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Is there a fix to this? Really...


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I have been wondering over the last few weeks/months if there is a fix to the financial situation of developed countries. I am serious here, this is not a joke.

 

Basically, we have an aging population which will require more and more care and will spend less and less being always afraid to run out of it (most are anyway). Then we have workers who are becoming commoditized within the global economy. Skills are being tought in developing countries and they are now capable to do what we do.

 

In theory, it should mean lower growth rates and a declining standard of living. This should result in less income at a certain tax rate for our governments and likely no more income even if they were to increase the tax rate since it would mean fewer dollars available to its population to sustain growth. All the while, they have made promises to pay for the aging population and they have racked up enough debt at current conditions that they barely can afford any increase to the interest rate on that debt. Infrastructure in many areas are falling apart and there is no cash to just maintain it.

 

I see very few solutions and they all seem really hard to apply:

 

1- Stop paying for medication and care past a certain age and for some very expensive and questionable treatments at any age. This may sound terrible, but when you have no more cash to extend life what do you do?

2- Stop paying old age pension. Again a drastic measure, but once again what is the alternative?

3- Inflate the currency like crazy. I am not even sure this is a solution looking at Zimbabwe and Weimar Germany. It could lead to war with countries who hold that debt and would certainly not be great for the citizens facing massive inflation.

 

The U.S. has one solution mostly unavailable to other large developed countries and it is to massively curtail its defense spending.

 

I am just wondering what you think on the subject. I have heard many commentators, but very few coming up with real solutions to the problem or at least very few explaining in plain numbers what their proposals would do in dollar terms to the debt and to the imbalances. I sense that no one has a clue and that we may be past the point of no return already or getting back to things as described in 1), 2) and 3).

 

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I agree with lower growth rates but that implies lower rate of growth in standard of living - not declining standard of living. If you take out the expected increases in Medicare and Medicaid costs US does not have even a tiny bit of problem in meeting commitments over the next century with roughly existing tax rates, expected economic growth and sustainable debt levels. So the main issue that needs to be dealt with is improving efficiency, limiting fraud and restricting some of the treatments at end of life in Medicare and Medicaid. Many have proposed solutions to these issues but it is more a matter of political will. I guess the public has to feel some pain before there would be a push to solve this problem.

 

I do not really have any concerns on the long term future of US. The current problems are puny compared to that faced by US in the past. Civil war, Great Depression, World War 2 where the very existence of the country is up in the air.

 

We might get a slightly lower increase in the standard of living. So what? I would very happily take this compared to say facing the GD or WW2. Bailouts, money printing, deficits? So what? We get some inflation for a few years (70s) or maybe at worst be like Japan (in 90s) but very unlikely. I see some turbulence in the next few years, but personally if given the choice of the country or the century to live in, US or any of the developed countries at the current time as a no brainer.

 

Just my ramblings, but you asked. :)

 

Vinod

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One other solution is what countries have done when thier debt is too high (selective default - esp. to foreigners).  I think you also are underestimating the amount of high value-added jobs that will move to low-wage countries.  We (UK/Europe/USA/Canada/Australia) have 3 current advantages: 1) a system that rewards success without being related to someone in control, 2) having a system that efficiently provides competition to improve products and services and 3) a system the provides protection for IP.  I don't see developing countries providing these advantages over the next 10 to 15 years as they are cultural in nature (absent a coup or change in gov't control of China).  

 

As an example, I have seen some firms try outsource software work to China.  However, most of the work is low level coding and QA-type of work.  When they tried outsource other work it was eventually moved back to the US.

 

Packer

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Personally I think the solutions are easy. You have outlined a few. This will require logical decision making and auctual sacrifice. The problem is easy to fix but no one wants to sacrifice - Not the rich, poor, unions, corporations, politicians, military industrial complex, or major industries. You cant solve a problem like this and leave everyone whole. Trying to take half a loath from one or two stakeholders also doesnt work.

 

Its an easy problem to fix, it just requires good old fashion sacrifice. Why are we spending billions nation building in two tribal countries when ours is falling apart? Why are hundreds of thousands of dollars spent trying to help an 87 year old man live an extra year? Why are we spending millions locking people up for petty crimes and marijuana?

 

Its time to give up some of these things. America has alot of fat and alot to give so its not too tough.....

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