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Comments
Peter Halligan
Jan. 2, 9:02 a.m.
John Mauldin’s seekingalpha.com reposted article from Dan and Dave is flawed in two key ways.
One is that terms such as austerity/recession/no way out rather miss the point. Consumption is running way ahead of that which is affordable by consumers, whether these are Governments, companies or individuals. It is not austere, or recessionary or “boxed into a corner” to amend bad behaviour to a level which is affordable and rational. If those in work cannot pay for their consumption (on houses that are too big, cars that are too expensive, diet that is excessive and leisure time that has not been earned) then either they find future lenders for odious debt at usurious interest rates (think vendor financing of all products, including weapons, houses, cars and electronics) or they “get real” and only spend what value they create.
Secondly, monetisation of fiscal or financial excesses (odious debt creation) cannot and never will work for the simple reason that if it did work, we need not pay taxes, ever. We simply print money.
It is about time these points enter mainstream thinking and we stop “scaring” people out of seeking a balanced life style and assuming that “big government” and central bank intervention has any value at all.
The solution is simple. Work out a trajectory for repaying debt by ear-marking a special “debt reduction tax” that retires 5% of outstanding debt every year, until the debt is a manageable proportion of the personal and corporate tax take. I think this is equal to a steady state 2.5% real GDP growth + 2.5% inflation, divided by 10% of the tax take. In the case of the US this would equate to a total (Government + Company + Personal) level of debt of 50% of GDP. It will take about 40-50 years to get to this point, allowing for the reduction of 275% debt to GDP from Exhibit 2 in the article.
This is the penalty (5% of our income per annum to make up for the same rate of benefit) we all have to pay for electing tin horns, snake oil sellers, liars and cheats over the last 40 years or so.