Going to Extremes can be Very Useful

Going to Extremes can be Very Useful

Courtesy of Dr. Paul Price

Billy Joel didn’t know why he ‘went to extremes.’

The 1989 hit from Billy Joel noted his manic-depressive swings while saying he didn’t know why they occurred. Only his shrink might hazard a well-informed guess.

I’m willing to propose that ‘going to extremes’ can often give you obvious answers to otherwise tough to answer questions.

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QE programs, our national debt and income tax rates have been much discussed during this presidential election year. Let’s take each of these ideas to an extreme viewpoint to see how the ideas stack up.

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Is QE (aka – printing money) the answer to GDP growth and reduced unemployment? Many seem to think so. This leads right to the ‘Helicopter Ben’ theory where Fed Chairman Bernanke simply dumps massive amounts of paper money overboard to the throngs waiting below. It’s just a larger version of President George W. Bush’s 2008 $600 stimulus checks.

Let’s ‘Go to Extremes’ with Billy Joel. Imagine we somehow were able to credit every single American with $1,000,000 in their bank account overnight. Almost everyone could pay off their underwater mortgages, buy their dream car, rid themselves of credit card debt and wipe out those pesky student loans.

Would that be great? Think about what that would do to prices. Merchants, seeing almost unlimited demand for goods, would instantly ratchet up prices or even pull merchandise from their shelves. Why part with inventory today when tomorrow’s prices are certain to be higher?

The purchasing power of your dollars would erode quickly leaving the double-digit inflation of the early 1980s looking like nothing.

Extreme money printing and its distribution to all would benefit those who had nothing to start with. This would come at the expense of anyone who had savings held in cash. It would also dramatically erode the value of all fixed pensions and annuities.

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Does the size of our National Debt matter? Let’s ‘Billy Joel’ it and see what happens. If excessive debt is no problem and actually creates jobs why not ratchet it up to $100 trillion? We could write off all government held student loans. FNM and FRE-held mortgage principal and interest could be forgiven outright. Forget that temporary 2% FICA cut. Let’s simply use debt to eliminate all FICA and Federal income taxes.

Imagine all the extra buying power that would be available. Wouldn’t that be great for our economy?

The problem? Who would be willing to buy America’s debt if this scenario was real? Like every family that hits its credit limit, the ability to keep living the dream can end very abruptly. This is exactly what occurred when HELOCs (home equity lines of credit) and cash-out refinancings dried up as the housing market crashed.

Look to Greece and Spain as examples of how too much debt plays out in the long run.

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Why not simply raise tax rates on those nasty ‘millionaires and billionaires’? Let’s go to extremes and set a 90% marginal rate like we had back in the 1950s.

When Ronald Reagan was still an actor he made just one movie each year. An interviewer asked him why. Reagan said that with a 90% tax rate it made no sense to make the extra effort. Why work for 10-cents on the dollar?

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How many doctors, dentists, plumbers, musicians etc. would continue seeing patients, fixing drains, or would endure the drudge (and drugs?) involved in touring the world when most of their labor would make no impact on their own financial well-being? They would have every incentive to simply earn a moderate amount before taking the rest of the week, month or year off.

Would you voluntarily do your job for just 10% of your salary? Some people might. The majority would rather just quit early and go skiing, shopping or to the beach.

The full-out versions of these ‘solutions’ are obvious non-starters. The use of partial-measures deludes many people into thinking they might just work.

Why?

Because they are fantasies people want to believe in.

(Like hope and change?)

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