Friday, October 05, 2007

The Debt That Isn't

#303 The Debt that Isn’t

A caller to the radio program suggested that the national debt is drastically understated and citied an web page endorsed by some influential supply siders, called Grandfather’s Economic report by Michael Hodges.

It’s a long piece that essentially says we spend too much on social programs and not enough on debt reduction. This is fairly typical of the University of Chicago school of economics which is basically the libertarian monetary headquarters.

With all due respect to Milton Friedman and his followers at Chicago, with all due respect to the Nobel committee, to Alan Greenspan, Newt Gingrich and that whole bunch: Nah. With the world economy grown into the complex being that it has become, there is no viable way to retreat from this debt, which is largely a paper debt, and too deeply entrenched to retrench.

Friedman worked fine in the age of the gold standard. And it worked fine when money didn’t circulate at the speed of light through electronic trading terminals. And it worked fine as long as money was used as a placeholder or shorthand for real value, which it hasn’t for decades.

With the instruments of currency trade, derivatives, futures, and so on, and with the psychological component that has become central to trading, we have a system that no one understands.

To reduce the national debt to a level that would satisfy the people like our Mr. Hodges, you would have to eliminate many of the vehicles that make it circulate. To do that would destroy tens of trillions of dollars in real and imagined wealth.

If you don’t like the numbers, the only thing you can do is forgive the debt and start over… the mechanism for which is too difficult to contemplate and carries with it unintended consequences that we cannot even begin to imagine.

Or you can print more money, which would be inflationary, and then try to control the ensuing inflation with interest rates.

The Hodges observations are probably well intentioned. But today, value is less important than the means, speed and complexity of its circulation.

The caller also mentioned under-funded or un-funded pension obligations as a major cause of this debt. Perhaps so. And part of the answer may lie in the recent creation of defined contribution retirement packages, the so-called 401Ks. (Which by the way tax recipients at a potentially higher rate than do old fashioned “regular” pensions.)

He’s right when he says that as an employer, he cannot touch the money once it goes in. But by the same token, he doesn’t account for the underpinnings of this system in which we employees make the investment decisions, usually limited and always based on advice from sources we assume – whether correctly or incorrectly – know more than we do.

Saves a bundle for the employer, even with the relatively generous 50 percent matching that our caller says he provides.

Defined benefit pension plans work as well or better if they’re handled correctly, and if companies don’t try to weasel out of the promises they make… or make promises they can’t possibly keep. And the taxes are much lower, in many cases.

But overall, the economy is its own universe, with its own gravitational fields, its own magnetic forces. The matter and anti-matter are only a part of a system that’s become so complex and reliant on motion that to uproot any single part or group of parts could be universally fatal.

I'm Wes Richards, my opinions are my own, but you're welcome to them.

(c) 2007 WJR

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