Arnold Kling  

What Next?

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Greenspan, Bernanke, and Bubbl... Stossel Parody...

John Baden writes,


there is diminishing support for institutions that generate wealth rather than redistribute it...both positive and negative values increasingly converge and agglutinate. This promotes substantial class differences. If one is blessed with responsible parents, intelligence, favorable genetics, health, presentable appearance, and the ability to defer gratification, she is exceeding likely to prosper--and to marry one with similar characteristics. However, everyone has one vote. The political calculus is obvious and on bold display; promising voters public largess brings victory and dependency.

Read the whole thing.

Another point I would make, related to the Juan Enriquez talk that I pointed to yesterday, is that we are acting as if we have a lot of fiscal slack. That is, all of a sudden everybody wants the government to provide bailouts and relief, and nobody cares about the deficits that might result.

In Europe, my guess is that they do not have the slack. At some point, their welfare states may be unsustainable, and lenders may start to worry about that. Here at home, I wonder how state and local governments will sustain spending--see New York state. At some point, world investors may decide that U.S. Treasury securities are no longer the risk-free asset.

[UPDATE: My last point is echoed by this blogger.


Once the deleveraging of the markets subsides, the dollar and Treasuries will drop, perhaps with some momentum, as the rest of the world realizes that the US has no choice but to default.

The question I keep asking friends is, "Where should you put your money now?"]


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COMMENTS (17 to date)
jb writes:

The only solace I can take in all of this, at this point, is that the rest of the world is so rancidly socialist that even as the US turns that way, we have far more 'fat' to live on than anyone else.

So, while treasuries may eventually be considered risky, it will be in a world where other countries have embraced a free market philosophy. But it won't be China, or Japan, or Europe, or Canada, or Australia.

Maybe petrodollars will be perceived as safe, but I suspect that engineering know-how is rapidly approaching the 'Peak oil is no longer a problem' phase.

It's unclear to me how long this will take. I suspect 50+ years, so I may not be around to find out.

dearieme writes:

And what do your friends answer?

aaron writes:

Hard commodities, canned goods and shotguns.

Eric Hanneken writes:

dearieme, I'd like to know, too. The only answers I can come up with are securities in emerging markets, and gold. I'm afraid to buy gold, however, because its price is volatile and largely based on speculation.

Does anyone else have ideas?

manuelg writes:

> there is diminishing support for institutions that generate wealth rather than redistribute it...

If there is less brain-drain from Engineering and Manufacturing, into High Finance...

If you are doing Engineering and Manufacturing in the United States, High Finance always seemed like an institution that redistributed wealth, instead of generating it...

floccina writes:

Coca-Cola looks like a good investement now. High profit margin 3.7% divdidend fall number of stock outstanding.

floccina writes:

Oh and another investment idea. For a few years I have been telling people that if more insulation or a new air conditioner have a good payback for them then that is a good investment before looking at stocks. Some home improvements can yield 20% year savings. You cannot get that kind of return anywhere else and remember a dollar saved is like $1.50 earned because you have already paid taxes on it. Then of course there is paying off debt.

winterspeak writes:

What will be world's reserve currency after the US$?

It will almost certainly be gold. You can get fully backed bullion at GLD. The good news is that you don't need much.

Long term, Asia looks a good bet.

aaron writes:

I like floccinas comments.

I also like the idea of investing in what you like. I'm not quite sure the best way to invest in cheeses, steaks, fish, micro brew beers, scotch, and mountain biking. I'm open to suggestions.

What I've done is simply increased my contribution to my retirement account to 25% (previously 5%--rate that gets full matching). I'm making up for undercontributing in recent years and I figure everthing is down now, buy everything (indexed funds).

Greg writes:

Sorry, but this is blatant hyperbole. Political movements go back and forth. Conservative philosophies have been modestly dominant for the last 50 years. Consider the top tax rate going from 90% to 35%. That's huge, and it's not going away. Unfortunately, these "conservatives" along with liberals have also been responsible for reckless spending.

Now the pendulum is swinging the other way, but there are clearly structural limits to how far it can swing. I don't think Obama plans to test those across the board. He has seen what happened to Clinton. Raising the top rate from 35% to 39-40% does not fundamentally change people's incentives to work. As Mankiw notes, his return to work differs by only 10% between McCain and Obama. Obama's biggest risk if he gets elected is disappointing the party faithful with how modest his ambitions are, in my opinion. I hope he does disappoint them, actually, the same way I was hoping that Bush would disappoint the Republican faithful.

Remember how Republicans were celebrating the permanent majority four years ago? Now they're lamenting our slide into socialism or communism. Give me a break.

Anyway, there are lots of reasons for optimism for the future. Technological progress marches on. Small businesses are still considered sacred animals in the US. Capital available for new ventures and corporate restructuring is at an all-time high. And finally, the crisis has if anything shown that the US remains the reserve currency for political reasons if nothing else. Europe's response has been a hash and has shown the difficulty of steering the Euro in a crisis. I would dearly love to get deficit spending down, but a recession is not the ideal time to do so. We will have problems to deal with, but they're not cause for dismay.

Greg writes:

Sorry, but this is blatant hyperbole. Political movements go back and forth. Conservative philosophies have been modestly dominant for the last 50 years. Consider the top tax rate going from 90% to 35%. That's huge, and it's not going away. Unfortunately, these "conservatives" along with liberals have also been responsible for reckless spending.

Now the pendulum is swinging the other way, but there are clearly structural limits to how far it can swing. I don't think Obama plans to test those across the board. He has seen what happened to Clinton. Raising the top rate from 35% to 39-40% does not fundamentally change people's incentives to work. As Mankiw notes, his return to work differs by only 10% between McCain and Obama. Obama's biggest risk if he gets elected is disappointing the party faithful with how modest his ambitions are, in my opinion. I hope he does disappoint them, actually, the same way I was hoping that Bush would disappoint the Republican faithful.

Remember how Republicans were celebrating the permanent majority four years ago? Now they're lamenting our slide into socialism or communism. Give me a break.

Anyway, there are lots of reasons for optimism for the future. Technological progress marches on. Small businesses are still considered sacred animals in the US. Capital available for new ventures and corporate restructuring is at an all-time high. And finally, the crisis has if anything shown that the US remains the reserve currency for political reasons if nothing else. Europe's response has been a hash and has shown the difficulty of steering the Euro in a crisis. I would dearly love to get deficit spending down, but a recession is not the ideal time to do so. We will have problems to deal with, but they're not cause for dismay.

R Richard Schweitzer writes:

Are there any factors to prevent (though possibly impede) the unwinding of government investments in financial institutions (and instruments) through the establishment of something similar to a mutual fund (please not "Trust!") to hold all the preferred and other positions acquired, then offer shares in the fund (tax advantaged, with diminishing guarantees?) to the general public - and recoupe the outlays thereby at some fairly early date?

Consider: How did Fannie and Freddy come to have public shareholders.

Let's go! Everybody start bloging about the best way to plan an exit strategy.

Remove this part of the "deficit" as early as possible by selling "assets." But, dress them up for sale.

Erich writes:

Long on volatility? Long calls on Japanese debt? What would tyler cowen do?

Dr. T writes:

Greg is incorrect. Our trend towards an increasingly socialistic, welfare, nanny-state government has been uninterrupted since 1930. The high tax rates enacted in the 1960s were a sop to the voters: there were so many loopholes that no high earners paid anything close to the top rates. Lowering the rates (while closing loopholes) increased federal revenues from income taxes. (Money that was desperately needed to support Medicare, which cost vastly more than originally estimated.)

The federal government has grown enormous over the past seven decades. Through misuse of the commerce clause it has taken much power from the states. The Bill of Rights has been turned into the Bill of Few, Limited Rights. The federal government is deeply involved in almost every aspect of our life: land use, education, finance, and medical care. I don't see how Greg can look at the trends and claim that they are just back-and-forth political movements. (Unless he's playing 'Mother, May I?' with each step to the left being a giant step and each step to the right being a baby step.)

Walt French writes:

It used to be conservatives such as Art Laffer, who claimed to be able to see second-order effects such as how lowering tax rates could raise tax revenues.

Ah, but when the shoe is on the other foot, you endorse Mr. Baden's promotion of a society where the accumulated dollar calls the tune and someone so irresponsible as to have been born into a family absent two Good Christian Hard-working, Wealth-accumulating parents, well, he gets to dance in the marathon, hoping to win the $10 prize. Never mind multipliers that caused 19th and 20th century America to prosper hugely every time public education, westward expansion or government-sponsored investment in railroads, etc., made sure there was a real carrot in front of average citizens, one that they could not just grab, but set aside for their futures.

We already have The Best Government that Money Can Buy® thanks to campaign financing where the majority of CongressCritters raise most of their funds and votes from Pacs, 527s, unions and other "entities" who are not persons eligible to vote in their districts. In case you haven't noticed, the causality goes from (A) running an ad from a well-financed spiel to (B) Jane Doe pulling the lever for the Right candidate or cause, not the other way 'round.

A little bit of right-wing demagoguery (you were talking about McCain's Joe the Plumber, right?) isn't about to change the mechanisms by which real disposable income per working capita has fallen for Americans in the lower three-quarters of the population. Alas, this country will continue to have a very strong dominance by the wealthy class and their short-sighted self-interest will continue to slow our progress as a nation and our ability to pass a better planet to our children.

My only surprise this year is how dispirited and disjointed a campaign McCain is running in mouthing musty old themes of "waste, fraud and abuse" and pretending that deferring taxes for wars, Part D's and such is somehow more financially responsible or economically valuable than the balanced budgets that "that Socialist" Clinton ran.

Doesn't it seem a bit crazy to be saying that only the top 10% or top 1% are suddenly working so much harder while most Americans are slackers? Is it time to repeal Democracy and all that "rights of man" crap explicitly instead of just de jure?

Erich writes:

I'll interpret this as tyler's answer to my question

Larry writes:

The safe path is to follow Buffett: Be greedy when others are fearful, and fearful when others are greedy. Now is greed time.

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