I'm sceptical of future equity returns myself, and I like the general thrust of the argument, but how can earnings growth of publicly traded companies be less than half that of the GDP growth? Is there research to substantiate that?

Some have suggested capital will continue to get higher returns by capturing a larger and larger share of net national income as population growth slows.

What happens in society if that happens? How low can wages go as a fraction of GNP?

I may be a bit confused after reading all of the Vox Baby post.

If we don't consider GDP growth at 1.9% per year to be realistic, why don't we build a discussion around another figure?

If we do believe that GDP growth at 1.9% per year to be fairly accurate, then it is clear that I need to shift much of my portfolio to Asian stocks. I reached the same conclusion after reading the CIA's 2020 Project report.

I also believe that ChasHeath's question about how low can wages go as a percentage of GDP is a valid issue. Particularly if you expand the consideration to include reduction in benefits, including DB plans, health coverage, changes in corporate/company contributions to 401(k)s, and other eliminated perks. But decling productivity will mute the macro GDP argument, as new hires drive up the wage costs. Still, the individual wages and benefits, on the whole, do not appear to be moving in a large net positive direction.

I don't see the upside of shifting to private accounts and further stock market investments under the current projections. Unless we're going to invest offshore.

Ok, straighten me out. What am I overlooking?

Historical stocks returns can only be sustained in coming years if economic growth is faster than 1.9% or price earning ratios increase in dramatic fashion. Faster economic growth will make worrying about Social Security meaningless, for the current fine system will be able to pay full benefits for the century. Continually higher stock market valuations will present us with ever more danger as with NASDAQ valuations before 2000. Rationales make no investment sense.

The Asian stock market, generally because of Japan, has been vastly risky for investment since 1990. This may in time be a partial answer, but not now.

You guys have simply missed the point--

http://home.earthlink.net/~cdtavares/direcway/miracle.jpg

Matt

That's pretty good!

Warren Buffett has long argued that traditional investing principles and valuations will prevail in the long run. Conservative economists are arguing quite the reverse. This is confusing and troubling.

Matt - great cartoon! Went back to my chalkboard over at Angrybear where I tried to note a model that incorporated what Brad was saying by having payout ratio = 1 minus investments in new tangible assets required to support growth. And the only way I got the P/E ratio not to fall with lower growth is to assume asset value to equal only tangible asset value with P/E = inverse of cost of capital. But wait, that implies P/E ratios in the low teens. Need to seriously rethink.

Anne

Thanks very much. Good points.

Follow up: "Faster economic growth will make worrying about Social Security meaningless, for the current fine system will be able to pay full benefits for the century. Continually higher stock market valuations will present us with ever more danger as with NASDAQ valuations before 2000. "
----

If I may, here are a few budget issues vs. projected/potential GDP growth rates.

I would ask a Republican friend who used to be the deputy director of OMB, but he wouldn't want to touch this. So, I'll ask you to be the Acting Director of OMB for a few minutes. Congratulations and Good Luck! :)

Where is the following funding coming from? How many marketable Treasury bonds are we willing to put on the market?

-----
Social Security -

"If approved by Congress, the government would have to find at least $664 billion between 2009 and 2015 to pay immediate Social Security benefits. Bush and White House officials did not disclose how that shortfall would be met."

http://www.azcentral.com/news/articles/0202howitwouldwork-ON.html

"The administration official said funding the individual accounts would cost $754 billion through 2015. But because of the phase-in, the personal-accounts system would not be fully effective until 2011."

"In its first 10 years, 2009 to 2018, the system would cost more than $1 trillion, Furman said. Between 2019 and 2028, the cost would jump to about $3.5 trillion, he said."

http://www.washingtonpost.com/wp-dyn/articles/A60749-2005Feb3.html

Projecting to 2015 appears to involve $664b + +$754b = $1.418 trillion

* I am assuming that the AZCentral knows the difference between transition costs and existing program shortfalls (elimination of the surpluses). My calculation is very close to their projection.

My understanding is that transition costs do not reflect replacement monies or IOUs to the SSA for lost (PA diverted) surpluses; transition costs only cover replacement of lost surplus revenues to the general fund of each fiscal year.

Social Security:

$1.418 trillion - through 2015

-----
Medicare/Medicaid -

"The Congressional Budget Office estimated five years ago that federal spending on the elderly would grow to more than $1 trillion -- 43 percent of the budget -- by 2010 from $615 billion -- or 35 percent of the federal budget -- in 2000."

"By 2015, spending on the elderly will consume nearly half the federal budget through Medicare and Medicaid, pensions for federal workers and military retirees, veterans' health care and pensions, coal miners' benefits, Supplemental Security Income, food stamps, heating and housing assistance and other programs for the elderly, according to the Brookings Institution."

"At that point, Medicare spending will be growing at more than 8 percent a year and Medicaid at nearly 9 percent -- rates that dwarf the problems of Social Security, said Douglas Holtz-Eakin, the CBO's director. "Medicare and Medicaid spending triples, maybe quintuples by 2050, while Social Security goes up by 50 percent," said Holtz-Eakin, a former White House economist."

http://www.contracostatimes.com/mld/cctimes/news/10831583.htm

Medicare/Medicaid:

$1 trillion (?) - through 2015 (I believe costs rise rapidly after 2010 or 2012, according to SSA data)

-----
Extended tax cuts -

$1-2 trillion (?) - through 2015?

-----
Mars missions -

?? (Is this DOA?)

-----
GWOT - (Global War on Terror)

$0.5 trillion - through 2015 ($50 billion per year; conservative estimate)

-----
Other deficit needs -

$2 trillion (?) - through 2015 ($200 billion per year; conservative estimate)

-----
Total: $5.9 - $7 trillion - through 2015

What will be the likely impact on interest rates and the stock market? And global financial relationships?

Looks like ANdrew Samwick belongs to the fuzzy math crowd. Either he has not looked at the numbers or he is hoping that others have not. Currently S&P 500 dividend yields are running a little less than 2% (based on 4-quarter trailing dividends). Lets say it is around 2%, to be charitable and to allow for forward dividends as opposed to trailing. Now, the dividend payout ratio is running at 34%. Given the huge volatility in "as reported" earnings (thanks of big bath write-offs) and to account for greater pro-cycliciality of earnings than dividends, one should use something 20-quarter average or more. That makes the dividend payout ratio at 40%. But as we shall see, that is minor in the scheme of things. To get dividend payout-ratio to increase to 6.5% as Samwick wants, keeping P/E ratios constant, we need dividend payout to rise by 90 percentage points. That is, go up from 34% to 124%. I am sure that can happen for a year or two and indeed it is not uncommon during the bottom of recessions when corporate profits are depressed. But we are talking about "sustained" dividend yields of 6.5%. It will take about 10 years for corporations to exhaust all their "retained earnings" after which legally they cannot pay dividends exceeding their earnings. So, even if we assume that somehow earnings were sustained miraculuosly despite no retention of earnings, it would still not be possible to pay dividends at the rate that would give a 6% yield for a few years at most.

Here's the bottom line -

http://www.weforum.org/site/homepublic.nsf/Content/AM05_CART3

http://iht.com/articles/2005/02/04/business/wbmarket05.html

February 5, 2005

They build houses, don't they?
Floyd Norris - International Herald Tribune

The American building boom helped to carry the economy in 2004, and even saw the first increase in six years in spending on manufacturing facilities.
.
Figures released by the U.S. Commerce Department this week showed that Americans spent $998 billion on the construction of everything from homes to factories in 2004. That was a record high, with spending up 9 percent, the fastest rate of increase since 1996, when the gain was 10.6 percent.
.
The figures are the government's estimates of actual dollars spent, and are not adjusted for inflation.
.
With construction spending growing more rapidly than other sectors, it equaled 8.5 percent of the gross domestic product, up from 8.3 percent in 2003.
.
The gain was fueled by the booming housing market, with private spending on residential construction climbing 14 percent from 2003 to a record $543 billion. It was the fastest gain since 1993.
.
There were gains in construction spending in almost every sector of the economy, but in areas outside of housing, the economy remained less robust than it was before the technology bubble burst and sent the economy into recession in 2001....

http://www.nytimes.com/2005/02/07/business/07fiscal.html?pagewanted=all&position=

Trim Deficit? Only if Bush Uses Magic
By EDMUND L. ANDREWS

WASHINGTON - The economy is growing. Tax revenues are climbing. But can these factors rescue President Bush from a federal deficit that seems stuck above $400 billion?

The answer, unfortunately, is almost certainly no, analysts say.

For all the programs that Mr. Bush is expected to slash in his budget proposal on Monday - from health care and housing aid to Amtrak - the cuts would total less than $15 billion next year and barely dent the deficit.

By far the biggest parts of the budget - Medicare, Social Security and military spending - would be immune from cuts and are expected to grow rapidly for years to come.

On top of that, Mr. Bush's plan to replace part of Social Security with private savings accounts could require additional trillions of dollars in borrowing over the next several decades.

The cornerstone of Mr. Bush's budget strategy is a belief that vigorous economic growth, spurred by supply-side tax cuts that were designed to provide incentives for upper-income Americans to produce more wealth, will generate big jumps in tax revenue that gradually reduce the deficit.

At first glance, he would seem to have grounds for optimism. After all, surging tax revenue did come to Washington's rescue during the economic boom of the 1990's, pushing the budget from the red to the black. Republican and Democratic budget analysts, however, say that such an event is much less likely this time around. The contrasts are stark:

¶Through most of the 1990's, government spending grew at a snail's pace. But government spending soared during President Bush's first term and is expected to keep growing rapidly as the nation's baby boomers start to claim old-age benefits.

¶In the 1990's, the biggest jump in revenues came from high-income taxpayers who made enormous profits in the stock market bubble that ended in 2000. But Mr. Bush's tax cuts of 2001 and 2003 reduced rates on the wealthiest taxpayers and cut in half the taxes on dividends and capital gains, making it all but impossible for revenues to rise at a substantially faster pace than economic growth.

¶Mr. Bush's own projections leave out the cost of rolling back the alternative minimum tax, a parallel tax that is expected to ensnare tens of millions of middle-income households as incomes rise with inflation. Republicans and Democrats both want to prevent such a trap, but a fix would cost roughly $500 billion over the next 10 years....

If you go the other way -- assume a stable PE and dividend yield of 2% and profits grow enough to generate a 10% stock return in an economy where nominal gdp growth is 4% and you get the conclusion that after tax profits share of gdp would rise from its post WW II average of 6% to over 35% of gdp in 50 years.

I doubt that scenario is anymore realistic then the high dividend or high pe scenarios.

All

Please explain to me where Brad Delong gets the current earnings yield of 3.8%.

Spencer

Please take us through your calculations.

The most commonly used social security projections use an economic growth rate of 1.9%. Does anyone know the growth rate required for social security payouts to equal social security taxes over 75 years? In other words, what is the social security breakeven point in terms of future gdp?

ChasHeath,

The low output growth assumption built into the Social Security Trustees' medium cost scenario is low because of slow population growth. In other words, the Trustees' answer to your question seems to be that labor's share of GNP won't vary much. If growth in the labor pool slows, output growth slows.

Just to repeat a point made here often, if the Trustees have been too conservative in their growth estimates, then Social Security doesn't face a funding problem, and we have no reason to overturn a very successful social insurance program. Outside the SS debate, there has been a fairly standard assumption that, as growth in the pool of labor slows, labor shortages will drive wages up. Only in the SS debate do we get hints that the wage share of national product will fall.

Over lengthy periods, the sort of periods on which favorable reviews of private accounts are based, labor's share of national output has been fairly steady, I believe. Those who argue that capital will capture an increasing share of output are thus, I believe, arguing against history, arguing that things will turn out more favorably for their own position than the record suggests. They are also arguing the US will grow ever rosier for those at the high end of the income and wealth range, where equity holdings are concentrated. That may be wishful thinking. I would hope (and try to assure) that this particular wishful thought does not prove to be the case.

The confusion between "growth" and "return on capital" runs so deep that I scarcely know where to begin.

Let me start here - let's grant for a moment that we have a low-growth scenario with dismal returns on capital. For example, take .2% labor force growth and 1.7% productivity growth, combining to result in 1.9% GDP growth.

Let's say we all agree that the returns on capital in that forecast are unacceptably low (let's say, 5%, the current E/P ratio), and that the Soc Sec trust fund is exhausted in 2042.

Now, let's increase the growth in the labor force by 1% per year, (due to higher immigration, maybe). I think we all agree that growth will also rise by 1% per year, to 2.9%.

Do we also agree that all of these new workers will require new capital with which to work? Let's assume that the labor/capital ratio does not change.

And let's assume that the income share to capital does not change, either - the new workers get paid just like the old ones, the new capital is just as productive, and all we have is a slightly larger economy, growing a bit more quickly.

Can we all agree that, since we have more workers and higher payroll tax receipts, but no more retirees (immediately, anyway) that the date of trust fund exhaustion for Soc Sec is pushed back, and, by that criteria, Soc Sec is "saved"? I think we can.

But can anyone give me a reason that the return on capital in this "higher growth, Soc Sec Saved" model is higher? The short answer is "no, you can't".

In fact, and this is a trivial principle of microeconomics which everyone forgets when they switch to macroeconomics, doubling the scale of an operation with a low return on capital doubles income and doubles capital employed, but does not change the return on capital.

We can reason through to a similar conclusion with productivity:

Increase productivity from 1.7% to 2.7%. We like higher productivity, and the economy will grow by an additional 1% per year.

Can we agree that this will also defer the date of trust fund exhaustion? Assuming (as is often done) that workers capture the benefit of higher productivity in higher wages, we will see an increase in the payroll tax receipts today. It has been argued that we also see higher wage-indexed benefits tomorrow, and it has been argued that higher productivity defers the Soc Sec insolvency without solving it, but that is a *VERY* separate issue. There is a general consensus that higher productivity will defer trust fund exhaustion.

But let's ask the same question as before - what, in this model, leads to higher returns on capital? IF the productivity gains are captured by workers, the retun on capital will be roughly unchanged.

Hmm, low growth may be a problem, but higher growth is not the solution. Interesting. Is anyone surprised? Most peole totally balk at the notion that growth is not a panacea at the macro level, even though they take that conclusion for granted at the micro level.

In fact, the Soc Sec model assumes a constant income share to capital. Unless we assume that the labor/capital ratio changes significantly over time, there is no room for the return on capital to grow, and higher growth does not lead to higher returns on capital.

But now that we know where to look, the solution is simple - either the ratio of capital to labor has to fall over time (odd), or the income share to capital has to rise, at least until we get to an acceptable target return on capital.

SO far, so good? If the idea that growth doesn't always help is too hard to grasp, just remind yourself of the old joke about the hatmaker - asked how he can make money selling hats for $9 that cost him $10 to produce, he says "I make it up on volume".

C'mon, it's a joke, but with a point - growth is not always "good", in the sense that growth need not raise the return on capital.

Final question - can we raise the return on capital in a low growth scenario? Now that we know where to look, the answer is obvious - raise the income share of capital.

Suppose, for example, productivity grows by 1.7% per year, but for two years workers do not get productivity raises (their wages track only inflation, and we observe "stagnant real wages", a familiar phrase.)

Very roughly, labor is getting about 90% of GDP, and profits are 10%. Putting two years of raises at 1.7% over to the capital side drops labor by 3.4%, to about 86%. Painful, but there you are.

On the capital side, this is a bonanza - profits rise from 10% to 13.4% of GDP, which is a 34% increase in the return on capital. If the old return was 5%, the new return is 6.6%, which is above our target. Red letter days are here, for capital, anyway.

So, growth is not the issue - in either low growth or high growth scenarios, you need to forecast a reasonable return on capital if that is what you want to observe (a truism, yes, but why do folks just expect a high return on capital to hop out of the numbers?).

To get that high return, you need a higher income share going to capital (or less capital employed). Even in a low growth scenario, that can happen if capital captures more of the productivity pie.

Is it implausible? Google on "stagnant real wages", or "outsourcing", and see what you get.

Hmm, these folks are the first hit, and they are worried about *falling* real wages. Do tell.

http://www.epinet.org/content.cfm/issuebriefs_ib196

My big finish - growth is not the issue. Growth scenarios that "save" Social Security may or may not "save" the stock market; that will depend on the income share going to capital.

Low growth scenarios that shatter Social Security but are great for stocks are also easy to conjure, and not particularly implausible - assume stagnant real wages for a short time, and capital is placated.

BTW - the next person to endorse this will be the first. However, I am thinking of commericalizing this proposition on my blog - I may be posting a $100 challenge bet, if I can define it carefully enough.

Frankly, I would bet against me if I didn't know much about this. But time will tell...

"Please explain to me where Brad Delong gets the current earnings yield of 3.8%."

A good question. According to today's WSJ, the estimated forward PE ratio on the S&P 500 is 17. So 1 divided by 17 = an earnings yield of 5.9%, give or take.

To be sure, most analysts would use a "normalized" (long-term) PE to adjust for the fact that we're in or close to the sweet spot of the cycle right now. But normalizing earnings is an art, not a science -- much like the accounting rules now used to calculate earnings in the first place.

If one were to look to the bond market as a neutral referee (a questionable assumption, but you have to start somewhere) one would probably say the current PE is way below normal, since the yield on the 10-year Treasury equals a notional PE of almost 25.

Split the difference between the actual S&P 500 PE and the notional bond equivalent, and you come up with a "normalized" PE of about 21, and a prospective earnings yield of about 4.8%.

Maybe Brad is using a broader benchmark than the S&P 500. (More small caps, higher PEs, lower earnings yield) Or maybe he's making some theoretical adjustment I'm not familiar with. But early last month he was pegging the equity earnings yield of 5%, and expected future returns in the 5.5 to 6% range:

http://www.j-bradford-delong.net/movable_type/2005-3_archives/000111.html

The market hasn't moved enough since then to knock 5% down to 3.8% (If anything, the earnings yield has risen, not fallen). I don't understand what else might have changed.

Tom Maguire wrote, "The confusion between 'growth' and 'return on capital' runs so deep that I scarcely know where to begin."

Please cite the specific place(s) where you observe this confusion; or else I'll conclude that you're erecting a strawman.

"Is it implausible? Google on 'stagnant real wages', or 'outsourcing', and see what you get."

That's about as unconvincing as you can get. Why don't you cite historical capital and labor shares of GDP instead?

Vanguard has the price earning ratio of the S&P Index at 19.6 and the Total Stock Market at 22.4 as of 12/31/04.

Barra has the p/e ratio for the S&P at 19.8 with losses and 18.4 with no losses for 1/31/05.

These p/e figures are based on the last 12 months of earnings data.

Since earnings yield is the inverse of the p/e ratio, I do not know where the 3.8% figure comes from.

Let's use Vanguard's numbers. The price earning ratio of the S&P Index is 19.6, so the earnings yield is 1/19.6 or 5.1%. About 60% of earnings have long been returned to shareholders in dividends and stock buybacks. Then, 60% of 5.1% is 3.1%. The current dividend on the S&P after Vanguard costs is 1.6%. Add 3.1 and 1.6 and you have a stock market return of 4.7%. Assume the economy grows at 1.9% and add Brad DeLong's 0.9% for capital growth. So, 4.7% and 0.9% gives a 5.6% projected real stock market return.

What am I doing wrong?

You guys are missing the point. Social Security is already debt-financed, because the government owes current retirees their contributions prior to retirement. Currently the government finnaces this through current workers' contributions, which will run out in 2018. What we need to do is re-finance this debt to avoid disaster!

www.humaneventsonline.com/article.php?id=6235

The Council of Economic Advisors assumes there can be a real long term stock market return of 6.5% to 7%. The projection I get is 5.6%. So, either the price earning ratio or economic growth must increase. However, if growth is higher than 1.9% there will be no problem paying full Social Security benefits as far as we might project.

There will be no problem for Social Security in 2020 or 2030 or 2040. The system will run a surplus till 2040, and each year of reasonable growth till then will extend the surplus. Then, there will be a drawing of the surplus for decades more. Precisely as interest and principle of Treasury bonds is safe now, Treasury bonds will be safe after 2020. There may be a small problem for Social Security by 2050, but that is easily fixable.

Tom Maguire

Though I read carefully through your example and your blog article, I am completely lost. Paul Krugman, however, I understand. I am willing to give your rationale a try, but the writing must be made coherent. Though you blithely assume we confuse growth and return on capital, there is no confusion in my mind other than with the explanation given but I have no problem handling investment portfolios.

Spencer, followup. Suppose we're getting that rise from 6% of GDP to 35% for profits from overseas. Exactly how are we supposed to be doing this given we're borrowing 6% of GDP from overseas every year? Is there some magic I'm missing?

Tom - my understanding is that wages get 55% of GDP currently, a number that has been falling.
What accounts for the other 35% with profits around 10% of GDP?

If real wages might actually fall, shouldn't that be a bigger concern for todays twenty-somethings than capturing a sliver of the increasing profits going to capital and praying the next generation will be able to pay a decent price/earnings multiple to buy back their shares on ever-falling wages?

And even if it works for a while, wouldn't it just be a new form of stagflation? Wouldn't the fed eventually have to switch from targeting wage inflation to targeting asset inflation, killing the goose that is sucking all of the productivity gains to capital?

Where the '3.8%' figure comes from isn't the only mystery here:

[It comes from Robert Shiller's dataset.]

"Though I read carefully through your example and your blog article, I am completely lost. Paul Krugman, however, I understand."

Do you understand Krugman to be positing the end of capitalism in the U.S.A., because that's what he's doing.

TREASURY BONDS

What's are the facts, assumptions, outlooks, and key concerns for future bond sales through 2015?

What are the bond volume tripwires that create major concerns?

----

Anne and All Others

I respect the other discussions. I have gained new knowledge from many posts. I am thankful for the efforts.

I trust that there will be some appreciation for this issue. I am confident that others can answer the above questions. It may not be easy, but it can be done. I believe it is essential.

Perhaps someone who knows Brad Setser personally can ask him to look at my budget post above (February 7, 2005 06:29 AM).

It would be helpful to have a knowledgeable source offer focused and thoughtful speculation on the levels of future Treasury bond sales through 2015 which could be considered sustainable, prudent, and/or affordable. Bottom line - when are we in trouble as we increase the commercial and Government bond volumes? At what volume levels (quantities) do the quarterly and annual combined bond sales impact the bond market, stock market, economy, and other nation-states' willingness to take U.S. Treasuries off of the table?

Once we surpass the bond volume tripwires and cause interest rates to grow rapidly, it may too late for an effective pullback within a given fiscal year of such sales. Dominoes in motion...perhaps.

If so, what courses of action are available to the Government at that point? As an example, the interest spike might begin in the second quarter of a fiscal year. Two quarters to go, but rates are already too high to avoid economic damage. So, what happens? I expect that Government programs would incur immediate cuts, with the exception of those tied to lawful obligations (if such are honored). Congressional action would be required to rein those in, and that could be done.

There appears to be a potential difference of opinion between Chairman Greenspan and Secretary Snow as to the safe limits of offering (selling) Treasury bonds on the open market. Snow's 3-day trip to Wall Street resulted in some flippant positive "can do" responses that were unsettling. I believe that Snow has another trip to Wall Street scheduled for later this month. Meanwhile, Greenspan's G7 London speech last week appeared to neutralize some of his previous concerns and Congressional testimony of this past fall. "All is well" - but I don't believe it when viewing the entire picture and unfolding events.

I am looking for the potential bond volume tripwires by year through 2015 based on what we know and anticipate at this time. A alternate breakdown of a, b, and c answers would be fine.

The absence of such bond volume tripwire discussions does not support an effective news media analysis of budgetary implications, forecasts, and financing needs. It is one of the missing elements of reporting that could impact future deficit expenditure expectations, probable outcomes, and let me be so bold, Congressional decisions. Imagine that. Informed decisions.

In the meantime, we have a large population of reporters who appear to be dumb as rocks. But I'm not so sure that all of the dumbness is their fault. Most perhaps, but not all. Where is the mentoring, assistance, and detailed (emphasis added) professional analysis and published commentary (including quotes) from skilled economists and financial analysts, at least from those who can appreciate the need for a 360 degree nonpolitical view?

Please stand up and be counted. And help others, myself included, understand the potential implications for excess bond sales.

Is there not a bond sales expectation model that allows for known and suspect factors and variables, including shifts in global currency reserve holdings' decisions? Or is it left to meetings whereby the best answer is, "Yeah, we'll take care of you, buddy. No sweat." or "No can do. Not this year." and so on?

Am I asking too much, or are we just going to flip a coin? Any of us can do that. I have a quarter.

My vote is to reel in deficit spending and reduce, not increase, Treasury bond sales in light of ongoing shifts in global financial decisions and foreign currency holdings, plus a brief list of other factors. While I believe that this is essential, I can not prove it or make an effective supporting case worthy of forwarding to Members of Congress and their staff members.

Tripwires, please. Or clues. Or we can sit back and watch them flip the coin over and over. But there wouldn't be much merit in complaining later on if we had the information at our and the news media's disposal. Thus far I haven't found it in the public arena, so where is it? If it hasn't been written, let's write it. Quickly.

Stated differently, are we in a NHRA dragster that can't turn well at speed without flipping over its back, or in a Formula 1 machine that can brake hard quickly and turn instantly, never losing much momentum? And just how fast can we go (bond sales volume) without risking an accident, serious injury, disaster, or death?

I know how fast I can drive my Typhoons and Syclones. I know their limits. I know that they will race from 0-60 in less than 4.3 seconds, how well the Baer brakes will bleed off the speed, and how tightly the lowered and modified suspensions can apex a tight, even unexpected, corner, as do the Corvettes, BMWs, and Porsches that refuse to offer further challenge, or no longer pull up alongside at traffic lights out of a quiet code of respect. I also know when not to push my vehicles too far, or do so unnecessarily. They are an extension of my life, and deserve ample protection and respect.

But I do not know the limits of Treasury bond sales piled on top of sales of commercial paper or the potential limits of U.S. Treasury bonds acquisition by foreign central banks or major foreign corporations. I should know, but I do not. If I was voting in Congress, let me assure you that I would know. I would leave no stone unturned in seeking the professional, independent answers from brilliant reality-based economists and financial analysts skilled in the operation of the bond markets.

To this end, can you help me in assisting my Members of Congress and other Members, prior to proposing or voting on any proposals for individual investment private accounts, tax break extensions, Mars missions, Medicare and Medicaid changes, and other major funding needs' decisions that will ultimately call for additional sales of marketable U.S. Treasury bonds?

Our futures may depend on it.

Thank you in advance for any consideration. I look forward to your thoughts.

Movie Guy

The following cartoons are central to such issues. Matt posted the second one earlier. The other is from the World Economic Forum. I believe that they sum up the situation. Humorous, yes. Meaningful, absolutely.

http://www.weforum.org/site/homepublic.nsf/Content/AM05_CART3

http://home.earthlink.net/~cdtavares/direcway/miracle.jpg

Apologies for the length of the post.

Ok. I'll just flip the coin.

Hmmm...

Let's see. We're going to need to sell enough Treasury bonds to cover the following additional projected debts.

Ten Year Potential Deficit Outlook 2006-2015:

$1800 billion - tax cut extensions ($1.8 trillion)
$ 664 billion - loss of Social Security surpluses
$ 754 billion - initial private accounts transition costs
$ 500 billion - Medicare - $50 billion growth per year (minimum)
$ 500 billion - alternate minimum tax fix
$1000 billion - Medicare prescription drug programs
$2000 billion - cumulative other deficit costs; $200 billion per year (estimate)

Total $ 7218 billion - ten year cumulative

Annual $ 722 billion - average deficit per year

What's that you say? It gets worse after 2015?

No problem. We'll just flip that coin again. Sell even more bonds.