Tuesday, June 22, 2004

marketocracy points out some stuff

With regards to my earlier statements about the Federal Reserve - I posted the prior post on Marketocracy's forums. Another poster pointed out that inflation would eventually mean a higher mortgage and credit card rate - causing a massive crunch at the point when rates rise to meet the inflation and then some so that inflation can be beaten back.

Of course I agree with this analysis. Milton Friedman pointed it out in his books - so have many others.

The point here isnt that it is a good policy - just that it is the most politically palatable, and therefore most likely - policy option.

Why do I say this? It probably ties to my belief that baby boomers generally always have gotten, and will always get, whatevey they want.

When they got their college education - thanks in large part to state funding of education - they quickly moved to get rid of any sort of subsidy for those who were less educated. Then they got a massive tax cut for those making high incomes (who, surprise surprise, happened to have a college education). They also lived through the time when the US called in all of it's debts from overseas and invested it in the US - and then some. They lived in a time when consumption overtook investment, when borrowing became much easier and equities really exploded in value.

But all of this wasnt quite enough - they still needed more "stuff" so they started to borrow against the value of their houses and implicitly borrowed against the value of their shares.

When all this came to a head in 2000 they saved themselves by cutting interest rates drastically, dropping the value of the US dollar and such - but saved their shares value in nominal dollar terms and their home prices continued to appreciate on the back of ever cheaper debt. Added to this - tax cuts were put in place for the richest Americans - many of them baby boomers so that they can continue to spend spend spend.

All of this financed by debt debt and more debt. Borrowing against the value of their houses, their shares, and finally debt issued by the US government to finance their high consumption life styles.

Now - only 8 - 10 years away from retirement it would not surprise me if they took the easiest route out - inflate, borrow and spend, at all levels - especially government, now that they have a willing and able ally in the Whitehouse and Congress.

I would bet that they wont let Social Security, Medicare or the PBGC go away (at least for themselves) - and will succesfully push the costs onto the next generation through budget deficits, reckless monetary and fiscal policy - the concequences of which they wont be around to witness.

As always - the educated, largely white, baby boomers will get their way due to the massive size of their generation; while the young, less educated, or otherwise under represented groups will get the shaft.
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