05/17/10 Beijing, China – We just stepped off the plane… We’ll have to catch our breath and open our eyes before we have anything to say about China…
In the meantime, let’s look back at what is happening in Europe and America.
And we will begin by thanking Paul Krugman, economiste ordinaire at The New York Times.
Sometimes, in the dark of night, we are haunted by demons of doubt and worry. Especially when we’re alone. And far from home.
Maybe we’re wrong. Maybe we’re leading thousands of loyal Dear Readers astray. Maybe the Great Correction isn’t what we think it is. Maybe deficits are good. And maybe the US will never run itself into the Greek-style yoghurt.
What a relief it was to find Krugman in today’s International Herald Tribune! Naturally, Krugman disagrees with us completely. Which puts our mind at ease. If Krugman agreed with us, we’d have to re-think our position.
“America is not Greece,” he says. So far, so good. His geography is correct.
It is all downhill from there.
Krugman won a Nobel Prize for his early work. Which makes us wonder about the Nobel committee.
The US is running about the same size deficit as Greece; but don’t focus on that, says Krugman. The two places are not the same, he insists. Because the US has a “much lower debt level.”
He’s wrong about that. If you add to the US national debt the debts of Fannie Mae, GM, and all the other financial holes, which the government will ultimately have to fill, the crater is about 120% of GDP – the same as Greece’s debt.
“Even more important,” he writes, “is that we have a clear path to economic recovery.”
Oh. Where’s that? As near as we can tell, the path is twisty, poorly lighted and full of lethal obstacles. There are now nearly as many people relying on the US government for food as the entire population of Spain. There are about as many people unemployed in the US as the entire populations of Greece, Portugal and Ireland…combined. And there are as many people who have gotten negligible income gains as…well…the entire population of America.
Without more income, how can Americans increase spending? Without more spending, how can the economy really grow?
The government can do the spending! Well, good luck with that. Already, the return on additional borrowing in the private sector is so marginal that banks are generally unwilling to lend. And the return on government debt? It looks like a positive return, at first. People spend transfer payments just like any other money. Economists like Krugman can’t tell the difference. But government spending generally produces negative real growth.
Nevertheless, Krugman explains that IF the economy improves…and IF the administration cuts deficits…and IF the new health care program doesn’t cost more than the Obama team says it will – heck…everything will work out just fine! With a few tax increases, of course.
Then, he tells us that, yes, over the long run we’re going to hell in a handcart. But that problem can be solved by a “combination of health care reform and other measures.”
Finally, he’s right about something. Enough ‘other measures’ and you’ve got the problem licked.
What other measures? Well, the deficit is now at about 10% of GDP. So, all you’ve got to do is to cut spending by 11% of GDP and you’ve got a surplus. Let’s see, where are we going to cut $1.4 trillion dollars? That’s cutting out 100% of the defense budget. And 100% of Social Security too.
And if you don’t do that…you get more deficits. And if you get more deficits, you end up with more debt. And if you keep adding debt faster than real GDP growth, you eventually get to the point where the markets cannot or will not finance it. And then you’re Greece.
What is likely to happen is that yields will stay low enough for long enough to make people think Krugman knows what he is talking about. They’ll think that the US can borrow as much as it wants for as long as it wants…
In The Washington Post, economist James Galbraith is already a believer. He argues that the chance of getting into a Greek-style jamb is “zero.” He says deficits don’t lead to trouble. The US has been running deficits since the ’70s, he points out.
And look at the Japanese, he adds. They’ve been running huge deficits (fiscal stimulus) since their economy slipped up in 1989. And they’re still able to borrow at practically zero interest.
Makes you wonder how Greece got into trouble. It ran plenty of stimulating deficits. Then again, everything was all right in Greece until it wasn’t.
A man jumped off the 65th floor of a skyscraper. As he went by the 11th floor, the secretaries heard him remark:
“All right so far.”
The US is all right so far. So is Japan.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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how much money did you make today harry??
Either we wake up and get some guts — which means telling the Money Masters and their central banksters that they and their funny money criminal syndicate can go to the hot place — or once-sane Western civilization will completely disintegrate in a fashion more ugly than Joe Six-pack can even begin to conceive. Actually traveling the path back to sanity would not be easy, but it is straightforward and clear enough. Godspeed
my, my, my, BB, you must be tired
get some sleep, have a good meal, take a steam, get drunk
and get rid of that defeatist attitude lest you be branded as one they need not Mirandize prior to a free train trip to Wyoming
Max-
Harry don’t come ’round on down days.
Enjoy the silence.
i don’t mean to be nasty but anyone who spends time refuting paul krugman – god’s gift of dunce to the economics profession – is a fool….
i could have a more intelligent conversation with a centipede than i could have with krugman…the man is not worth the time of day…..
The main difference I see between the US and Greece is that the US can create dollars at will and Greece can not. The spark that ignited the Greece crisis was the rumor(?), or maybe convincing evidence, that Greece was going to be unable to meet the interest payments on its bonds by May 19, which was the due date. The problem was brewing more or less since Dec. ‘09, but the SHTF in early May.
Obviously, an equivalent financial crisis for the US will be different. Since so many investors fled to Treasuries in response to the Greek/Euro crisis the US/dollar will probably be the last to “fall”. Bond rates in other countries will probably begin to rise, spreading out from the other PIIGS to countries like England, Germany, France, etc. Eventually, bond investors will demand higher rates from Treasuries too, and that will be the last straw. A vicious cycle of higher interest rates, slower growth, lower revenues, higher deficits, more monetization, higher inflation expectations, and thus higher interest rates demanded by Treasury holders. And so on. A rapid capitulation and currency collapse would then ensue.
this is an idiot response to Krugman. the sky is falling.. the sky is falling.
But to be fair, let’s re-read this in one year and see if as I suspect, calmer heads have prevailed.
Bonner is right that it is astonishing that the Nobel committee awarded a prize to Dr. Krugman in economics, but it’s also surprising that a University awarded a degree in economics to Bill Bonner. Oh, wait a minute, Bill Bonner has *never gotten a degree in economics anywhere*. But despite that, he knows more about it than Krugman, Stiglitz, Solow, and the late Paul Samuelson. Remarkable.
BTW, using the ‘royal we’ doesn’t make you sound sophisticated, just pompous and arrogant.
“A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.”
i like how he pads his reume with meaningless gibberish… clever!