Latest news with #Capitalism
Forbes
27-04-2025
- Business
- Forbes
Closed-Loop Demand For Government Bonds
With the whipsawing in the markets over the last month, a concern du jour has arisen. What if the United States cannot sell its bonds to the old reliable ready purchasers, to the same always game counterparties? The Chinese appear to be disgorging themselves of their vast stash of treasuries. (Emphasis on 'appear'—China badly needs to maintain the impression that its currency is convertible in the dollar.) The stodgy economies of Japan and the UK have become the major holders. The United States is supposed to float its massive debt reissues to yesterdays-news buyers such as these? Duck and cover. 'Maybe the Fed will buy it!' he said risibly. How illuminating history can be on these issues. Let us cast our minds back not to the history of federal debt, but to that of the gigantic newcomer in the twentieth century, municipal debt, particularly of the school-bond variety. Readers will recall the column I wrote on the work of recent economics Nobelist Claudia Goldin, work that absolutely lionizes the tremendous boom in school, particularly high school construction over 1910-1940. The Nobelist forgot to tell us what it cost and what were the consequences of the financing model, namely unbelievably jacked-up property and new state-level income taxation. There is quite a case that financing this school-building caused, yes caused, the Great Depression. Thanks a lot, good government types. A few years ago, in the Marxist-adjacent journal Capitalism—quite a good journal, actually—appeared a most delicious article on school-bond financing in the golden era, the 1920s through the 1960s. (Michael R. Glass and Sean H. Vanatta's 'Frail Bonds of Liberalism' may be found here.) The finding of the article was that from the 1920s through most of the 1950s, the unprecedentedly massive new issues of school bonds basically had one buyer: state government employee pension plans. Here was the closed loop: districts planned schools, issued bonds, and raised taxes to in the hope of paying for them. The market was dubious, so another government agency, the pension plans, agreed to buy basically all of the bonds up all the time. It actually was a sound strategy for the funds in the 1930s and 1940s. Who wants to bet on corporate bonds, or stocks, in the 1930s? Property tax levels in 1932 soared to 7 percent of GDP, an absolutely unconscionable number that is utterly inconsistent with maintaining a viable private economy. Corporations were going down the drain in the 1930s. Pension plans wanted governments, governments, governments, because at least they had taxing authority. That authority was being abused to the tune of destroying the private economy, true, but all that meant is make sure you don't buy corporates. It was a ridiculous time, and school districts thought it normal. Governments got a little smaller after World War II (federal spending fell by 75 percent, 1944-46), and private business began to feel out its new place in the world. The stock market finally went up, achieving 1929 levels in the 1950s. Government pension plans noticed and thought it might be time to let their hair down and buy regular market securities, beyond school bonds, real corporates. So they did. The school districts threw a fit. We have a compact for you to back school construction, it's a civic duty to be our buyer, you're just looking out for number one, you're becoming a creature of Wall Street, etc., etc., was the gist of the complaint. One of the problems, a real beauty of one, was that federal tax rates were so high (91 percent at the top in the 1950s), that to hold school bonds, like all munis federally tax exempt, made zero sense in public pension plans, because those plans were also tax exempt. Tax-exempt plans should hold taxable bonds, because those bonds pay enough interest to cover taxation, and tax-exempt plans don't have to pay. So the New York system in particular said bye-bye to munis as the schools in their baby-boom boom cried. The article says that the borrowing costs increased sometimes to the tune of a new school every time a district issued a new tranche. Districts had to raise interest rates on their offerings past four percent on their fixed thirty-year issues in the late 1950s! Give it time—because did these districts ever make out like bandits. When the great inflation hit in the late 1960s, averaging about 9 percent for 13 years, these now silent grinning school districts were paying four percent on their huge long-term obligations. The little old lady holders were getting impoverished, as the districts got fat through the early 1980s on the late 1950s issues they had squealed about—four percent—but it's not about the sucker holders, is it? Government debt is a 'safe asset,' the economy needs it as a 'benchmark,' it is equivalent to a 'riskless security' in the financial models. All of this stuff is impeding the normal maturation of the market economy. Government debt probably caused the Great Depression, it deteriorated the welfare of widows and orphans in the stagflation period, and it is now all told at some unconscionable number in the many tens of trillions. The history of public debt in whatever variety it comes inevitably uncovers some new pathetic, or hapless, or lame, or sordid tale. Just start getting off the stuff.
Ya Libnan
04-02-2025
- Business
- Ya Libnan
Bitcoin will eventually be zero, economist predicts
Here's when By Alexey Borovets & Anthony Patrick Eugene Fama, the renowned 'Father of modern finance,' predicts Bitcoin will be worthless in a decade Why? Cryptocurrencies 'violate all the rules of a medium of exchange,' Fama said on the Jan. 30 episode of Capitalism. 'They don't have a stable real value. You know, they have highly variable real value. That kind of medium of exchange is not supposed to survive.' Fama, who authored the efficient markets hypothesis in the 1960s, didn't actually guarantee that Bitcoin would be worthless. Rather, he agreed when podcast host, finance professor Luigi Zingales, asked what the probability was that, 'within 10 years, the value of Bitcoin would go to zero?' 'I would say it's close to one,' Fama replied. 'Is it a bubble?' The interview started with Fama expressing disapproval of the term 'economic bubble' as bubbles need to have a predictable ending. But nothing in the market is predictable, he argues. Journalist Bethany McLean, who cohosts the show with Zingales, asked Fama whether Bitcoin was a bubble, Fama indicated that he hopes it bursts. 'I'm hoping it would bust because, if it doesn't, we have to start all over with monetary theory — it's gone,' Fama said. 'It might be gone already.' 'All we thought we know about monetary theory says [cryptocurrency] shouldn't survive,' Fama adds. Crypto violates all the rules of a medium of exchange as they don't have stable value and people won't use it as a currency, he explained. This sentiment, predictably so, angered some in the crypto comm McLean posed that question to Fama, who said using U.S. dollars on the blockchain 'could work,' because dollars have 'stable, real value.' Another big threat to Bitcoin voiced by Fama is 51% attack. Although such an attack would have been costly, Fama says that every transaction system faces 'a problem of verification and a problem of who is enforcing the rules.' Fama, who was awarded with a Nobel Prize in economics in 2013, also insists that — unlike Bitcoin — gold is more favorable because it has many use cases. And the government's role in the crypto market may speed up the loss of value of Bitcoin. It's worth noting that Fama essentially checked the boxes of the main surface-level threats to decentralized digital money, but that none of his predictions were expressed with utmost confidence. 'His open-mindedness for admitting that he might be wrong… he's willing to adapt his universe at age 86,' Zingales said. 'I think that's really remarkable.' CRYPTO NEWS
