Monetizing the Risk

With hearings of the Joint Deficit Reduction Committee underway, we have the opportunity to closely examine what caused the deficit in order to reduce it.

To control the budget, there is much to do about what we spend money on rather than the need to spend it. Remember, for example, Republicans said reducing marginal tax rates would create jobs. Now, with the highest unemployment rate since the Reagan administration, and after extending the ten-year-old, marginal tax-reduction program associated with it, Eric Cantor says, "We need to focus on creating jobs."

If the conservative program is so good, and ten years is certainly enough time to make it happen, why are we monetizing all this debt to counter a deflationary trend?

The conservative program causes unemployment, and without deficit spending (debt monetized by the Federal Reserve), the recession would turn into a depression. That value of risk--the deflationary risk--is empirically expressed as a budget deficit, which adds to that huge number we call the public debt.

Not only did the conservative economic program cause a massive budget deficit, like it did during the Reagan administration, but the money did not sufficiently circulate to jump start the economy. The stimulus did not fail, it is the conservative program that continues to fail us (and if you have been following the risk assessments on this website, the failures are not at all unexpected, which helps keep small investors in a safe, if not a winning, position). Money spent does not return to the treasury because it consolidates into the marginal tax bracket that continues to receive tax reduction to create jobs.

Massive failure of the conservative economic program "crowds out" (consolidates) value both before and after the budget deficit occurs, which means the program is a dead-weight loss. Both conservative and subsequent liberal measures fail to reduce debt-to-GDP (and the conservative program will make it worse). Everybody loses, even those big winners in the marginal tax bracket. (Remember that Pareto Optimality measures loss on the status quo. If the program yields losses to the beneficiaries of zero-sum gains, everybody experiences a loss. If employment gains from the accumulated value, however, especially without being borrowed, or monetized, from the treasury, the gain is non-zero-sum because it yields a return, a profit, on the investment--it increases GDP over debt, and everybody gains.)

A deflationary trend accumulates risk that for the economic elite is negatively valued. If the value is not monetized, the detriment exacted to finance the accumulation is so extreme that a change of elites is likely to occur. A political elite gains power at the expense of the economic elite (which is the gamma risk I have been telling you about). The result, in the final analysis, is not a zero-sum, the loss is dead-weight (a change of legitimacy that values the gamma-risk proportion).

Assuming the new boss, wielding power in a gamma-risk proportion, will be less detrimental than the old boss is likely to assume too much risk. "Probable" beneficiaries are not self-determined, but dependent, and once it is lost, it is hard to get it back.

To minimize the risk, we monetize it, but that does not mean we have to incur debilitating budget deficits. Unfortunately, the Joint Deficit Reduction Committee will not come to this conclusion without identifying what causes deficit spending and accumulated debt.

We are not condemned to monetizing accumulated risk if we focus instead on deconsolidation of its market value.