real” thing that matters is consumption, but excess wealth accumulation hinders consumption just as much as the ability to accumulate wealth can drive consumption. The system must be balanced, and deviations in either direction are equally harmful.

      3. No, not all assets are financial in the sense that they are liabilities (e.g. gold, real estate, a car, a stock — that last one is not the consensus of people here apparently). And not all financial assets are liabilities of human beings (e.g. currency, reserves, Treasury bonds).

        Suppose Warren Buffett’s wealth was all in Treasury bonds. Don’t we discuss all the time here that it is up to the government to provide enough financial assets for aggregate demand to be optimal? If there is insufficient aggregate demand because Warren Buffett is a miser, that’s not the fault of Warren Buffett. That’s the fault of government. It should distribute enough money to make up the difference.

      4. And I should add that the “free market” or “capitalism” solution to Buffet piling up billions in claims on over-indebted households without generating sufficient offsetting demand is that those billions become millions. In the great depression the stock market lost 90% of its value and there were mass defaults. So Buffet’s stock and bond holdings should — in the capitalist model — disappear when he refuses to consume just as rapidly as they appeared when others drove income into his investments. Capitalism requires both gains and losses.

        To the degree that the government prevents liquidation from occurring by supplying enough income to Buffet’s debtors, it should tax the hell out of his holdings, reducing them to the level that they would be if it did not intervene. Only in this way can we maintain a “pseudo” capitalist system in which people’s assets ballon during the spending boom and shrink during the spending slump, all while consumption demand is maintained by the government. Without both gains and losses, assets are not valued fairly, asset allocation is distorted and the result is a subsidy of asset holders.

        And this subsidy, rather than a positive interbank lending rate, drives inequality and rentier income.

      5. It’s completely unnecessary to tax Warren Buffett’s wealth. What good does that do? The government can boost aggregate demand to sufficient levels simply by cutting taxes or spending itself. If Warren Buffett eventually decides to consume (or to give his money away to somebody else to consume), then the government can raise taxes to dampen demand. But it shouldn’t tax away wealth for no good reason. That creates a distortion which discourages the generation of wealth and a distortion which encourages the consumption of wealth. This is one of the reasons the estate tax is counterproductive.

      6. “What good does that do? ”

        Taxing the assets of those who accumulate excessively and supplying an offsetting level of assets to those who do not restores the income flows to a level that supports growth. I agree that this takes away “freedom” — but if you don’t do that then let the “free market” take its course, throw us into a depression, in which case Buffet’s debtors default and his wealth is reduced anyway.

        Because we want to avoid the depression, the government supplies excess income to the debtors, but in this case it also needs to subtract income from the creditors. Otherwise government demand maintenance causes a permanent wealth shift from debtors to creditors that the free market, if left to itself, would not allow. I.e. the government is providing subsidies, and the purpose of the taxes is to remove those subsidies.

      7. ESM

        “The accumulation of wealth is NOT a zero-sum game, not even close. J. K. Rowling’s billion dollars of wealth did not come at the expense of poor people. Quite the contrary — she created multiple billions of dollars worth of wealth and kept only about 10-15% for herself. There is not a fixed amount of wealth that needs to be distributed in some fair way. There is an ever-increasing amount of wealth, and setting up a system where people are able to keep a significant fraction of the wealth they create (i.e. capitalism) is the best way we know of to maximize the production of new wealth”

        I’m not entirely sure about this. There is a fixed amount of resources on the planet and unless govts are creating “new” vertical money there is a relatively fixed amount of money.
        Our living standard is coming at the expense of others standards. This is not meant to induce guilt for our prosperity but we need to be aware that the system is not set up to be win win win for all. There is a lot of zero sumness in our actions. I agree that it doesnt have to be, but our currency rules and trade policies are not non zero sum in nature.

        “Wealth and/or income do not matter per se in the allocation of real resources. All that matters is consumption. Warren Buffett’s tens of billions of accumulated wealth do not harm anybody because he has no intention of consuming even a small fraction of that amount during his lifetime. Last I heard, he still lives in a 4-bedroom house and drives an old Lincoln. If you look at consumption inequality (which I claim is all that really matters), I think you’ll find it is much smaller than wealth or income inequality”

        Not sure its relevant what he intends to consume, his wealth commands attention, accumulates power and definitely influences what others have access to. Again, with our fiat system it doesnt have to be that way but unfortunately it is. We do not have to care what bondholders want but we do. Bondholders are screwing plenty of citizens inEurope and making them poorer in order to maintain their own income. I think yours is a naive position.

        “The extreme poverty we see in parts of the third world has nothing to do with the wealth of Western countries, or even a lack of charitable giving to alleviate such poverty. It is a direct consequence of poor governance in those areas. Tens of millions of people die each year because of lack of access to clean water. In theory, these people could be saved for much less than $1 per day per capita. Who wouldn’t want to pay that? The problem is that giving that amount of money or even 10x or 100x that amount will not get the job done. The money is just stolen or wasted at the local level. It is not the multi-national corporations which keep people in poverty around the globe. It is the lack of rule of law, and the good governance required to maintain it”

        It has to do with the POWER of western interests who have in many cases hijacked the resources of Africa and Central South America for their own profits while the locals make pennies an hour. Many of those countries have people in power that were PUT THERE by western interests. Yes their problems are political and our (not necessarily US but western interest) politics has interfered for years. We cannot credibly just stand back and go “Hey its THEIR doing!”

      8. What IS the endgame. What does a billionaire do with his wealth? He purchases political power and authority in any number of ways—including purchasing political OFFICE because his ‘war chest’ is unmatched in size and scope. He creates, through his very existence, laws and norms that benefit his accumulation of more wealth. He finds ways (HFT comes to mind as but one in a myriad of examples) to “win” the game, and in doing so he appropriates increasing amounts of productive capital from those on the fringes who either buy into his pyramid scheme or who are hapless in the face of his growing authority.

        Look at us. We defend the ability of men to accrue billions in personal wealth, and we excoriate public unions for trying to make life fiscally tolerable for the rank-and-file. Worst of all, we view the poor bastards in Somalia and Kyrgistan and Appalachia and Grand Isle as being—despite our fraudulent cries to the contrary—Darwinian detritus, left to decay in the wake of humanities unbounded and unequaled avarice.

        What an embarrassment of a species we are. What a joke.

      9. A “fixed amount of resources” has little to do with the practical limits of wealth (of which there are none). We are not on the verge of running out of any resource and when we do (e.g. oil) I have no doubt that technology (and the free market) will find a viable substitute.

  9. We cannot credibly just stand back and go “Hey its THEIR doing!”

    Blame the victim is pretty standard in the model.

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