James Pethokoukis

What a weird column from Paul Krugman. He says Americans shouldn’t worry about the ten-year budget forecasts ($9tr debt,  70 percent of GDP) because a) plenty of other nations have had far higher ratios, b) other countries continue to lend to the US, and c) it’s the longer-term liabilities that are the problem.

But at what point do interest rates rise — especially since huge current deficits give markets scant confidence that America is serious about fiscal soundness? And the current deficits make the fixes to entitlements harder to do. Clearly Krugman wants a Stimulus 2.0 program. He should take a look at my plan to create fiscal space in the present by dealing with entitlements now. And heaven help us if we get another financial crisis within the next generation …

How will America escape its debt trap? The indispensable Arnold Kling puts some odds on various scenarios. An excerpt:

1. Muddle through. No major change in policy, and no major change in economic growth, but somehow the ratio of debt to GDP remains stable. I give this a 10 percent chance, although it implies that I am miscalculating the path that we are on

2. Technology to the rescue. Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control. I give this a 20 percent chance.

3. Policy changes. Congress increases taxes (but does not enact a wealth tax) and/or takes steps to rein in Medicare and Social Security spending.  I give this a 25 percent chance.

4. Inflate away the debt with moderate inflation (between 5 and 10 percent per year). I think this would be politically costly, and it might not be enough to really inflate away the debt (it depends on how quickly bond investors adjust expectations and raise the inflation premium in nominal interest rates). I gives this a 15 percent chance.

5. Wealth tax. The government takes, say, 5 percent of everyone’s personal assets above $100,000. It does this on a one-time basis (or so it says). I give this a 25 percent chance.

6. Hyperinflation. This would certainly expunge the debt, but it would be political suicide.

7. Default. The U.S. simply refuses to pay some or all of its debt.  I think that the combined chances of (6) and (7) are no more than 5 percent, with (7) even less likely than (6).

Me: I think #3 is mostly likely, though I hope #2 happens — and there is a greater chance of that happening than most policymakers realize.

I don’t think cap-and-trade is going anywhere soon, but its opponents are not letting up on the pressure (via The Hill):

Advocates for manufacturers and small businesses are launching a multimillion-dollar ad campaign against climate change legislation in states represented by senators likely to determine the bill’s fate.

The National Association of Manufacturers (NAM) and the National Federation of Independent Business (NFIB), groups that have historically leaned Republican, are targeting the House Waxman-Markey bill as a threat to the economy because it would raise energy costs.

Karen Tumulty of Time opines:

The bill most likely would attempt to cover children who have not received coverage under other federal programs, and possibly their parents. It might also expand the Medicaid program to low-income people who do not currently qualify.  … If the Senate decides to pass the bill under parliamentary rules that prevent a filibuster, it may also have to get rid of other provisions that do not directly affect federal spending, such as those that attempt to encourage wellness programs and more preventive care.

Another problem with trying to write a scaled-back bill is that so many elements of health reform are interconnected, politically and substantively. … Making an individual mandate work requires subsidizing people who could not buy insurance on their own, and that is expensive. Cut the subsidies and the mandate back too far, and insurance companies — deprived of the millions of new paying customers promised under broader proposals — could end their support of the deal, which would include new requirements that they sell affordable policies to people with pre-existing conditions.

Me: This is what I have been saying. A rump bill passed in the senate under reconciliation would expand children’s health insurance (SCHIP) and expand Medicaid and perhaps pay for it all with a surtax on upper incomes, though some Dems think they can push through a public option, too. Anything else — regulations, health exchanges — would have to pass in a separate bill. But  a hard-line move by Dems would through Congress into an uproar and I doubt anything else would pass.

The most obvious way to predict a stock market crash is to find out when I go all in. But there may be another, says New Scientist:

Now a team of physicists and financiers have bucked the trend by successfully predicting a steep fall in the Shanghai Stock Exchange. …  The idea is that if a plot of the logarithm of the market’s value over time deviates upwards from a straight line, it’s a clear warning that people are investing simply because the market is rising rather than paying heed to the intrinsic worth of companies. By projecting the trend, the team can predict when growth will become unsustainable and the market will crash.

Sornette, Zhou and colleagues applied their model to the Shanghai Composite Index, which tracks the combined worth of all companies listed on the Shanghai Stock Exchange, the world’s second largest. Early this year, the index gained 50 per cent in just four months. In July, the team predicted that the index would start to fall sharply by 10 August. The index duly began to slide on 4 August, falling almost 20 per cent in the subsequent two weeks.

Me: I assume this would also work with individual stocks. Econophysicist Didier Sornette has a paper that puts his approach in a bit more context.