Gary, your reasoning is spot-on. (Do you really not have a background in economics?) My own knowledge of economics is amateur, so if a professional can set us straight I’d appreciate it. Until then, here are my own rough-hewn thoughts on some more of what you’ve said.
1. “Just like the individual, doesn’t our nation eventually either have to walk away on its debt obligations or begin to make some very drastic and painful changes in spending?”
Precisely. If we do walk away from those obligations (by letting the dollar devalue), we’ll still have to reduce spending, because we won’t have access to new sources of money. But at least we won’t have to reduce spending enough to repay all the excess money we’ve spent in the prior decades. Another part of the solution could be exporting more. We’ll have to do better at making things or services foreigners want.
2. ” ‘For the simple reasons that population is growing and the productivity is also growing. Do the math, if GDP does not grow, the hours worked per person must drop.’
I’m not overly informed I guess, but this doesn’t make sense to me.”
I think the sustainable growth in $ money is the sum of growth in working population, growth in (real) productivity, and inflation. I know you’re saying real productivity may be overstated. Could be. But when it’s measured correctly, you get the conclusion I describe above. E.g. total sustainable money growth = 1.5% (pop) + 1.5% (real productivity) + 3% (inflation) = 6%. I’d guess 4-7% is a reasonable range.
3. “Erring continuously on the side of inflation must certainly have eventual consequence.”
Not inevitably. Savers may get tired of getting hit by inflation, but will that stop people like me who need high levels of financial security from saving? Not much. So the effect could be small. We all need to save some for retirement, regardless of how unattractive the return may get, or for how long.
4. “How long can we continue to put off eventual repayment of our collective debts?”
A long time. If we spend 5% more than we save, it would take 20 years for the extra debt (in real terms) to amount to one year’s income. That’s a lot, but not impossible.
Is today’s state fragile, though? Yes, I think so. Asset prices are maybe 15 times what they were back at the last trough in 1979-1981. After inflation, maybe 5-7 times. Corporate earnings are a bigger % of our GDP than ever before, maybe twice the average, so P/E ratios have a questionable long-term e. Clearly we’re more likely to be at a peak than an average. And importing more than we export to the tune of 5% of our GDP is historically high.
But people want more. People in other countries desperately want more, and know how to get it. The world’s economy will keep growing. So the end of all this fragility is unlikely to be a depression, just some cinching of US belts and a new focus on making more exportable goods and services.
