Abandon All Hope All Ye Who Enter Here

I’m afraid tonight’s topic is too plebeian.  Because I don’t think in “budget cut” terms the way DC does, I am not impressed with what is being discussed in DC, and in most of the states where there is a shadow of budgetary furor.  Also, because I don’t think about budgets in the “cash” accounting terms that so many do, I am not impressed with what so-called radicals are proposing.  We need to start thinking in full-fledged accrual “net present value” terms with discount rates in the 4-5% range.

To me the Democrats and Republicans are Frick and Frack.  There is little true difference in what they are proposing.  Until I begin to hear real proposals on Medicare and Medicaid, or lesser proposals that are shocking: “We propose to end the departments of Interior, Agriculture, Commerce, Labor, HHS, HUD, Transportation, Energy, Education, Veterans Affairs, EPA, and Homeland Security.  The other departments will be cut in half at minimum, including Defense.”  (There has not been a war I have been in favor of in my lifetime.)

I believe in shared sacrifice.  I would accept the Bush tax cuts being sunsetted.  The budget holes are so big on a long-term basis, that if real cuts aren’t proposed, much less made, that there is no way that the budget will come into balance in the long run.

Cuts like this would result in large job losses in the short run, while in the long run, intelligent labor would get released to more productive uses, leading to far more growth in the long run.  Face it, when so many work for the US Government, it is no surprise that the economy grows so slowly.

So many radical and rational decisions founder because there will be job losses.  I say look past the initial troubles, and think of Eastern Europe.  The nations that took the pain recovered the most rapidly.

Even as our monetary policy has been messed up for over 25 years because central bankers thought we couldn’t take any pain, so should fiscal policy assume that we can take pain.  It is troublesome in the short run, and beneficial in the long run.  One weakness of many macroeconomic models is that they don’t take account of the long-term resilience of economies, but focus on short-term losses, as if that were all that goes on.

When the budget is this far out of balance on a net present value basis, every sane proposal sounds insane to those who think the past should continue.  And many insane proposals sound sane, thinking that the past is prologue.

Okay, who is willing to step up, and balance the budget in the long run?  Who?

The silence deafens.  Maybe we will get some who say it never has to be balanced, or that we just have to get deficit growth below nominal GDP growth, or that we can do an external default that sabotages the rest of the world, while we get our house in order.

Sadly, our time of flexibility has escaped us.  Aside from the concept of an external default, or creating a dual currency, things are probably so bad that we are simply waiting for the crisis to hit, and that there are no measures that can prevent the crisis now.

(Still, the easy way out is eliminate Medicare and Medicaid.  But who would have the guts to try that?)

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About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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