If you are looking for an easy read, you might want to skip this one, since it will involve some math and a lot of mental contortions. But reading a paper by the Bank for International Settlement has shown me that – whether you like it or not – there is a way in which governments can run large budget deficits forever without being punished for it.
I am not anywhere near a financial guy or a quant, so I will need time to digest this. But on the surface, it seems this is an equation with constraints and the feds are using some form of Lagrange multiplier (financial repression?). This means the critical points for spending, outstanding debt, (g-r) or (m-r) would be subject to some ideal value or limit. Now, if private investments for higher-income households get a bubble effect from this (to keep m higher?) and lower-income households languish with the repressed interest rates r, the same government that is looking to provide jobs (infrastructure, higher GDP) is also increasing the inequality gap. I love irony but not here. If the government makes a patch job of increasing taxes on the higher-income households, wouldn't that diminish the capital base of the "rich" from which return m can be generated and eventually lower the allowable gap m-r and any future spending program?
What is the projected number of "rich" as in not really wealthy but potential equity participants as we are encouraged to sock away 401K and IRAs (because surely by fear of inflation, the retirees will have to invest their retirement accounts as if they are "rich", yet once they get to RMD - required minimum distributions, the tax factor above will come to haunt them.
Meanwhile, some of the "value" stocks are doing buybacks and borrowing heavily to prop up their dividends so they appreciate abreast the growth stocks - i.e. join the stock market party?
Before I wrote this, I thought I needed a pencil to try to follow the math, now I am just looking for a spoon. I think my teeny brain just splattered on the floor.
If the real interest rate is greater than zero (r >0), the purchasing power of the investors would increase (hence their wealth would increase). At the same time, if the GDP growth is zero investors would not find better opportunities elsewhere in the economy (risky investments). So why would investors view new issues as part of Ponzi scheme?
Also, governments could keep printing the money to repay debt and stimulate the economy for growth. Once the desired economic growth is achieved government could start issuing new debt to control unsustainable growth and inflation.
One issue with this model is that it assumes the marginal return on every unit of money spent by the government remains constant. It is this fallacy that led China to build highways to ghost cities and America ending up with government cheese. When fiscal policy is involved it tends to be so large compared to its target market that the effect of diminishing returns kicks in really quickly (which means the practical m is could be much lower than the theoretical m).
I am not anywhere near a financial guy or a quant, so I will need time to digest this. But on the surface, it seems this is an equation with constraints and the feds are using some form of Lagrange multiplier (financial repression?). This means the critical points for spending, outstanding debt, (g-r) or (m-r) would be subject to some ideal value or limit. Now, if private investments for higher-income households get a bubble effect from this (to keep m higher?) and lower-income households languish with the repressed interest rates r, the same government that is looking to provide jobs (infrastructure, higher GDP) is also increasing the inequality gap. I love irony but not here. If the government makes a patch job of increasing taxes on the higher-income households, wouldn't that diminish the capital base of the "rich" from which return m can be generated and eventually lower the allowable gap m-r and any future spending program?
What is the projected number of "rich" as in not really wealthy but potential equity participants as we are encouraged to sock away 401K and IRAs (because surely by fear of inflation, the retirees will have to invest their retirement accounts as if they are "rich", yet once they get to RMD - required minimum distributions, the tax factor above will come to haunt them.
Meanwhile, some of the "value" stocks are doing buybacks and borrowing heavily to prop up their dividends so they appreciate abreast the growth stocks - i.e. join the stock market party?
Before I wrote this, I thought I needed a pencil to try to follow the math, now I am just looking for a spoon. I think my teeny brain just splattered on the floor.
If the real interest rate is greater than zero (r >0), the purchasing power of the investors would increase (hence their wealth would increase). At the same time, if the GDP growth is zero investors would not find better opportunities elsewhere in the economy (risky investments). So why would investors view new issues as part of Ponzi scheme?
Also, governments could keep printing the money to repay debt and stimulate the economy for growth. Once the desired economic growth is achieved government could start issuing new debt to control unsustainable growth and inflation.
One issue with this model is that it assumes the marginal return on every unit of money spent by the government remains constant. It is this fallacy that led China to build highways to ghost cities and America ending up with government cheese. When fiscal policy is involved it tends to be so large compared to its target market that the effect of diminishing returns kicks in really quickly (which means the practical m is could be much lower than the theoretical m).