U.S. Debt Hysteria Is Getting Ridiculous

By James Kwak

I don’t spend a lot of time trying to police the economic news media — Dean Baker and Brad DeLong are much better on that — but I found myself reading a two-week-old Newsweek column by Robert Samuelson that enraged me enough to type this out. (I read it on old-fashioned paper, but here’s the WaPo version.) The title of the WaPo version is “Could America Go Broke?” and here’s the last paragraph:

“Deprived of international or domestic credit, defaulting countries in the past have suffered deep economic downturns, hyperinflation, or both. The odds may be against a wealthy society tempting that fate, but even the remote possibility underlines the precariousness and the novelty of the present situation. The arguments over whether we need more ’stimulus’ (and debt) obscure the larger reality that past debt increasingly constricts governments’ economic maneuvering room.”

Deep economic downturns! Hyperinflation! “Precariousness and novelty of the present situation!” You’d think there was some actual reason to be afraid.

But not only does Samuelson provide no evidence that high debt levels lead to disaster, the evidence he does provide contradicts his alarmist conclusion. He says, “We have moved into uncharted territory and are prisoners of psychology. Consider Japan.” Then he considers Japan — and points out that even though Japan has the highest debt of any advanced economy, interest rates on Japanese debt have fallen to historically low levels. Somehow he says the “correct conclusion to draw” from the Japanese example is that “[major governments] can can easily borrow as much as they want until confidence that they can do so evaporates — and we don’t know when, how or whether that may happen.”

That’s not a conclusion from the Japanese example — that’s a truism that Samuelson asserted before the Japanese example and just repeated after it. (How we are on “uncharted territory” when Japan is already on that territory also escapes me.)

Samuelson doesn’t say anything that’s demonstrably false, because basically his column can be boiled down to this:

“If a government loses the ability to borrow money, bad things can happen. A government will lose the ability to borrow money when people are no longer confident that the government will pay them back. We don’t know when people will lose confidence. It may have something to do with the total amount of government debt, but then again it may not (see Japan).”

But that column is obviously not worth writing. So instead we get hyperinflation.

I’m not a fan of massive and increasing government debts in the abstract, forever. Who is? And there are real arguments to be made on this topic. But that’s not an excuse for empty rhetoric that serves no purpose. But wait — it does serve a purpose — the purpose of scaring people and politicians into not doing something about massive unemployment (because doing something might lead to hyperinflation, of course).

(After deciding to write this I realized that Dean Baker beat me to it by two weeks, but I think I’ve added onto what he had to say.)

Comments

[VennData]

Short term US rates are negative. Negative means people really really want US paper.

www.theglobeandmail.co.../

2009 Nov 20 04:08 PM

[Jeff Nielson]

Not only is this just more Keynesian tripe ("deficits don't matter"), but the author has the audacity to accuse someone ELSE of "empty rhetoric" - in his own piece of intellectual "fluff", with nary a fact to be seen.

Deficits DO matter. The $60 trillion in total public/private is already enough to drown this economy. Not a penny remains for the OTHER $70 trillion (or so) in "unfunded liabilities" which are NOW starting to come due with the retirement of the "baby-boomers".

It was economic heresy, and simply poor arithmetic for U.S. "economists" to argue that "deficits don't matter" 30 years ago.

2009 Nov 20 04:23 PM

[SPOTS]

We have already arrived at the point where people/institutions don't want our paper: The Fed has had to buy up to 70% of treasuries and more of MBSs at the auctions. That is called monetization of the debt, if you didn't know, and it's inflationary, anti-individual rights, and very dangerous.

China told Obama to take a flying leap on his recent begging trip to Asia. He got nothing he wanted: Iran, Pakistan, N. Korea, the yuan, trade negotiations, and especially our debt. If you haven't read what you're writing about lately, they are now buying short-term debt, so the inevitable rise of interest rates, as the world shuns us, won't hurt them. Read the recent Chinese papers and you'll get a taste of the anger the government and people of China have toward out actions over the last decade.

And do a little chartwork yourself. I've used the numbers from 4 different agencies that predict future economic conditions and progressive debt, based on present circumstances and Congressional action. Even the most optimistic numbers say we will become and remain a broken, high-taxed, high interest rate country decades into the future; there is no way to avoid a > $100 trillion debt (SS and Medicare can't be avoided since even if a revolution of the government caused the programs to fail, someone would have to pick up the tab, families, cities, states, etc., which would crush most highly indebted families and local governments).

I could go on for much longer, but I don't have time. Just do a lot of your own study before making bold statements that can throw off Americans about to lose their country.

2009 Nov 20 04:47 PM

[JasonC]

Spots - flat wrong. The Fed hasn't been buying treasuries since October, and it owns no more today than it did the day Bear went bankrupt. The size of the Fed's total sheet is the same as it was last October. All of the buying of treasuries only rebuilt the position sold off earlier in 2008 as it moved from ownership of treasuries to direct loans to the banking system. The only net new position is the mortgage backeds, which have run up only as fast as loans to the banking system have been repaid. The Fed did expand the sheet one-off during the actual panic, but has been doing nothing but reposition from short loans to the money market into long term securities, since then.

Once again we see that any error is tolerated and any slipshod fallacy is indulged provided it alleges doom and criticizes present institutions. It is just ridiculous at this point, the title of the article is correct. There isn't anything a doom mongering hyperinflationist can allege that won't be lapped up eagerly by the endless legions of lemmings all betting on the exact same thing that cause the bubble of the "oughts" in the first place - the metaphysical faith that anything you can hit with a stick is worth infinity, while anything denominated in money and especially in dollars doesn't exist.

It's crap, the same crap that gave us $147 oil and $1 million 3 bedroom houses 20 years old. It is an inflationary brainstorm but the much maligned authorities are simply not living up to the doom mongers' script.

The reason the bubble burst last year is the Fed held M1 completely flat for 3 years. That is all it took to make all the blown inflation-monger bubbles collapse of their own absurdity. The same will happen this time around. How many times do these idiots have to lose $10 trillion before they wake up to the fact that prices of real assets you can hit with a stick, can and do go down?

2009 Nov 20 05:00 PM

[yellowhoard]

All of these Central Banks and hedge fund managers are so stupid to be buying gold and shorting the dollar.

2009 Nov 20 05:25 PM

[Nettligent]

Nightmares before Christmas and Beyond. Time to face a painful reality. We are on the verge of total economic collapse under a monster debt load. Global companies scaling back on spending for 2010. High productivity, more jobloss and gold is going to soar.

2009 Nov 20 06:25 PM

[Fanatical Yankee]

Mr Nielsen, your comments are savage, cruel...and apt.


On Nov 20 04:23 PM Jeff Nielson wrote:

> Not only is this just more Keynesian tripe ("deficits don't matter"),
> but the author has the audacity to accuse someone ELSE of "empty
> rhetoric" - in his own piece of intellectual "fluff", with nary a
> fact to be seen.
>
> Deficits DO matter. The $60 trillion in total public/private is already
> enough to drown this economy. Not a penny remains for the OTHER $70
> trillion (or so) in "unfunded liabilities" which are NOW starting
> to come due with the retirement of the "baby-boomers".
>
> It was economic heresy, and simply poor arithmetic for U.S. "economists"
> to argue that "deficits don't matter" 30 years ago. For people like
> you (and DeLong) to CONTINUE to spout such drivel is either a case
> of hopeless self-delusion or deliberate deceit.

2009 Nov 20 09:06 PM

[E Nuff Sed]

Totally agree with the author.

This site is crawling with destructive austrian school termites.

So what is the alternative - nationalize the banks go under and turn all the car dealerships into soup kitchens? It is this kind of liquidationist thinking a balance sheet recession into the great depression in the 30's.

We barely avoided another one thanks to the coordinated global fiscal and monetary response . What the austrian termites don't get is that this is about the consumer and the private sector deleveraging. If the government does not leverage up and provide monetary and fiscal support a quarter of the population will be depending on food banks instead of 5%, now.

2009 Nov 21 12:20 AM

[Dave Wrixon]

I thought we the US economy was recovering. Didn't they just tell us that? ROTFLMFAO


On Nov 20 06:25 PM Nettligent wrote:

> Nightmares before Christmas and Beyond. Time to face a painful reality.
> We are on the verge of total economic collapse under a monster debt
> load. Global companies scaling back on spending for 2010. High productivity,
> more jobloss and gold is going to soar.

2009 Nov 21 03:26 AM

[anobjectivist]

Mr. Kwak,
I infer that you believe that it is the government's right, and even obligation, to "do something" about unemployment. You seem to believe that increasing debt can raise employment (that is almost axiomatic today). That I disbelieve it is not important. What is important is that your commentary ignores the moral questions about America's predicament.

Destroying the value of the dollar for the sake of raising employment is not an economic issue. It is theft. And it is not a coincidence that immoral government policies lead to decreasing prosperity and the destruction of an economy.

It is not the bureaucrats' right to manipulate the economy or interests rates. Americans are being deprived of a right to sound money, and deprived of a right to save in the way that they choose.

The foundation of serfdom in America is taxation on all forms of savings (taxes on "gains" and "profits" in gold, stocks, real estate, foreign currencies). Imposing a cost on saving, and taxing anything that outperforms the dollar (which is, by the way, almost anything), allows the government to manipulate the dollar for their political purposes. One of those purposes is to transfer wealth from the productive to the unproductive.

Suppose I held a gun to your head and asked for your money. Would you make an economic decision? Or some other sort of decision?

For all intents and purposes there is no economy, because under coercion there can be no economic decisions. Americans have been coerced into behaviors they would not otherwise take. Let's remove all taxes on precious metals, the truly legal money, and discover what free people chose.

It seems that you would treat every American and Japanese as a slave, for the benefit of some imaginary "common good" of lowering unemployment. That is what enrages me.

Considering the amoral, pragmatic issue: the story of Japan is not complete. America is in uncharted territory and Japan is, too. Would you admit that, while hyperinflation in Japan has been avoided, overall things do not look bright? If they had a chance to do things over, should they choose the same policy?

2009 Nov 21 09:38 AM

[enigmaman]

there wouldn't be so much screaming about government spending and the resulting debt if the spending was targeted as we were told it would be, to save the financial sector form doom, revive the economy and create jobs rather then reimburse political party favors. Yes the financial industry was pulled back from the brink, but there abuse of the TARP funds had less to do with helping the economy recover and more to do with using it to line there own pockets and all with the blessing of the Admin. The stimulus was more about paying back political favors to unions and states, created wasteful overly expensive clash for clunker cars, cash for clunker appliances, 1st time home buyer credit, funds to increase the social safety nets, saving jobs that were not needed, and to add insult to injury only 10% was employed during the time it was needed the most with the rest to kick in just around the next political election cycle. As it stands right now the Admin saddled us with debt that has done very little if anything to stimulate the economy though the resulting financial burden will be ours to carry for the foreseeable future. Yes the large debt is worrisome because it all has to be paid back, that it was used for political gain is very disturbing, that its been politicized is DC business as usual, that it appears the administration doesn't have a clue how to fix what ails us and is adding unnecessary additional debt on to our shoulders at the worst possible time is unconscionable, so in the end if screaming about the debt burden results in American paying attention, then more power to these demagogues.

2009 Nov 21 10:39 AM

[bob adamson]

Thank you, James Kwak, for the dissection of the recent column by Robert Samuelson.

Reading the responses to your article and the responses elsewhere on SA, I am struck again and again how many of us are fixated on money and the personal and public spending of it as a deeply moral issue. While concurring that there is an important moral aspect to our choices of what to do and how to achieve our chosen goals, I suggest that we must guard against making dogmatic choices that don’t address the circumstances of the moment. Dogmatic choices, because they are made in isolation from their likely consequences, too often lead to bad economic and moral outcomes.

A case in point is monetary and fiscal policy since 2002. Too often after the economy was apparently booming around 2004 or so, one heard the argument that taxes were inherently theft and that the historically low rates then applicable therefore should be lowered further for that reason even though the Iraq and Afghan wars and already inadequate government revenues were expanding the public debt. A similar dogmatic moral tone overhung discussions about monetary policy. Later, when a real possibility of a general collapse into a deep deflationary depression became a clear and present danger in the fall of last year, too many of us focused on the need to punish someone (the individuals who had become bankrupt because of credit spending, the Washington elite, investment bank executives, illegal aliens, China, auto workers – whatever) for some real or imagined moral transgression rather than the greater need to calmly deciding what needed to be done in the face of the crisis. Some almost welcomed the prospect of a depression as a moral judgment not to be interfered with (let the constructive destruction do its cleansing work unimpeded!). Now that the immediate crisis has abated but the way forward remains very uncertain, some advocate extreme austerity while others advocate unrestrained spending in the certain conviction, unimpeded by the course current economic reality, that their truth with set us free. Happily many other specialists and general citizens are more grounded.

The point I’m trying to make is that monetary and fiscal policy needs to constantly change to best address current needs and that dogmatic adherence to moral judgments or economic theories only diverts our attention to side issues and impedes our ability to change direction as circumstances require. Morality and theory have an important place in focusing our thinking but to be effective they must be applied creatively to address real current problems and we must be open to debate with those holding other opinions.

2009 Nov 21 01:43 PM

[SPOTS]

Jason C.

Let's see your numbers. Because it looks like you are making them up.

You say, "The Fed hasn't been buying treasuries since October, and it owns no more today than it did the day Bear went bankrupt"

The fact is a year ago they owned $476.44 billion, "officially"
Now they own $776.527 billion.

You say, "The size of the Fed's total sheet is the same as it was last October"

The fact is they continue to add at a rapid pace. "The Fed’s balance sheet expanded in the latest week, rising to $2.192 trillion from $2.112 trillion" (WSJ, 11/20/2009) That was mbs, treasuries, and agencies.

But the biggest thing you are missing is the "check kiting" deals they are doing with foreign central banks. This is very clear from studying and comparing the Treasury International Capital (TIC) flows, Treasury auctions, and Federal Reserve Custody Accounts. You will see that despite the fact that capital flows into the U.S. are dropping dramatically, foreign central banks are somehow buying up to 68% of treasuries at auction.

To let Chris Martenson summarize, "1) Foreign central banks sell agency debt out of the custody account. 2) The Federal Reserve buys those agency bonds with money created out of thin air. 3) Foreign central banks use that very same money to buy Treasuries at the next government auction. ... If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight."

"The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt" Agency debt which has been purchased by the fed in floods, as the Washington Post said,

"The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion. In its statement yesterday, the Fed said it will increase its purchases of mortgage-backed securities by $750 billion, on top of $500 billion previously announced, and double, to $200 billion, its purchases of [Agency] debt in housing-finance firms such as Fannie Mae and Freddie Mac."

And the "crap that gave us $147 oil", as you said, and is still giving oil priced much too high for the massive supply overhang, is due to "dark pools" centered at the ICE, out of reach of U.S. authorities, acting the same way as the Fed scheme above.

My major point though was the impossible amount of debt we have, without citizens that could possibly pay it off. As Meredith Whitney said last week, "Consumer liquidity was never this bad, even during the depression". Add to that the huge government debt and deficits, trillions in future military health care and rebuilding, demographically impossible social security, a bankrupt medicare and you have in excess of $100 trillion in debt and liabilities.

Unless Martians land and give us great new knowledge, "real" American productivity will continuously fall from the high taxes and interest rates. But even if it didn't fall, I would love to see you, Jason, show how we can pay off such debt when the government's own stats show that just the interest alone will exceed 50% of government receipts.

2009 Nov 21 02:00 PM

[Brynjo]

There may be a grain of truth in Mr. Kwak's article, but just a grain, as most of it seems to be off target.

For example, certainly the current debt ratio of the US Treasury is manageable. However, we do seem to be heading down a cul-de-sac. In particular, at what point will the banking system, homeowners with 110% LTV mortgages (and rising resets), commercial real estate sector, and the 10.2% of the labor force that make up the unemployed be ready for the fiscal tightening that would be necessary to reverse the current trend of fiscal deficits, and therefore debt? Aside from this cyclical reality, I'm not sure that the secular reality, or the political reality (i.e. focus on health-care, projecting military power, bigger government and knee jerk populism on every issue) paints a prettier picture!

Without trying to position myself as an "answer man" for policy makers, or as a policy maker myself, I instead try to focus on observation. My observation is that absent some kind of revolutionary productivity surge the federal (and municipal) deficits will eventually come to roost. Theoretically, that could take a decade...but markets always react faster...our lenders will bail out, leaving just the Fed as they financier to the Treasury...

2009 Nov 21 02:46 PM

[Tony Daltorio]

So you're saying...you don't want to own anything real...like land, metals, gems, fuels, etc., but you do want to own pieces of paper and computerized digits that are worth what your lords and masters in the government tell you it's worth?

I thought I had seen and heard it all in my near 3 decades in the investment business.....

Let me give you one one piece of free advice - asset values come down to the basics - supply & demand...Real assets have real demand and FINITE supply, paper assets have an INFINITE supply which can easily overcome any demand.

One last thought - the biggest bubbles I have ever seen in financial markets I am seeing right now in US Treasuries & US stocks.


On Nov 20 05:00 PM JasonC wrote:

>
> Spots - flat wrong. The Fed hasn't been buying treasuries since October,
> and it owns no more today than it did the day Bear went bankrupt.
> The size of the Fed's total sheet is the same as it was last October.
> All of the buying of treasuries only rebuilt the position sold off
> earlier in 2008 as it moved from ownership of treasuries to direct
> loans to the banking system. The only net new position is the mortgage
> backeds, which have run up only as fast as loans to the banking system
> have been repaid. The Fed did expand the sheet one-off during the
> actual panic, but has been doing nothing but reposition from short
> loans to the money market into long term securities, since then.
>
>
> Once again we see that any error is tolerated and any slipshod fallacy
> is indulged provided it alleges doom and criticizes present institutions.
> It is just ridiculous at this point, the title of the article is
> correct. There isn't anything a doom mongering hyperinflationist
> can allege that won't be lapped up eagerly by the endless legions
> of lemmings all betting on the exact same thing that cause the bubble
> of the "oughts" in the first place - the metaphysical faith that
> anything you can hit with a stick is worth infinity, while anything
> denominated in money and especially in dollars doesn't exist.
>
> It's crap, the same crap that gave us $147 oil and $1 million 3 bedroom
> houses 20 years old. It is an inflationary brainstorm but the much
> maligned authorities are simply not living up to the doom mongers'
> script.
>
> The reason the bubble burst last year is the Fed held M1 completely
> flat for 3 years. That is all it took to make all the blown inflation-monger
> bubbles collapse of their own absurdity. The same will happen this
> time around. How many times do these idiots have to lose $10 trillion
> before they wake up to the fact that prices of real assets you can
> hit with a stick, can and do go down?

2009 Nov 21 02:55 PM

[Donald Ingram]

Got some news for yah there 'Sparky' 48% of American's are now relying on food banks or shelters to augment their meals. It is "ostrich's" such as yourself (debt is not bad) that have ruined the country. You would fit right in at Congress along with all the other 'dunderheads', so go to Washington 'Sparky' and see if they need some help in the peanut gallery!


On Nov 21 12:20 AM E Nuff Sed wrote:

> Totally agree with the author.
>
> This site is crawling with destructive austrian school termites.
>
>
> So what is the alternative - nationalize the banks go under and turn
> all the car dealerships into soup kitchens? It is this kind of liquidationist
> thinking a balance sheet recession into the great depression in the
> 30's.
>
> We barely avoided another one thanks to the coordinated global fiscal
> and monetary response . What the austrian termites don't get is that
> this is about the consumer and the private sector deleveraging. If
> the government does not leverage up and provide monetary and fiscal
> support a quarter of the population will be depending on food banks
> instead of 5%, now.

2009 Nov 21 04:35 PM

[Gregman2]

As I've said before, there's an old Chinese saying: "He that owes is king." The fact is, we're in a cooperative global system and work-outs are the only way things can play out. We can't totally default. That said, incremental parts, units, districts can and sometimes do and shall default...consider the California City of Vallejo as one example. But in general we're talking about discounted and restructured debt sums. It's not so simple as black and white, all or none.

2009 Nov 21 04:42 PM

[dingding]

It simply amazes me to hear supposedly intelligent and educated people say that debt does not matter.

Debt does matter because it must ultimately be repaid.

The Japan example is not applicable to the USA because unlike Americans, the Japanese citizens save. America, on the other hand, is headed towards utimately selling the land on which the country is built.

2009 Nov 21 09:33 PM

[LaurenNicole]

If I owe Visa $20K, I am Visa's b*tch?

2009 Nov 21 09:41 PM

[newbietech]

You need to get your facts straight.
It was Reagan administration officials who first asserted that deficits do not matter. You are right in that it was deliberate deceit to assert such drivel.
You were however, suspiciously absent when W. Bush was cutting taxes and increasing deficits at the same time.
Why, I wonder.

On Nov 20 04:23 PM Jeff Nielson wrote:

> Not only is this just more Keynesian tripe ("deficits don't matter"),
> but the author has the audacity to accuse someone ELSE of "empty
> rhetoric" - in his own piece of intellectual "fluff", with nary a
> fact to be seen.
>
> Deficits DO matter. The $60 trillion in total public/private is already
> enough to drown this economy. Not a penny remains for the OTHER $70
> trillion (or so) in "unfunded liabilities" which are NOW starting
> to come due with the retirement of the "baby-boomers".
>
> It was economic heresy, and simply poor arithmetic for U.S. "economists"
> to argue that "deficits don't matter" 30 years ago. For people like
> you (and DeLong) to CONTINUE to spout such drivel is either a case
> of hopeless self-delusion or deliberate deceit.

2009 Nov 22 12:29 AM