Bill Bonner

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 in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

Recent Articles

The End of the “Gun Control” Bull Market

Greg Guenthner

For the last few years, gun enthusiasts have been concerned that the Feds would find a way to block their access to firearms. Now those fears appear to be subsiding... and so do gun sales. Greg Guenthner explains how to navigate this market in the coming months and years. Read on...


The Most Important Trait of Any Successful Resource Investor

Henry Bonner

The gold mining sector is one of the most difficult areas of the market to navigate successfully. But there is money to be made here. Henry Bonner sits down with one of the giants of this industry and picks his brain about how to find winners in this market and the four things every great investment has in common. Read on...


Extra!
The Currency that is Winning the “Race to the Bottom”

Jeff Desjardins

Central banks all over the world are in the midst of an epic race to see which country can devalue their currency the fastest. It's a pretty close race, but you may be surprised to find out who's in the lead. Jeff Desjardins displays the current standings via a humorous and informative "infographic." Check it out right here...


“How to Get Rich” is Not How You’d Expect

Chris Mayer

The first thing you might notice about the life of Felix Dennis is that he devoured crack cocaine during massive orgies with hookers at his mansion. Yet despite his penchant for sex and blow, he admitted, "making money is the one addiction I cannot shake." And thankfully, he wrote a book about it. Chris Mayer explains...


How “Travel Hacking” Can Help Improve Your Credit Score

Chris Campbell

Right now, there is a way for you to travel almost anywhere in the world, completely free of charge. It stems from a relatively new phenomenon called "travel hacking," and if you follow a few simple tips, you could be on your way to a free vacation in no time. Chris Campbell has all the details, right here...