Paul Murray's weblog, with news you may have missed and my $0.02 worth on a number of topics.

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it."
- Art Buchwald

I bet you don't have a friend who's an acupuncturist

E-mail me: pmurray [at] despammed.com

Bill Gross: GM is the canary in the coal mine. Bond king Bill Gross says that "General Motors is a canary in this country's economic coal mine; a forerunner for what's to come for the broader economy. Their mistakes have resembled this nation's mistakes; their problems will be our future problems." And he grimly predicts that our solutions will analogous to theirs, which will affect everyone, including investors (emphasis in the original):

Owners of these liabilities (either existing/future debt holders, or tax paying corporations/citizens) will likely be the sacrificial lambs of the future. Investors, therefore, should factor in an increasing propensity for higher inflation in future years as debt principal is eroded much like the shaved edges of a Roman coin. Higher taxes, as well, are just around the corner. Finally, currency devaluation effected through a low Fed Funds policy vs. competitor nations and/or global policy coordination should apply the coup de grace for foreign holders of U.S. liabilities. Chinese, Japanese, OPEC, and other substantive holders of U.S. Treasuries will have two ways to lose in future years: they will watch U.S. inflation erode their principal and on top of that the real dollar value of their global purchasing power will decline as the dollar sinks. Actually, the same applies to U.S. citizens although the decline in global purchasing power can be masked by domestic asset appreciation in the short-term (houses, stocks).

If the U.S. chooses to pursue many or most of the above policies, the investment implications are significant, although it must be recognized that I am not speaking to "overnight" developments but instead to changes that should occur in future years. Higher inflation, higher personal and corporate taxes, and a lower dollar point U.S. and global investors away from U.S. assets and toward more competitive economies less burdened by health and pension liabilities -- those personified by higher savings rates and investment as a percentage of GDP. Need I say more than to sell U.S. assets and buy Asian ones denominated in their local currencies; or if necessary to hire a global asset manager with sufficient flexibility and proper foresight to thrive in an increasing difficult investment environment?

posted by Paul Murray at 2:12 PM | permanent link |

So much for "starving the beast." For more than two decades, the GOP has argued that cutting taxes will force the government to rein in spending. Well, guess what? Not only is this not true, but the opposite is true -- government spending actually increases when taxes are cut. From Sebastian Mallaby in today's Washington Post:

Everybody knows that the Reagan tax cuts did not actually cause spending to come down in the 1980s; most people have surely noticed that the Bush I and Clinton tax hikes were followed by spending constraint in the 1990s; and the Bush II tax cuts certainly have not stopped Congress from spending like a drunken sailor recently. But then the plural of anecdote is not data, and until the starve-the-beast theory is conclusively discredited, tax cutters won't stop hiding behind it.

Well, now it has been discredited. [In the new issue of Atlantic Monthly, Jonathan] Rauch cites William Niskanen, an economist who worked in the Reagan White House and now chairs the Cato Institute. Niskanen has crunched the numbers between 1981 and 2005, testing for a relationship between tax cuts and government spending, and controlling for levels of unemployment, since these affect spending and taxes independently. Niskanen's result punctures his own party's dogma. Tax cuts are associated with increases in government spending. The best strategy for forcing cuts in government is actually to raise taxes.

One can speculate about why this is. Maybe cutting taxes before cutting spending makes government feel cheap: People are still getting all the services they want, but they are paying less for them. Maybe this illusory cheapening has a perverse effect: Now that government feels like a bargain, people want more of it. But the really interesting question isn't why the starve-the-beast theory is 180 degrees wrong. It's how Republicans will react to this finding.

posted by Paul Murray at 11:44 AM | permanent link |