"Betting The Ranch" (Q&A-12)

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"Betting The Ranch" (Q&A-12)

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---------------------------- Original Message ----------------------------
Subject: Betting The Ranch (Q+A-12)
From: Solutions
Date: Tue, October 1, 2013 8:01 am
To: John Karls

Dear John,

Your Answer-12 concludes: “And kudos to Princeton U. Economics Nobel Laureate & NY Times OpEd Columnist Paul Krugman who has argued for stronger economic stimuli from the get go!!! [If you are going to gamble with the American economy, as described in the next two Q&A’s, then any Las Vegas gambler would tell you to go “all in”!!!]”

What did you mean exactly by that parenthetical?



---------------------------- Original Message ----------------------------
Subject: Re: Betting The Ranch (Q+A-12)
From: John Karls
Date: Tue, October 1, 2013 2:34 pm
To: Solutions

Dear Solutions,

The parenthetical references “the next two Q&A’s.”

They describe in graphic detail what can easily happen if disaster befalls the “bet” that is being recommended by our author in our focus book, and by Professors Lawrence Summer & Paul Krugman in their reviews.

Q&A-14 points out that even our third-party debt (which excludes amounts owed to other governmental agencies such as the Social Security trust fund) already exceeds Spain’s debt as a percentage of annual national income, when the ability of the Spanish government to continue borrowing AT ANY RATE came under attack in 2011 and was bailed out by Chairman Bernanke and his U.S. Federal Reserve.

When anyone’s debt sinks to “junk bond” status, an individual is extremely lucky to obtain a new credit card (or credit-card increase) at 30% and the same is true of corporations!!!

Since there is no Celestial Reserve Bank to bail out the U.S. government if the value of its debt is attacked in the market by investors, the U.S. would not only be lucky to be able to finance its current deficits which are additions to its total accumulated debt AT ANY RATE, BUT A MERE 20% INTEREST RATE ON ITS EXISTING DEBT WOULD MEAN (SINCE 20% OF TOTAL ANNUAL U.S. ECONOMIC OUTPUT IS THE LEVEL OF ANNUAL U.S. GOVERNMENTAL REVENUE OVER THE LAST DECADE OR SO) THAT ALL OF OUR REVENUE WOULD HAVE TO BE USED TO PAY INTEREST ON THE DEBT AND NOTHING WOULD BE LEFT TO PAY FOR ANYTHING ELSE!!!

Moreover, since as we have studied in the past, a country’s currency is nothing more than zero-coupon infinite-maturity debt, an attack on the value of U.S. debt would also entail the value of the U.S. dollar going in the toilet.

So Q&A-13 points out two prominent examples of countries whose currency did go in the toilet (starving 1930’s Germany trying to run on the British Pound Sterling and starving 1990’s Russia trying to run on the U.S. Dollar) because there were tremendous economic dislocations during such transitions as virtually all non-farmers tried to grow food in their back yards and/or hoped they were related to a sufficiently attractive young woman who could barter sexual favors for food.

Since the U.S. is in worse shape than Spain in 2011 when the value of its debt came under attack in the markets, nobody who advocates huge U.S. governmental deficits as an application of fiscal policy (aka Keynesian economics) to lift the U.S. economy out of its malaise -- whether our author, Prof. Lawrence Summers who at least is cautious, Prof. Paul Krugman who is Gung Ho, or President Obama who is not even an economist -- can guarantee that the result will not be disaster on the order of starving 1930’s Germany or starving 1990’s Russia.

Accordingly, if we are going to gamble with America’s well-being, better to apply a massive jolt that we know will be sufficient to restore an acceptable level economic activity if the additional governmental debt does NOT cause “the sky to fall” in the form of disaster on the order of starving 1930’s Germany or starving 1990’s Russia.

Because there’s no point in “playing with fire” permanently for mediocre results.

The parenthetical reference to Las Vegas in Answer-12 was meant to convey the idea that every gambler knows (even though most ignore it in practice) that if you make one massive bet, you have a chance of winning but if you keep betting, the house always wins!!!

So I’m with Krugman -- if we are going to gamble whether tomorrow we will all be back-yard farmers and our daughters will be whores, let’s at least make the one sufficiently-large “bet with the devil” that gives us a chance of salvation!!!

If you have any further questions, please advise.

Your friend,

John K.

PS = Before you send me another e-mail querying whether Prof. Krugman and I see "eye to eye," my comment in the penultimate paragraph that "I'm with Krugman" was only intended to mean that he and I both agree on a big jolt -- though I recognize that our motives are completely different (he wants to make sure the mission is accomplished as quickly as possible and I want to limit America to one "bet with the devil"!!!).

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