Wednesday, November 05, 2008

Arnold Kling provides us with strategies in a banana republic

and no, the consequences of shopping are much worse than you might think:

A banana republic is a country where government obligations swamp total wealth. In a typical banana republic, wealthy individuals race to move their savings overseas to safe havens. Those who fail to do so will suffer from taxation, inflation, and currency devaluation.

There is a term in economics called "Ricardian equivalence." The idea is that people incorporate government obligations into their personal balance sheets. Imagine that you were the only citizen of your jurisdiction. The government borrows $1000 and gives it to you. Has your net wealth gone up? Obviously not, since when it comes time for the government to repay the debt, the only citizen who can do it is you. If you believe in Ricardian equivalence, then there is no such thing as fiscal stimulus.

In practice, when government borrows and spends, the people who receive the money know who they are better than the people who are going to have to pay it back. That is why fiscal stimulus works...supposedly.

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My point is that sooner or later the U.S. government is going to have to get serious about stripping the assets of those of us who have tried to live within our means. Sooner or later, the profligate are going to take from the prudent, the grasshopper is going to confiscate the property of the ants.

If you've got wealth, you need to find a haven for it. You don't want to keep it in a banana republic for too long.

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