average saving rate affect on ability to retire

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bb
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average saving rate affect on ability to retire

Post by bb »

In Bernstein's article: "Retirement Calculator from Hell, Part IV:
A Nation of Wal-Mart Greeters"

http://www.efficientfrontier.com/ef/103/hell4.htm

It is stated:
If you want to retire early, what matters is not how much you save, but how much more than everyone else you save.
I was wondering if someone could elaborate on this issue a little. I am familiar with
living below means, safe withdrawal rates, etc but have never read assertions that
my ability to retire is affected by everyone else's savings rate.
hiddensee
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Re: average saving rate affect on ability to retire

Post by hiddensee »

He's saying that if there are more people spending money but not producing things then prices will rise.

I'm not sure this is true, at least not enough to crowd out all or most of the benefit of saving more. Capital investment increases productivity, allowing fewer people to support more people. This is in contrast to debt-funded state pensions where his analysis is more accurate: by adding interest repayments to the national expenses without increasing investment in productive capital, they mean more workers can support increasingly fewer retirees! But, he seems to be talking about private, savings-funded pensions.
livesoft
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Re: average saving rate affect on ability to retire

Post by livesoft »

I will only guess that ueber savers drive up the prices for things that one needs and consumes, so that one needs to save even more than them to get ahead.

I haven't read it, but the book by the Warrens' "The Two-Income Trap" probably tells a tale about this.

In my own life, I see that college expenses, health care expenses, housing, vacationing, etc have all increased in costs although one can still find bargains.

Here's an anecdote from my spouse: She was talking with a friend of her's in Boston. The friend had related about all the exceptional things she had done over the past year: Galapagos, cooking school in Provence, kids accepted to Ivy League, building ecological water treatment plants in Costa Rica, but then it turned out that none of these were exceptional because all her friends had already done all these things.

So I guess the trick is not just to Keep Up With The Jones's when saving, but to become the Jones that everybody else tries to keep up with.
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RadAudit
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Re: average saving rate affect on ability to retire

Post by RadAudit »

The reason we don't discuss it is that it probably doesn't apply to us as individuals, the fix to the situation is not actionable on an individual basis, and the ultimate conclusion to the situation, if not fixed, is not pretty to contemplate.

Economics is such a cheery science!!!!
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
hiddensee
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Re: average saving rate affect on ability to retire

Post by hiddensee »

livesoft wrote:Here's an anecdote from my spouse: She was talking with a friend of her's in Boston. The friend had related about all the exceptional things she had done over the past year: Galapagos, cooking school in Provence, kids accepted to Ivy League, building ecological water treatment plants in Costa Rica, but then it turned out that none of these were exceptional because all her friends had already done all these things.

So I guess the trick is not just to Keep Up With The Jones's when saving, but to become the Jones that everybody else tries to keep up with.
Do you think those people have any savings?

The great thing about our current society for us individually - if the claim of the article is true - is that the median savings rate is probably close to or below zero. The cookie-cutter elite that worships the Ivy League and pays $millions for tiny houses in expensive urban centres is unlikely to be saving much of its money. The millionaire wearing a thrift store raincoat in an unfashionable small town is doing much better.
Professor Emeritus
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Re: average saving rate affect on ability to retire

Post by Professor Emeritus »

At least in part, the trap in Bernsteins analysis is the failure to look at economic productivity PER WORKER. if we pumped water by a having a bucket brigade his desert island makes sense. But we don't . We have made enormous increases in output Per worker. (about 2% compounded ) Ensuring productive social investment is the most important factor in making private investments profitable.
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laughlinlvr
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Re: average saving rate affect on ability to retire

Post by laughlinlvr »

I subscribe to this sentiment, but not in the explicit manner of the other posters who answer in terms of wealth and outputs per worker.

My take is that the relative aspect of a savings rate is twofold:

First, safety nets are geared to averages. This includes ss and other income in retirement. If it's available/priced for the average, then you - as the more able saver - will be better off come retirement when compared to the average.

Second, By saving more than the average such individuals will be living more frugally than the average during their accumulation phase. This will stand them in good stead during retirement. They should be able to live their - by now familiar - frugal lifestyle longer than others. Or, depending on the amounts saved and invested successfully be able to relax their frugal lifetstyle. Those that haven't will be living the frugal lifestyle later rather than sooner, a much harder lifestyle than the other way around.
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Re: average saving rate affect on ability to retire

Post by nash031 »

RadAudit wrote:The reason we don't discuss it is that it probably doesn't apply to us as individuals, the fix to the situation is not actionable on an individual basis...
Exactly. The only thing an individual can control is his/her own savings rate. I don't compare mine to anyone else's, I just try to find ways to maximize it while still having a good enough standard of living for my family.
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bb
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Re: average saving rate affect on ability to retire

Post by bb »

Reminder - please don't discuss politics, social policy, etc. Just trying to make sense of
Bernstein's assertion.

Thanks,

Brian
madmanx
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Re: average saving rate affect on ability to retire

Post by madmanx »

I think ignoring technological innovation, current unemployment and immigration is a big mistake when it comes to his theoretical world.
whomever
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Re: average saving rate affect on ability to retire

Post by whomever »

"If you want to retire early, what matters is not how much you save, but how much more than everyone else you save."

It's in the context of demographic bubbles.

Imagine an island where ten fisherman live - 9 working and 1 retired. Their ages range from young to old. The retired one saved by stacking gold in a cave; each week he pulls out a piece of gold and uses it to buy fish from the 9 workers. They put the gold in their cave for when they retire. At about the time #1 dies, #2 retires and starts spending his gold (and #10 has a kid, hopefully).

Now imagine another island with 10 fishermen where there was a baby boom. Everything is like the first island this year, but next year 5 of the fishermen retire, so there is 5 workers and 5 retired people. It's all OK, because the 5 retired folks have caves with just as much gold saved as the people on the first island. But - with five guys fishing and five wanting to buy, what happens to the price of fish?

Or a third island, just like island #2 but where people saved half (or twice as much) gold. Will the retirees on the third island be eating half (or twice) as much fish as the retirees on the second island? No, on both islands there are 5 workers and 5 retired people - the productive capacity of the 5 workers will be divided among the retired ones according to the relative wealth of the retirees, not their absolute wealth.
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bb
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Re: average saving rate affect on ability to retire

Post by bb »

I guess I follow the uber simple example. But lets say we have 10 people.

person #1: age 90-100
person #2: age 80-90
etc

Let's say a few raise food, a few do other jobs. So it is not clear to me just becuase
people start to retire at 80 in stead of 90 that the price of food has to go up.

Productivity allows fewer people to be farmers. Some people might work in travel
business. Retirees consumption of travel may go up but the consumption of food
is relatively constant. So why would there be a rise in food prices?

The example seems so contrived to not be applicable to a real economy. But I think
Bernstein is far smarter than me so is it applicable?

Brian
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G-Money
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Re: average saving rate affect on ability to retire

Post by G-Money »

bb wrote:In Bernstein's article: "Retirement Calculator from Hell, Part IV:
A Nation of Wal-Mart Greeters"

http://www.efficientfrontier.com/ef/103/hell4.htm

It is stated:
If you want to retire early, what matters is not how much you save, but how much more than everyone else you save.
I was wondering if someone could elaborate on this issue a little. I am familiar with
living below means, safe withdrawal rates, etc but have never read assertions that
my ability to retire is affected by everyone else's savings rate.
It's just like being wealthy. You need to either earn more or save more than whomever your comparing yourself to. If you want to retire early, you need to have more saved for retirement (in relation to how much you'll spend) than someone who plans on retiring at an "average" age.

We can't all be above average.
Don't assume I know what I'm talking about.
hiddensee
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Re: average saving rate affect on ability to retire

Post by hiddensee »

bb wrote:I guess I follow the uber simple example. But lets say we have 10 people.

person #1: age 90-100
person #2: age 80-90
etc

Let's say a few raise food, a few do other jobs. So it is not clear to me just becuase
people start to retire at 80 in stead of 90 that the price of food has to go up.

Productivity allows fewer people to be farmers. Some people might work in travel
business. Retirees consumption of travel may go up but the consumption of food
is relatively constant. So why would there be a rise in food prices?
Both examples are ignoring the real reason investments are useful.

Take Society L, where ten people work the land. They set aside 50% of their income each year. When they reach age sixty, they buy a tractor that allows one person to produce twice as much food. They rent the tractor to a younger worker in exchange for half his yield. He earns 10x as much as they did for the same job, and they live as well as before! Capital investment here has increased the ratio of retirees to workers that can be supported, as well as the total wealth of society.

Now take Society S, where those ten people instead spend that money on holidays, ipads and other consumption goods that are over or broken by the time they want to retire. They find that they have to keep working or starve.

Society S is more like the one we're living in but the blog is using the flaws of this sort of society to attack people proposing to make it more like Society L.
The example seems so contrived to not be applicable to a real economy. But I think
Bernstein is far smarter than me so is it applicable?
As I said, the author is trying to make a political point (Social Security is good, Republican think tanks are bad) first and foremost. Politics makes only certain allowance for intelligence.
MathWizard
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Re: average saving rate affect on ability to retire

Post by MathWizard »

I understand his point, but don't agree. The example
used to support or explaIn his point is far
too simple to capture enough of the complexity
of a large economy.

Reasoning from very simple examples lets
people who have virtually no experience
make grand statements.
Topic Author
bb
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Re: average saving rate affect on ability to retire

Post by bb »

I generally think of my ability to retire is determined by some
notional SWR and current account balance.

How does what age other people retire factor into this?

Where is the dependency on the average retirement age on SWR
and projected stock/bond prices or the cost of goods?

Brian
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Re: average saving rate affect on ability to retire

Post by Professor Emeritus »

bb wrote:I generally think of my ability to retire is determined by some
notional SWR and current account balance.

How does what age other people retire factor into this?

Where is the dependency on the average retirement age on SWR
and projected stock/bond prices or the cost of goods?

Brian
I recall a cartoon in the early 60s where a man prepared his fallout shelter for nuclear war by stocking it with 100 dollar bills.
Survivalists don't save money they stockpile "stuff".
The question is how the economy will divide resources.
SWR etc are a function of Microeconomics. Microeconomics assumes a functioning and relatively stable economy, Macroeconomics is the study of how overall economies work.
Since retired people do not produce but only consume they can only consume what is left after the productive portion of the economy takes what it needs. Essentially the goods and services allocated to the retired will be priced to clear the market. So the quality of your retirement, i.e. what your notional money will buy is a function of the macroeconomic division of resources.
Last edited by Professor Emeritus on Fri Feb 14, 2014 5:09 pm, edited 2 times in total.
hiddensee
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Re: average saving rate affect on ability to retire

Post by hiddensee »

The historical savings rate also affects the size of the economy so it isn't a zero sum game.
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Dutch
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Re: average saving rate affect on ability to retire

Post by Dutch »

Professor Emeritus wrote:I recall a cartoon in the early 60s where a man prepared his fallout shelter for nuclear war by stocking it with 100 dollar bills.
Survivalists don't save money they stockpile "stuff".
The question is how the economy will divide resources.
SWR etc are a function of Microeconomics. Microeconomics assumes a functioning and relatively stable economy, Macroeconomics is the study of how overall economies work.
Since retired people do not produce but only consume they can only consume what is left after the productive portion of the economy takes what it needs. Essentially the goods and services allocated to the retired will be priced to clear the market. So the quality of your retirement, i.e. what your notional money will buy is a function of the macroeconomic division of resources.
Are you saying that a dollar from income is different from a dollar from saving? And that somehow one get's preferential treatment over the other?
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sans souliers
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Re: average saving rate affect on ability to retire

Post by sans souliers »

I'm retiring LATE. I had originally planned to retire at 58, and if everything went great (that never happens), I would have been fortunate to retire at 55. Turned 55 in 2009. Retirement sure wasn't happening THAT year, and 58 was a target missed, but now for me, 60's the new 58.
And I just know that for the next ten years, I'll be trying to get people to understand that while I'm retired early, I won't be taking Social Security payments until I'm 70, even though I can.

Early is a relative term. Relative to most of the population, I'm retiring early, but according to my plan, I'm late. Reminds me of the fella that was running past another guy, saying a bear was headed this way. The other guy says "What's the use? You'll never outrun a bear", and the running guy yells back "I don't hafta outrun the bear, all I gotta do is outrun YOU!"
Last edited by sans souliers on Fri Feb 14, 2014 10:49 pm, edited 1 time in total.
Sometimes pessimism leaves me pretty well prepared for when things don't go my way, and pleasantly surprised when they do.
Topic Author
bb
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Re: average saving rate affect on ability to retire

Post by bb »

Since retired people do not produce but only consume they can only consume what is left after the productive portion of the economy takes what it needs. Essentially the goods and services allocated to the retired will be priced to clear the market. So the quality of your retirement, i.e. what your notional money will buy is a function of the macroeconomic division of resources.
There are no retiree only new cars, or restaurants, or anything else for that matter. Yes older
people are buying more of some goods and services but a large part of the goods and services
they buy are the same goods and services that everyone else buys.

If a barber earns a dollar cutting hair and spends it how is that different than a retiree earning a dollar
of interest and spending it?
Professor Emeritus
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Re: average saving rate affect on ability to retire

Post by Professor Emeritus »

bb wrote:
Since retired people do not produce but only consume they can only consume what is left after the productive portion of the economy takes what it needs. Essentially the goods and services allocated to the retired will be priced to clear the market. So the quality of your retirement, i.e. what your notional money will buy is a function of the macroeconomic division of resources.
There are no retiree only new cars, or restaurants, or anything else for that matter. Yes older
people are buying more of some goods and services but a large part of the goods and services
they buy are the same goods and services that everyone else buys.

If a barber earns a dollar cutting hair and spends it how is that different than a retiree earning a dollar
of interest and spending it?
OFGS Societies have all kinds of ways of controlling supply and demand. Ever read this bit?

If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold

Manipulation of interest rates is the current favorite method of favoring workers over savers. Why do you think the SWR has dropped?
Where do you think the chained CPI comes from?
Why do you think they increase medicare premiums and co pays?
Elderly people are very dependent on minimum wage. Increases in the minimum wage help workers at the cost of the elderly

NOTE TO MODERATORS I AM NOT DISCUSSING SUITABLE Policies I AM GIVING SIMPLY GIVING EXAMPLES

The articles point is that when the crunch comes your retirement dollars will not go as far in buying the things retirees routinely buy.
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Dutch
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Re: average saving rate affect on ability to retire

Post by Dutch »

Professor Emeritus wrote:OFGS Societies have all kinds of ways of controlling supply and demand. Ever read this bit?

If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold

Manipulation of interest rates is the current favorite method of favoring workers over savers. Why do you think the SWR has dropped?
Where do you think the chained CPI comes from?
Why do you think they increase medicare premiums and co pays?
Elderly people are very dependent on minimum wage. Increases in the minimum wage help workers at the cost of the elderly

NOTE TO MODERATORS I AM NOT DISCUSSING SUITABLE Policies I AM GIVING SIMPLY GIVING EXAMPLES

The articles point is that when the crunch comes your retirement dollars will not go as far in buying the things retirees routinely buy.
I'm not really sure what your point is.

Yes, inflation is bad for retirees. But surely equities, TIPS etc. provide a measure of inflation protection?
Professor Emeritus
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Re: average saving rate affect on ability to retire

Post by Professor Emeritus »

Dutch wrote:
Professor Emeritus wrote:OFGS Societies have all kinds of ways of controlling supply and demand. Ever read this bit?

If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold

Manipulation of interest rates is the current favorite method of favoring workers over savers. Why do you think the SWR has dropped?
Where do you think the chained CPI comes from?
Why do you think they increase medicare premiums and co pays?
Elderly people are very dependent on minimum wage. Increases in the minimum wage help workers at the cost of the elderly

NOTE TO MODERATORS I AM NOT DISCUSSING SUITABLE Policies I AM GIVING SIMPLY GIVING EXAMPLES

The articles point is that when the crunch comes your retirement dollars will not go as far in buying the things retirees routinely buy.
I'm not really sure what your point is.

Yes, inflation is bad for retirees. But surely equities, TIPS etc. provide a measure of inflation protection?
OFGS Have you ever heard of "rationing'? There are lots of ways to ration things. Constrict the supply of specific items and the price goes up
it's not "inflation" it's demand manipulation. The increase in tuition prices at State Universities is not "inflation" it is price manipulation to by eliminating subsidies. Home mortgage interest deduction is a massive subsidy to the Homebuilding industry.

Now if you want to direct more wealth to the "productive" portions of society you restrict subsidies for the elderly.

none of this is "inflation"
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Dutch
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Re: average saving rate affect on ability to retire

Post by Dutch »

Professor Emeritus wrote:OFGS Have you ever heard of "rationing'? There are lots of ways to ration things. Constrict the supply of specific items and the price goes up
it's not "inflation" it's demand manipulation. The increase in tuition prices at State Universities is not "inflation" it is price manipulation to by eliminating subsidies. Home mortgage interest deduction is a massive subsidy to the Homebuilding industry.

Now if you want to direct more wealth to the "productive" portions of society you restrict subsidies for the elderly.

none of this is "inflation"
And this would happen in a situation where a large(r) part of the electorate is retired?

This all sounds very "conspiracy theory" to me.

PS. Most people would consider subsidies a form of price manipulation, not the elimination of one.
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Re: average saving rate affect on ability to retire

Post by Professor Emeritus »

Dutch wrote:
Professor Emeritus wrote:OFGS Have you ever heard of "rationing'? There are lots of ways to ration things. Constrict the supply of specific items and the price goes up
it's not "inflation" it's demand manipulation. The increase in tuition prices at State Universities is not "inflation" it is price manipulation to by eliminating subsidies. Home mortgage interest deduction is a massive subsidy to the Homebuilding industry.

Now if you want to direct more wealth to the "productive" portions of society you restrict subsidies for the elderly.

none of this is "inflation"
And this would happen in a situation where a large(r) part of the electorate is retired?

This all sounds very "conspiracy theory" to me.

PS. Most people would consider subsidies a form of price manipulation, not the elimination of one.
Both providing and eliminating subsidies are forms of price manipulation. and your comment about Electorate indicates simply that you think the elderly can politically win the price manipulation battle. They can win the battle but lose the war.
NB I am elucidating the point in the article. That is not the same as agreeing with it. But the simple fact is that societies have to make trade offs among investment and consumption. Ancient farmers knew they had to plant crops even if it meant the children and elderly starved in the meantime.
You can't eat money. and you cant let those with mere money claims to consume what the productive people need.
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Re: average saving rate affect on ability to retire

Post by Bill Bernstein »

No, I was making a much more basic macroeconomic point, which is that there are only so many goods and services to go around, and if, say, a third of the population is retired, which we'll get to soon enough (the Japanese are nearly there, for example), and if they all have substantial (say $1,000,000) savings, then there are a lot of stocks and bonds chasing a limited amount of goods and services produced by the other two thirds, and so the prices of those goods and services will get bid up dramatically.

OTOH, if only a very few people have substantial savings, then prices do not get bid up nearly as much, and those few with substantial savings will be in much better shape.

It's not Keeping up with the Joneses; it's being able to Outbid the Joneses.

Bill
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Re: average saving rate affect on ability to retire

Post by Professor Emeritus »

wbern wrote:No, I was making a much more basic macroeconomic point, which is that there are only so many goods and services to go around, and if, say, a third of the population is retired, which we'll get to soon enough (the Japanese are nearly there, for example), and if they all have substantial (say $1,000,000) savings, then there are a lot of stocks and bonds chasing a limited amount of goods and services produced by the other two thirds, and so the prices of those goods and services will get bid up dramatically.

OTOH, if only a very few people have substantial savings, then prices do not get bid up nearly as much, and those few with substantial savings will be in much better shape.

It's not Keeping up with the Joneses; it's being able to Outbid the Joneses.

Bill
And my point is that it can actually be worse than you describe. A rational society protects its future by , one way or another, "devaluing" non producers with money claims for consumption relative to consumption by those needed for production. The Detroit bankruptcy is just one example. Medicare cutbacks are another. Airlines do the same thing to frequent flyer mile holders. Germany did this with pensioners in the former DDR. Cutting healthcare subsidies promised to retirees has the same effect.

Yes it is harder in the main to differentially raise prices on general goods but tax increases and elimination of subsidies and public services go a long way.
Note to Moderators-I am not advocating or discussing these possibilities. I am stating that they may need to influence investment decisions.
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