GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 12

[DrSpike]

I must interject.........the demographic changes you have mentioned are exceedingly important, just not for a labour shortage per se. The reason the changes have received a lot of attention in recent times is because of the effect on how pensions are funded. Now the US doesn't stand the worst by any means, but it will have to make some key decisions in this regard in the coming decades along with all advanced economies.

[Ted Striker]

I agree DanS, the rate of scientific advancement in my opinion has been leaping forward at exponential rates over the last 5 years. What is ironic is that we know more about the other non-medicinal factors in living longer and healthier (primarily eating healthy), yet the US population is becoming more and more sick due to poor eating habits.

Did you hear about the "smart bomb" cancer drugs?

Currently, most anti-cancer drugs work to kill off cancer, but they also kill off alot of healthy tissue as well. Now there are drugs coming out that know how to specifically go after cancer cells and ONLY the cancer cells.

Hey, I have a good idea. Let's plan our budget and complementary tax strategy 10 years into the future, because of course we know the exact amount of revenue that the US government is going to take in and can plan accordingly.

Oh wait.

[Ted Striker]

Spike,

Would you care to elaborate on your analysis of the demographic changes? In particular, what do you think needs to be done (the decisions you mentioned) to make sure this demographic change doesn't become a problem? Thanks for your input, as looking back,you seem to offer a different angle from the rest of the pros on this thread.

[DanS]

Quite true re living healthily and doing more to expand the end-of-life. I was talking more about some rumblings in Washington (unconfirmed, speculative, and hush hush of course) over the past couple of years that there will be a young adulthood expansion therapy, involving stimulating--female, at this time--reproductive organs.

Anyway, some of the bigger medical/teaching institutions, such as Johns Hopkins, have recently added longevity institutes, funded by uncle sugar, so...

In the immortal words of former Congressman Trafficant: "Beam Me Up!"

[DrSpike]

Originally posted by Ted Striker
Spike,

Would you care to elaborate on your analysis of the demographic changes? In particular, what do you think needs to be done (the decisions you mentioned) to make sure this demographic change doesn't become a problem? Thanks for your input, as looking back,you seem to offer a different angle from the rest of the pros on this thread.

Sure. The age distribution of the population is changing as the baby-boomers come closer to retirement, as you have mentioned. As you probably know this generation's working population funds the pensions of the preceding generation, so that when the system of funding originates you get a freebie. However, whilst this is appropriate in an economy where the demographics are such that they are more than enough workers to support retirees it becomes problematic when the proportion of retirees to working age population increases substantially, as it is the process of doing. The problem reaches a head around 2025.......and most govts need to decide what to do about it now.

Broadly you can pick and mix amongst raising taxes, cutting state pensions, enforcing private saving, privatising pensions completely, raising the retirement age.

Some of these are inevitable, such as changing the retirement age, and some move towards more private saving. Far and away the most interesting facet (hey, it's a very dry area ) of the problem is exactly how this increase should be achieved. When it comes to nuts and bolts I am more au fait with the UK than the US; here we have a basic pension and a secondary means tested pension. My personal preference would be increasing the basic pension to a subsistence level, and abolish the means tested secondary pension. Ultimately, as with all welfare you have to navigate a path between providing a safety net and providing the right incentives to individuals........the approach I discussed does that without resorting to compulsion, which in any case would be politically unpopular and no economist wants to provide more ammunition for the foot draggers.

A brief overview, hope it helps.......if you are interested I can try and dig up some references.

[Ted Striker]

Thanks Spike, very informative and very interesting as well.

Regarding raising the basic pension, I can see that it actually might be a little more sellable nowadays after the 401K disasters of last year. However social security still is a very dirty word. Last summer I know there was alot of talk about reforming the 401K but now I don't hear about it anymore. Bush says now that Homeland Security has been taken care of that his number one priority is the economy. So we will see if that happens or if Iraq stays at the top of the National Dialogue.

One interesting note was that, I was watching a talk show where they had a financial advisor come in and work with couples that had millions of dollars in their 401K and had lost it all. While I appreciated his distribution of the investments (well diversified), his estimates of returns were still way too optimistic for my tastes. He had 3 couples and he predicted a 10% return every single year and had them making over 1 million in their accounts in something like 10 years (can't remember the exact time frame). While this is certainly doable, he seemed to be a little too optimistic in that way that irritates Roland.

This reminds me of the 10 year tax cut predictions that to me it would seem common sense that you can't predict the budget needs 6 months down the road much less 10 years!

[HershOstropoler]

GP:

"I think the Fed should be indifferent to investor booms."

Exactly.

"The Roland crowd thinks that the market dances to the Fed drum."

It does short term especially when the Fed engineers a happy little bubble economy. You and Sten are still ignoring the big picture.

Ted Striker! Welcome back, how's your drinking problem ?

"is the scam that the ITAA perpetuated on the public, and that is myth of the shortage of tech workers in the American workforce. Herr Rechtsberater will appreciate this story."

Nice story, old story. What made me laugh was that people here took that story, just adjusted the "lack" for population size and were crying for the immigration of Indian IT workers. Absurd even by bubble standards....

[Sten Sture]

Originally posted by HershOstropoler

It does short term especially when the Fed engineers a happy little bubble economy. You and Sten are still ignoring the big picture.

Uhh, why do you keep saying that we had a bubble economy? We had an investment bubble in a microscopic sector of the economy. That is a very big difference. Look back again at GDP. I am not sure why you are continuing to judge the Fed based on the NASDAQ chart - which is nearly irrelevant. The Fed kept real rates low because the economy needed them there. If the Fed would have tightened to try to shut down the tech boom it would NOT have worked. Those companies were not being valued on economic fundamentals - they weren't even involved economically. Shut down the real economy and the only assets getting funds are going to be the story stocks that sound like a neat new idea.

If the Segway people mover scooter company gets a market cap of $6 trillion on IPO and they have only sold 20 scooters for 5k a piece should the Fed tighten?? Of course not, it is absurd!

[HershOstropoler]

"We had an investment bubble in a microscopic sector of the economy. That is a very big difference. Look back again at GDP."

Yeah look at GDP. What happened to investment, what happened to savings ?

[DrSpike]

Sorry GP, I nicked this from one of my PMs to you:

The fed has one lever, interest rates, and it uses it to hit an inflation target. The idea that the fed should use interest rates to affect individual private investment decisions through the stock market it 95% ludicrous. I say 95% not 100% because if you can show the imbalances created will ultimately lead to a greater recession than the one we inevitably would have had if interest rates _weren't_ slashed post dot com crash (as Roland wants) then there maybe is a case for tighter monetary policy in the face of a possible bubble. It is not a good case though.

Ultimately it is not the fed's place to say what is and what is not a good use for capital. The idea that lower interest rates lead to misallocated capital is flawed, as I have told Roland a few times. Sure there is more investment when interest rates are lower, but it is private individuals' and institutions' rational response to the changing situation. Now in retrospect it is undeniable capital was misallocated. Could the fed have done anything about it? Yes. Should it? Short of not encouraging the market (I sympathise with Roland's view here) the answer is no.

Ironically the policy that Roland wants in retrospect (higher interest rates) would quite probably have lead to the very scenario he fears most from the swift unwinding of the undeniable imbalances that have built up in the face of looser monetary policy. That is not to say the doomsday scenario is impossible......but it still unlikely, precisely because of the way the fed acted.

[HershOstropoler]

"The idea that the fed should use interest rates to affect individual private investment decisions through the stock market"

Who suggested that ?

"The idea that lower interest rates lead to misallocated capital is flawed"

"lower" relative to what ?

"have lead to the very scenario he fears most"

What we have here is a failure to communicate.

[DrSpike]

You have repeatedly said the fed should have acted to contain your 'bubble'. You have repeatedly said monetary policy was too loose. You have repeatedly said that the imbalances that have been built up through the fed's policy made a Japanese style slump far more likely than it otherwise would have been.

Or are you taking that back now?

[HershOstropoler]

I stick with all of that as you repeat it, just your apparant interpretation above is off the mark.

[DrSpike]

Oh I see. The bit where I said you wanted tighter policy was off the mark? What about the bit where I said you advocated using monetary policy to cool the stock market? Or perhaps the bit where I said you thought 'loose' policy made a doomsday scenario far more likely was off the mark?

You are slipperier than an eel coated in baby oil having slept in a bath of Mr Slippery's slipperiest conconction of slipperiness inducing slippery juice.

[HershOstropoler]

"The bit where I said you wanted tighter policy was off the mark?"

No. But what you implied about directing individual decisions.

"What about the bit where I said you advocated using monetary policy to cool the stock market?"

Wrong. That would be a possible side effect.

"Or perhaps the bit where I said you thought 'loose' policy made a doomsday scenario far more likely was off the mark?"

What scenario ? Japan or a sharp recession ?

If I wanted to be slippery you'd notice. You spent most of your contributions to this thread as an econ textbook argueing against a strawman.

If you can answer a question for a change: Are you denying that a central bank, by forcing interest rates below their natural market level, can create a self-reinforcing consumption and invest boom ? Yes or no.