The Financial Riddler: Five Questions

1. Does Conventional Financial Planning Meet a Reasonable Fiduciary Standard?

a. Yes

b. No

And the answer is …

My answer is no. But, full disclosure, I’m an economist and my software company markets MaxiFiPlanner to households and financial professionals. MaxiFi does economics-based planning. This article, which compares MaxiFi Planner with one of the latest conventional planning tools, called New Retirement, considers the general, and generally severe, problems with conventional planning. The biggest of these is the assumption that a financial plan with a roughly 80 percent probability of success is safe. Success here means not running out of assets in retirement. But having a one in five chance of becoming penniless apart from your home and Social Security benefits is hardly safe. FINRA — the Financial Industry Regulatory Authority — is, it appears, condoning Wall Street’s practice of putting millions of Americans at huge risk of impoverishment — impoverishment that can occur early, midstream, or late in retirement.

2. Has Federal debt increased or decreased as a share of GDP since President Biden took office?

a. Increased

b. Decreased

And the answer is …

It’s decreased. Federal debt held by the public is now 93 percent of GDP. It was 105 percent of GDP when President Trump left office. The reason this net debt ratio fell is inflation. Inflation raises GDP measured in nominal dollars. I.e., outstanding federal debt stays fixed in nominal dollars. Stated differently, inflation eroded the real purchasing power of Uncle Sam’s obligations, watering down what Uncle Sam needs to repay. Gross federal debt also fell as a share of GDP — from 135 percent to 121 percent.

3. What is Argentina’s annual inflation rate?

a. 152 percent

b. 113 percent

c. 71 percent

d. 33 percent

And the answer is …

According to the Economist, it’s 113 percent. Argentina appears poised to elect a libertarian politician, Javier Milei, who wants to dollarize the peso as in eliminate the peso and have the country do as Panama and other countries do — use the dollar. This is what the country should have done more than two decades ago rather than peg the peso to the dollar. Hopefully, Milei will be elected President in October and a century plus of awful economic policy will come to an end. Argentina had roughly 80 percent of the U.S. living standard back in 1920. Today it’s roughly 15 percent. That was all due to precisely the type of policies our country has been running in the postwar.

4. Former Fed Chairman Ben Bernanke claimed and claims the world is experiencing a saving glut. Former Treasury Secretary, Lawrence Summers, claimed and claims the U.S. is experiencing secular stagnation. Former IMF Chief Economist, Olivier Blanchard, claimed and claims U.S. deficit-finance may be free. Are all these views correct and do they connect to the basic facts?

a. Yes

b. In part

c. Not at all.

And the answer is …

The answer is c. On the first two conjectures, there is very strong, direct, opposing, and readily available evidence, which neither Bernanke or Summers appeared to have examined. See my article with Berkeley economist Alan Auerbach posted here on the saving glut (It appeared in VoxEU.) As for Blanchard’s conjecture that deficits are free, articulated in his American Economic Association 2019 Presidential Address and in a recent book, his analysis fails close scrutiny. In this regard, please check out this paper as well as this one. (Math geeks only!) Both were co-authored with economists Johannes Brumm at Karlsruhe Institute of Technology, Felix Kubler at the University of Zurich, and Xiangyu Feng at Xiamen University. The former paper is forthcoming at AEJ:Macro (The macroeconomics journal of the American Economic Association) and the later was published in The Journal of Public Economics.

5. How fast does the Chinese hypersonic missile fly?

a. 500 miles an hour

b. 1,500 miles an hour

c. 3,000 miles an hour

d. 15,000 miles and hour

And the answer is …

The answer is 15,000 miles an hour. The Russians also have a hypersonic missile. We, on the other hand, do not. Nor, it seems, can our 11 huge aircraft carriers defend against them. This means those ships and the rest of our navy can be sunk anytime China and, probably, Russia want to do so. This would produce a devastating retaliatory American response from our land-based miles and submarine missiles. Still, being outgunned in this manner feels very dangerous.

Related: Comparing MaxiFi Planner with New Retirement