LBYM is not factored into our economy

[Gone4Good]

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.

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.

 

[kombat]

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?

 

[stoutboy]

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.

 

[Sam]

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.

 

[Gone4Good]

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.

 

[Focus]

Entertainment will increase, but guess what....our house will be fully paid off in 3 years...one year before rehirement.

A Freudian slip?

 

[youbet]

+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.

 

[Nords]

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:

Boomers retire...

 

[Independent]

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.

 

[mickeyd]

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.

 

[EO 11110]

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.

 

[HFWR]

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

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)

 

[Independent]

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.

 

[chinaco]

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!

 

[MasterBlaster]

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.

 

[chinaco]

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.

We will see what happens.

 

[Danmar]

First thing they should do is phase out mortgage tax deductibility. Really a stupid thing-no such deduction north of the border. Also, agree with youbet- spending 30% more in retirement than before and having a lot of fun doing so.

 

[Gone4Good]

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

And you'll notice that many oil producing countries, like Saudi Arabia, also have a dollar peg. Saudi, for example, has FX reserves 30% greater than those of India, notwithstanding a GDP one quarter its size.

Beggar thy neighbor policies are employed far and wide, even if it's China who gets all the attention.

All of those excess reserves reflect loans to the country in which the currency is denominated, mostly the U.S. That serves to depress interest rates in the recipient country, discouraging savings and encouraging consumption. Decades of deliberate export focused economic growth policies by our trading partners have made the situation increasingly worse. We never cared because the world was loaning us cheap money to buy stuff with. That system is looking increasingly unstable.

 

[Emeritus]

Without saving, there is no investment. Without investment, there is no capital formation or growth. So the economy requires saving just as much as it requires spending.

Actually the economy requires productive investment. Whether that investment is public or private is not really important. What is important is that it is productive. Building the Brooklyn bridge is productive. Building a bridge to nowhere is not. Both the public and private sectors make productive and unproductive investments.
But as Adam Smith wrote
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce....