Krugman makes a very interesting point this morning...

[kentuck]

Especially the last paragraph in this post:
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http://www.nytimes.com/2005/02/01/opinion/01krugman.html

<snip>
The price-earnings ratio - the value of a company's stock, divided by its profits - is widely used to assess whether a stock is overvalued or undervalued. Historically, that ratio averaged about 14. Today it's about 20. Where would it have to go to yield a 6.5 percent rate of return?

I asked Dean Baker, of the Center for Economic and Policy Research, to help me out with that calculation (there are some technical details I won't get into). Here's what we found: by 2050, the price-earnings ratio would have to rise to about 70. By 2060, it would have to be more than 100.

In other words, to believe in a privatization-friendly rate of return, you have to believe that half a century from now, the average stock will be priced like technology stocks at the height of the Internet bubble - and that stock prices will nonetheless keep on rising.

Social Security privatizers usually defend their bullishness by saying that stock investors earned high returns in the past. But stocks are much more expensive than they used to be, relative to corporate profits; that means lower dividends per dollar of share value. And economic growth is expected to be slower.

...more

[AlGore-08.com]

1. Krugman's a national treasure

eom

[K-W]

2. Believing in conservative economics is no more valid

than beleiving in a perpetual motion machine.

I loved one privitization argument I read from a republican lawmaker which talked about the 'magic of compound interest'

As if the money just comes from nowhere. Idiots.

[Viking12]

10. Faith-based economics

Go well with their faith-based biology, physics, and chemistry.

[BOSSHOG]

3. And therefore he will be

pummeled by the right wing media machine. Krugman is kicking gop ass on the social security issue with FACTS and REASON. I'm sure the lemmings will hear from that economic expert limbaugh today how evil and unamerican Krugman is. They will stare at their radio, breathing through their mouths in wonderment as the social security "crisis" is keenly and succinctly explained to them. Then they will spread their "independent" thoughts throughout the land. There must be some solace in being an idiot. If there are any idiots from freeperville reading this, please feel free to chime in and educate me about the social security crisis. If you have the time, please share with me where the WMD are, and lastly, how about a hint about what the next big lie will be that you will swallow like a 20 dollar Bourbon Street whore.

[gratuitous]

4. Krugman makes an excellent point this morning

It's tempting to let your eyes glaze over when reading about numbers and percentages and projections, but it's not all that complicated.

In a nutshell, if private accounts are going to "save" social security, you must assume a sterling rate of return in the stock market. And by "sterling," Krugman means more than 6% over the annual rate of inflation. Forever. Every year. Without fail.

Unfortunately, that's just not possible -- that would be the equivalent of dot-com stocks of the late 90s, running at their overheated best indefinitely. And if it were possible, then the taxes levied on wage-earners to fund social security would far exceed any imaginable need for the funds in social security.

[soupkitchen]

5. Asset inflation is The economic issue nobody wants to talk about

Keeping the math simple. If a $100 stock sells for a p/e of 10, sees its price increase by demand to $200 but its PE to 20 no wealth has been created. If its price moves to 200 but its p/e to 30; real value has beeen lost.
Well, privatizing social security would create artificial demand, but real asset inflation.

In fact, if I were a Democratic Senator I would tie any privatization of social security into price earning formulas that prevented private account owners from buying inflated stocks.

What this would do, very quckly, is get the financial industries to withdraw their support for privatization. Their bluff would have been called. For the last thing they want is the public to start examining the real values represented by p/es.

[ProfessorGAC]

8. Sorry, I Repeated Your Point

This has been part of my position since this first came up, so i posted right after i read Krugman's piece. Then i read yours and they pretty much say the same thing.

Sorry for the repeat.
The Professor

[SmokingJacket]

6. Too bad more people can't distinguish between

an intelligent argument and a talking point.

Krugman's a fricking genius, but some people would rather listen to nonsense.

:grr:

[ProfessorGAC]

7. Krugman Is Leaving Out One Important Factor

While i agree with everything in the article, there is one more barrier to the privateers that he doesn't include.

The market is subject to supply and demand, in addition to the speculative, and less measurable elements. There is only so much total value in the market. So, when an extra 20% (or so) of $1.1 trillion hits the market, it becomes additional cash chasing after the same value in goods. This is the classical definition of inflation.

So, as time goes on the cost of a given equity will rise due to market inflation, the corporation itself does not realize any capital from the sale of stock owned by an existing investor, the value of that equity is now only tied to the inflation rate of the market, and the only people who make any serious money are those that already hold the equities.

Then, this effect exacerbates the dividend value that Krugman describes twice. So, the growth is illusory, and the dividend value falls, making the overall return equal to only inflation.

The Professor

[fob]

9. Hey Professor, I posted this question in a different thread, then I

remembered your post expanding on Krugman. So I figure anyone willing/able to EXPAND on a Krugman analysis would be a better choice to field my question.

My question;

What would happen if bush* gets this effed up plan enacted and for arguments sake, EVERYONE invests there portion in China. China is afterall the hot economy right now. What affect would that have on OUR economy. A giant outsourcing of US funds to overseas taken right out of the (in effect) General Fund which would have to be BORROWED from foreign investors (like say China) to fund the transition costs.

Thanks in advance,

fob

[kentuck]

11. Inflation is the monster hiding in the closet...

so to speak...