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Old 10-19-2010, 10:03 AM   #21
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Originally Posted by mickeyd View Post
1) As consumers, it is our job, no, our requirement, to spend at breakneck speed. Our economy requires it.
2) Debt is part of the fabric of our economic system ever since the Fed got involved in 1913.
3) Savings has no (little?) place in the formula.
4) The economy as a whole does not care about our personal interests.
5) You spend; they profit. This is how the American economy works.
I added the numbers ...

1) IF we've been spending at a breakneck speed, a sudden change leads to lots of dislocations which have real cost. That doesn't mean our economy couldn't be sustainable with lower levels of consumer debt.
2) Debt was part of the fabric of our system long before the Fed. Debt is a good thing when it's the other side of a voluntary transaction that involves somebody deferring consumption.
3) Our economy couldn't last without savings, and I wouldn't know where to find an economist who would disagree with that.
4) Correct. Adam Smith explained how an economy can work efficiently even if it's a totally impersonal set of rules. It's not a moral system, but it's not immoral either.
5) You work, earn, then choose to spend or save. Some private businesses are planning to make a profit on your spending, some are trying to make a profit on your saving, many are interested in both your spending and saving.

I think I'm saying there is nothing inherent in free market capitalism (or fiat money, if that's your underlying concern) which forces us to over-spend and under-save. If Americans do that, IMO it shows that we aren't using this tool as well as we should.
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Old 10-19-2010, 10:05 AM   #22
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I see those "warnings" every now and then, but all of them are published in the financial section of newspapers and magazines.

I could not recall a single warning or encouragement from our USA government promoting personal saving, have you?
What about tax breaks on ROTHs IRAs 401k etc.

I'd also like to see the US do something similar to the UK with "Individual Savings Accounts". These are similar to IRAs, but they are not for retirement, just regular saving and investing. You can put in around $15k a year and all the dividends and capital gains are tax free.
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Old 10-19-2010, 10:06 AM   #23
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You are both right and wrong. Our national savings rate was actually quite healthy until the early-mid 1980s. That's when "Greed is Good" became respectable and living beyond one's means became the norm. One can clearly mark our national decline from that point, and it has only accelerated since. We are embarked on a race to the bottom.

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Originally Posted by mickeyd View Post
Based on information that I have absorbed over my lifetime of trying to understand American economics, this is how I see it.

As consumers, it is our job, no, our requirement, to spend at breakneck speed. Our economy requires it. Debt is part of the fabric of our economic system ever since the Fed got involved in 1913. Savings has no (little?) place in the formula. The economy as a whole does not care about our personal interests. You spend; they profit. This is how the American economy works.

Am I wrong?
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Old 10-19-2010, 10:10 AM   #24
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You are both right and wrong. Our national savings rate was actually quite healthy until the early-mid 1980s. That's when "Greed is Good" became respectable and living beyond one's means became the norm. One can clearly mark our national decline from that point, and it has only accelerated since. We are embarked on a race to the bottom.
It's interesting that you trace the timeline to a significant electoral shift and a change in political leadership. I'm sure that's just a coincidence; wouldn't want to get all political here....
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Old 10-19-2010, 10:18 AM   #25
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What about tax breaks on ROTHs IRAs 401k etc.
That's true. Thanks.
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Old 10-19-2010, 10:20 AM   #26
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I added the numbers ...

1) IF we've been spending at a breakneck speed, a sudden change leads to lots of dislocations which have real cost. That doesn't mean our economy couldn't be sustainable with lower levels of consumer debt.
2) Debt was part of the fabric of our system long before the Fed. Debt is a good thing when it's the other side of a voluntary transaction that involves somebody deferring consumption.
3) Our economy couldn't last without savings, and I wouldn't know where to find an economist who would disagree with that.
4) Correct. Adam Smith explained how an economy can work efficiently even if it's a totally impersonal set of rules. It's not a moral system, but it's not immoral either.
5) You work, earn, then choose to spend or save. Some private businesses are planning to make a profit on your spending, some are trying to make a profit on your saving, many are interested in both your spending and saving.
+1

I'll expand on #4 to say it is not a moral or immoral system, it is an amoral system. It is not designed to reward virtue and punish vice, it's designed to allocate resources and couldn't care less about any puritanical notions of right and wrong. Nor should it.

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I think I'm saying there is nothing inherent in free market capitalism (or fiat money, if that's your underlying concern) which forces us to over-spend and under-save. If Americans do that, IMO it shows that we aren't using this tool as well as we should.
It seems pretty clear, though, that the mercantilist policies of our trading partners (managed exchange rates, centrally planned export policies, etc) and the largely laissiez-faire policies of the U.S. have lead to a situation where we borrow a large chunk of the world's savings and they borrow a large chunk of our consumption. This isn't a product of free market comparative advantage, but rather of manipulated markets on one side and relatively open markets on the other.
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Old 10-19-2010, 10:26 AM   #27
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Without saving, there is no investment. Without investment, there is no capital formation or growth.
Is this true? Couldn't the businesses simply borrow any needed capital, and pay it back with profits? Don't lots of private businesses succeed just fine without the injection of any external investment capital?
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Old 10-19-2010, 10:30 AM   #28
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Is this true? Couldn't the businesses simply borrow any needed capital, and pay it back with profits? Don't lots of private businesses succeed just fine without the injection of any external investment capital?
they borrow from the savers--well actually the banks where the savers keep their money.
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Old 10-19-2010, 10:41 AM   #29
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they borrow from the savers--well actually the banks where the savers keep their money.
or they borrow from the banks and the banks get the money from the government printers. This scheme can not last forever, but has been used before.
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Old 10-19-2010, 10:46 AM   #30
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Is this true? Couldn't the businesses simply borrow any needed capital, and pay it back with profits? Don't lots of private businesses succeed just fine without the injection of any external investment capital?
This is true by accounting identity S = I (savings = investment).

For someone to borrow, someone else has to lend.
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Old 10-19-2010, 10:48 AM   #31
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Entertainment will increase, but guess what....our house will be fully paid off in 3 years...one year before rehirement.
A Freudian slip?
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Old 10-19-2010, 11:08 AM   #32
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+1

I expect my personal expenses to go UP once I retire because I will have more time on my hands and I have a very long bucket list to work through. If the expenses don't go up enough, I may have to force myself to spend the money.
Yeah, that's how it's working for us. 4.3 yrs into FIRE, we're definitely spending more than when we were working. And enjoying the hell out of it!

Our costs of working were never very high and were dominated by my commute. Beyond the commute, there was very little else.

Now FIRE'd, travel, house decorating and remodeling, entertaining, doing "stuff" with the grandkids, medical insurance, hobbies, bucket list checkoff's, etc., all add up. We have no regrets for having planned it that way.
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Old 10-19-2010, 01:00 PM   #33
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The cycle will look like this: Boomers retire and begin spending down their assets and eventually die (some sooner than later). The job vacancy is filled by some new college graduate. The retire boomer spending + the replacement worker spending increases spending overall. When the mid career person's boomer parent dies, they inherit, that money will be spent or free up resources for them to spend more (in total).
According to the popular media's "OMG you aren't saving enough for retirement" campaign, I think the cycle breaks down right... about... here:
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Boomers retire...
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Old 10-19-2010, 01:25 PM   #34
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It seems pretty clear, though, that the mercantilist policies of our trading partners (managed exchange rates, centrally planned export policies, etc) and the largely laissiez-faire policies of the U.S. have lead to a situation where we borrow a large chunk of the world's savings and they borrow a large chunk of our consumption. This isn't a product of free market comparative advantage, but rather of manipulated markets on one side and relatively open markets on the other.
I'll agree with this.

I think a lot of moralizing about our "excess debt" could be replaced by noting that if a nation runs a trade deficit it will automatically borrow to cover it. And, to the extent that trade deficit is your trading partner's rejection of a free market in currency, you probably should be doing something about the currency issue if you don't like the debt.
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Old 10-19-2010, 02:06 PM   #35
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What about tax breaks on ROTHs IRAs 401k etc.
Good point however, my cynical side says that Congress made these plans available to us so that current (Roth IRA) and future (401k etc) Congresses could generate income tax on the entire mess. Nothing is free of taxes.
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Old 10-19-2010, 03:01 PM   #36
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they borrow from the savers--well actually the banks where the savers keep their money.
That's a popular misconception. The US uses fractional reserve banking. Essentially banks create money to loan.

If you deposit $10,000 dollars in your bank, the bank can loan $100,000 to other customers. It creates $90,000 out of thin air.

This explains why there is a bank on every street corner.
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Old 10-19-2010, 03:13 PM   #37
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I don't vouch for the accuracy of this, but a majority of our trade deficit is because of the amount of oil we import...

US Trade Deficit - A Description of the United States Trade Deficit and Its Impact on the US Economy

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America's dependence on foreign oil drives the trade deficit. In 2009, the U.S. imported over $253 billion in petroleum-related products while only exporting $49 billion.Petroleum-related products include crude oil, natural gas, fuel oil and other petroleum-based distillates such as kerosene. This oil-related deficit of $204 billion was over half of the total 2009 trade deficit of $380.7 billion. (Source: Bureau of Economic Analysis, U.S. Trade, Exhibit 9)
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Old 10-19-2010, 04:19 PM   #38
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That's a popular misconception. The US uses fractional reserve banking. Essentially banks create money to loan.

If you deposit $10,000 dollars in your bank, the bank can loan $100,000 to other customers. It creates $90,000 out of thin air.

This explains why there is a bank on every street corner.
I believe it goes this way: If you deposit $10,000 dollars in your bank, that bank can loan $9,000 to other customers. It only needs to keep $1,000 in the vault. (We're both assuming 10% reserves.) The bank owes you interest, or services in lieu of interest, on your $10,000. It collects interest on the $9,000 it loans out.
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Old 10-19-2010, 04:35 PM   #39
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According to the popular media's "OMG you aren't saving enough for retirement" campaign, I think the cycle breaks down right... about... here:

It would seem like it wouldn't it.

But consider the liquidation of all owned assets by boomers. Many people own houses, they have some level of savings.

When they transition to SS... that expenditure (as a minimum pension) plus the liquidation of their assets... add on the replacement worker who is younger and spending everything to get established....It will yield an increase in dollars spent by adults.

The thing that would break that is if we have a net loss of jobs for the long term or if the replacement jobs are much lower in earnings (on average). I suppose it could happen... but I do not believe it will.

I think the next generation could be looking at a big boom cycle... but it might take a while to climb out of the last bust!
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Old 10-19-2010, 04:47 PM   #40
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I think the next generation could be looking at a big boom cycle... but it might take a while to climb out of the last bust!
You have forgotten about those pesky unfunded/underfunded liabilities that are out there and promised to the Boomers. To fund some percentage of what has been promised means higher taxes and lower growth. Most analysis sees nothing but the opposite of a big boom cycle. The liabilities far exceed the assets.
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