The title of this post comes from what Niall Ferguson wanted to call his Financial Times column, but that title was censored. This video is one of the most important things I have ever posted on this site. I think that the implications are so important and that everyone should start thinking and preparing themselves for the coming surge in interest rates and the rise of inflation.
8 thoughts on “PIGS R US”
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The same day you posted this, Carpe Diem had a post showing that inflation was nowhere to be found. And I posted that I was buying puts on GLD.
A study of history shows that inflation doesn’t hit before a major sovereign debt crisis, but after. But by that time it is too late.
Higher interest rates and/or substantial inflation is in our future. Its just a question of when.
Higher interest rates, certainly. Inflation, maybe. Sovereign debt crisis in the U.S. — I actually don’t think so. I think our leaders will make course corrections before we get too close to that cliff.
Please let me know how exactly they accomplish that.
The broad strokes aren’t hard to see. Americans intuitively are wary of the fiscal picture and fear the consequences. Under these circumstances, politicians ought to be able to sell some austerity as the near term price of longer term prosperity. I think if Americans are dealt with honestly instead of being pandered to, a majority of them will be willing to swallow the medicine.
That medicine could include a VAT to increase revenues on the tax side, and changes in the rates of increase of our entitlement spending. With Social Security, something along the lines of Robert Pozen’s progressive indexing proposal. With Medicare and Medicaid, we can cap increases at the rate of inflation and force changes down the line to comply with that (e.g., bring in more foreign physicians, perhaps by getting rid of requirements that they redo their entire residencies here). There’s also literally hundreds of billions of dollars of fraud in those programs that can be reduced.
Additionally, enforcing our current immigration laws would encourage illegals, who tend to be net fiscal drains, to head home.
Winding up the wars in Iraq and Afghanistan within the next few years would free up another couple hundred billion dollars. We could then free up maybe another hundred billion by reducing some of the generous reenlistment bonuses and other personnel costs needed to run a volunteer military during wartime.
We could also tweak the way CPI is calculated for federal pensions, which could shave another hundred billion or two off of our federal budget.
A hundred billion here, a hundred billion there, and pretty soon you’re talking about real money.
Also, to increase tax revenues, we could adjust our tax system so it encourages more companies to set up shop here, e.g., by cutting corporate income taxes. We could use the VAT to more than make up for the lost revenues. Corporations are more mobile than consumers, so it makes sense to raise taxes on consumers and lower them on corporations.
Oil: down today. My puts on oil royalty trust BPT up today.
Gold: down today. My puts on GLD up today.
Looks more like deflation than inflation at the moment, no?
In the short run, of course, gold and silver and oil can plunge in price. You clearly made a very smart and timely call. But when the currency breaks, and it will, you need to be prepared.
Did you listen to the Niall Ferguson video? Have you gone through the numbers? Do you realize that the interest expense on the debt if about to pass all of our defense spending as a % of the budget?
By 2040, By CBO and BIS estimates, all of our tax revenue will be used to pay interest expense. Does that sound sustainable to you?
How about the fact that to get back to a normalized annual budget we need to cut 12% of GDP from our spending. Do you not think that will have an economic impact?
What do you think is more likely, that politicians raise taxes, cut services, spending or that they print money? My bet is that sure they will raise taxes, but its not enough. They will also print money and that is what history shows what happens.
I highly recommend you read “This Time It’s Different.”
Honestly, I didn’t watch the video all the way through. I will though, when the dust settles. I am a fan of Ferguson. But in your comment above you are assuming current trends will continue unabated for decades. My semi-optimism is based on my belief that they won’t. As Herb Stein said, if something can’t continue, it won’t.
Which means that we will make the necessary adjustments, sooner or later. Obviously, the later we make them, the more painful they will be.