Megan McArdle gets around to making the point that I’ve been making here for some time:
One possible story about the financial crisis is that an unusually rosy period of growth in the west taught us to expect–no, to need–an unsustainably high rate of low-risk return on assets.
but then she goes off into the brush:
We made a whole lot of unsustainable promises during the boom years, most of them involving permanent increases in the ratio of non-workers to workers. Those promises required a very steady cash flow, but also (because of demographics) a very high rate of return. Otherwise the previous compact–in which current workers had allowed the elderly and disabled to skim a portion of their rising earnings from increased productivity, in exchange for the promise that they’d get the same deal when the time came–would be broken. Workers would have to turn over all of their increased earnings, and in fact cut into what they’d had previously, in order to keep the system going.
Unless the “boom years” begin in 1965 (or 1935) what promises requiring a steady cash flow have been made?
Contrariwise, I see the developments in the economy over the last 30 years as completely consistent with a flight to safety model for capital investment, with “safety” increasingly being defined as “whatever the government is subsidizing”. Healthcare comprises the overwhelming preponderance of “unsustainable promises”, healthcare depends preponderantly on government subsidies for its revenues, and, consequently, investing in healthcare is seen as a safe bet whether the investment takes the form of spending huge sums on getting the education and training necessary to become a physician, building a hospital, or pharmaceutical stocks.
Another possible definition of “flight to safety” is “flight to whatever the Baby Boomers are buying”. That used to be houses. Increasingly, it will be healthcare. Both of these definitions could be in operation. They’re not necessarily in competition with one another.
A thousand times no. McCardle is making clear she doesn’t understand the monetary or banking system. Quote:
Or you could make them invest it in “safer” sovereign debt. There are two problems with that: one of the things that defines safer debt (at least in normal times) is government debt from governments who don’t issue too much of it.
This model applies to nations on the gold standard or which have adopted a foreign currency. They issue little debt because they have no other option, and what “safety” those debts offer is entirely dependent on maintaining a balanced budget.
The U.S. offers safety because:
A) It controls its own non-convertible currency and always has the means to pay its liabilities. This benefits society by giving the private sector a risk-free method of saving.
B) U.S. debt isn’t really debt. When someone buys Treasuries, the buyer’s bank disburses its reserves (created by the federal government) to the government’s account at the Fed. When the debt matures, the government switches the reserves back to the buyer’s bank. Issuing U.S. debt literally means borrowing from itself and then paying itself back. It’s entirely a monetary operation.
Damnit, the second passage should have quotation marks around it. Sorry for any confusion.