Thursday, November 03, 2011

Could defaulting on debt be like a graduated tax on wealth?

Looks like investors will be "taking a haircut" as Greece defaults even 50% on it's debt as the most recent agreement I heard about calls for. Those who have the most money will have the most to loose. The most money invested in Greek debt; that is.

Hopefully this is the case. At least it sounds logical to me. Of course, folks always try to Wiesel out of everything, but hopefully logic can prevail.

Does this mean that default is sort of like a graduated income tax? A graduated tax on accumulated wealth?

Big investors loose more than small investors.

Same thing could happen with default of US debt. The more money one has, the more one has to loose.

Default could be like the graduated tax that conservatives usually don't want.

If the wealthy don't pay the tax up front, like supporting a higher income tax, they may end up paying it later, if things default.

Large accumulations of wealth would loose more than small accumulations. Accumulations that are "invested" in these debts at least.

It could be sort of like justice in the end. Another term for this is "poetic justice."

Of course, people with less wealth have a lot to worry about also since even a slight haircut could mean the rent isn't paid or no dinner is on the table. Folks with vast sums of money can take a haircut and still have their basic survival needs met, but here's the catch.

Folks with vast sums of money still have worries. Its a different kind of worry. Folks with vaster wealth have worry about business responsibilities and obligations that can't be met. Watch out, if you are wealthy. Here come your employees, clients, vendors, customers and tax collectors. They are all banging down the door. The wealthy have a lot to worry about. The wealthy have more to loose.

Responsibilities = Headaches.

Still, our world wide debt load means we have to accept taking haircuts. It's best if this can be done as rationally as possible.

Rational haircutting can be a lot of things. One form of it might just be "means testing" for Medicare and Social Security.

If we can get through this rationally, and accept a few haircuts, we can get beyond the world debt crisis.

It was stupid, for the managers of all these various investment instruments to have lent out all this money anyway, but that's water under the bridge now. Or, maybe I should say, "that's money under the bridge;" ... the bridge that needs to be rebuilt.

It's all under the bridge now, but we need to look to the future. We have to take a haircut. The rich will have to take a bigger haircut. We have to resolve this debt mess and move on. Partial defaults, like what's likely happening to Greek debt, is part of the solution.

Printing money may ease the situation some, with the accompanying "tax" of inflation.

Means testing, budget cuts, tax increases and economic growth to pay down current debt. All these things are part of the solution.

Looks like the debt is so big that some of the solution will be "investor haircuts." When we get beyond this "debt overhang," we can move on into what will hopefully be a brighter future.

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