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Split Topic: How free is the US economy?

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Let's not forget about the $7.7 trillion that the Fed lent out free to irresponsible banks

And $7.7 trillion is a drop in the bucket compared to our $100+ trillion in unfunded liabilities, and the $700+ trillion in derivatives exposure ($200+ trillion in the US alone) that people mistake for real wealth.

Edited by brian0918

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I have to agree with a statement Yaron Brook made regarding the issue of economics. He basically stated that the free-market economists have proven their points over and over again, that a free market is much more efficient at getting valuable goods to the market and that regulations and having to contend with them are costly at all levels without doing much to protect the consumer. So, the real battle is not economic, and I think trying to isolate out the economics of capitalism from the *political* / economic system is like arguing that you need gasoline to operate a car, but it is OK if you throttle the gasoline producers because they are greedy SOB's that are only out to make a profit. In other words, if you want a free economy, then you have to support individual rights and the morality of egoism -- not just focus on one's everyday dealings with bureaucracy -- which is really bad in certain sectors of the economy. Businessmen need to learn to stand up for their rights. Yes, follow the law (or risk going to jail) but write protest letters against it, but not just protest the bad economics -- protest the fact that you are not a slave of the State.

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I have to agree with a statement Yaron Brook made regarding the issue of economics. He basically stated that the free-market economists have proven their points over and over again, that a free market is much more efficient at getting valuable goods to the market and that regulations and having to contend with them are costly at all levels without doing much to protect the consumer. So, the real battle is not economic, and I think trying to isolate out the economics of capitalism from the *political* / economic system is like arguing that you need gasoline to operate a car, but it is OK if you throttle the gasoline producers because they are greedy SOB's that are only out to make a profit. In other words, if you want a free economy, then you have to support individual rights and the morality of egoism -- not just focus on one's everyday dealings with bureaucracy -- which is really bad in certain sectors of the economy. Businessmen need to learn to stand up for their rights. Yes, follow the law (or risk going to jail) but write protest letters against it, but not just protest the bad economics -- protest the fact that you are not a slave of the State.

The problem is that you aren't addressing the topic. This topic was deliberately splt from another topic to address specifically how free is the US economy in fact?

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And $7.7 trillion is a drop in the bucket compared to our $100+ trillion in unfunded liabilities, and the $700+ trillion in derivatives exposure ($200+ trillion in the US alone) that people mistake for real wealth.
Figures as high as $100 trillion come from using an "infinite horizon". That is to say, assume that the promises will be kept, and then discount the infinite stream of payments using an assumed discount rate. Bringing that down and looking over 4 or 5 decades reduces that number significantly. Of course, even a number like $25 Trillion unfunded for the next few decades, would bankrupt us. However, that does not imply we'll go bankrupt. What it does mean is that the promises will not be kept. I think there's a pretty good chance that voters will finally agree to something like Simpson-Bowles sometime during in the next 12 years (three presidential terms). That would mean that taxes are raised for anyone making over $100K (as they would pay payroll taxes on that amount), and benefits will be reduced (SS will probably be about 60%-75% of what was promised for anyone over $100K, and Medicare will simply be capped at some budgeted amount).

None of this is good. However, the real issue is not that unfunded liabilities are $10 Tr, $25 Tr, or $100 Tr., but that taxes will be raised and benefits will be reduced.

As for the derivative exposure, Zerohedge is being (typically) alarmist. A lot of derivative positions -- in fact the vast majority -- will cancel each other out if they're netted. We saw this in the Lehman bankruptcy, where the net exposure was nowhere near the gross exposure. Using gross exposure is a bit like adding Assets and Liabilities to come up with a single number, instead of subtracting them to see what the real loss could be.

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And $7.7 trillion is a drop in the bucket compared to our $100+ trillion in unfunded liabilities, and the $700+ trillion in derivatives exposure ($200+ trillion in the US alone) that people mistake for real wealth.

Interesting. Can you explain who, exactly, are the counter-parties to this debt? You're saying the Federal government owes somebody $700T: who is that somebody? Where do they live? What are they going to do with all of that money? Maybe those super-beings will be nice to us and loan us some of it back?

Seriously though, (because nobody here was being serious before, to be clear), you have to remember that the "national debt" is not at all like your own credit card debt, its more like borrowing some of your own money from savings. Our "national debt" is money we borrow, collectively, from ourselves for the most part (yes, a lot is borrowed from other countries but we also balance that with loaning them a lot of money so for the most part its us borrowing from us).

Again, none of this is to say that things are hunky-dorey, but its just retarded to get out doomsday numbers like this...

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Seriously though, (because nobody here was being serious before, to be clear),

I am under the impression that everyone posting has been serious.

Is this intellectual dishonesty or a hamfisted attempt at snark?

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As for the derivative exposure, Zerohedge is being (typically) alarmist. A lot of derivative positions -- in fact the vast majority -- will cancel each other out if they're netted.

Objectivist entrepreneur Keith Weiner has argued that this is not the case during a crisis:

Even worse, in the formal and shadow banking system, derivative exposure is estimated to be more than 700 trillion dollars. Many are quick to insist that this is the “gross” exposure, and the “net” is much smaller as these positions are typically hedged. But the real exposure is close to the “gross” exposure in a crisis. While each party may be “hedged” by having a long leg and a balancing short leg, these will not “net out”. This is because in times of stress the bid (but not the offer) is withdrawn. To close the long leg of an arbitrage, one must sell on the bid (which could be zero). To close the short leg, one must buy at the offer (which will still be high). When the bid-ask spread widens that way, it will be for good reason and it does not do to be an armchair philosopher and argue that it “should not” occur. Lots of things will occur that should not occur.
Edited by brian0918

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Interesting. Can you explain who, exactly, are the counter-parties to this debt? You're saying the Federal government owes somebody $700T

No, I am saying that people count that money as wealth in their assumptions about their current economic situation. When that wealth evaporates as the financial institutions that hold those derivatives fail, their standard of living will necessarily drop, which will likewise impact the rest of the market. It is fine to gamble your money like this in a free market, but our centrally planned government-enforced banking system has incentivized gambling, and as a result we believe we are much wealthier than we are, which further contributes to malinvestment and destruction of capital.

Edited by brian0918

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Objectivist entrepreneur Keith Weiner has argued that this is not the case during a crisis:
Yes, but that's analogous to a liquidity crisis, not a solvency crisis. To any particular person, their gross exposure may be their actual exposure. However, this is not true of the system as a whole.

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No, I am saying that people count that money as wealth in their assumptions about their current economic situation. When that wealth evaporates as the financial institutions that hold those derivatives fail, their standard of living will necessarily drop, which will likewise impact the rest of the market. It is fine to gamble your money like this in a free market, but our centrally planned government-enforced banking system has incentivized gambling, and as a result we believe we are much wealthier than we are, which further contributes to malinvestment and destruction of capital.

So we (they) all think we're $700T richer? That's in US dollars, right?

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A few days ago, J.P.Morgan announced a potential loss of $2 billion on some derivative trades in London. Over the next few quarters, it will be interesting to see what the final loss amounts to. It will also be interesting to know the notional value of the underlying contracts. Some reports say the notional value is over $100 biillion.

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