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Professor Fergie vs the Big Bad Wolf
In our recent post, Coming
to America, we encouraged readers to study Nail Ferguson’s concerns
voiced in the Financial Times – A
Greek crisis is coming to America. It does not take a wild
imagination to see that ballooning debt levels on government balance
sheets pose a grave systemic risk to the global economy and capital
markets. This is precisely why we are left with our tongue on the floor
when we hear Nobel laureate Joseph E. Stiglitz describing the prospect
of a US or UK default as absurd, “particularly in the US because all we
do is print money to pay it back.” Excuse us Joey, (wonder if the
friends of a Nobel economist call him Joey, or maybe even
“Joey-Bag-a-Donuts” as we affectionately call my cousin Joseph who’s not
a Nobel economist but a pretty strong “quant guy”), but don’t default
and hyperinflation effectively accomplish the same goal? Perhaps that’s
a better question for our German friends?
We digress. But our intention is simply
to clarify a few important points in this economic scuffle. To do so,
it is only fair that we also share the “glass is half full” point of
view recently outlined by the FTs Chief Economist, Martin Wolf here. “The
Wolf” (wonder if his friends have seen Pulp Fiction) makes some
important points in this piece, so we will highlight a few of them and
offer up some food for thought.
The Wolf argues that Prof Fergie’s
numbers for gross federal debt to gross domestic product are wrong. He
states that “White House projections are for federal debt held by the
public to be 71% of GDP in 2012 and not to exceed 77% by 2020.”
- While we haven’t taken the time to
confirm or dispute either number, we think The Wolf is missing the
point. As Dylan Greece of Soc Gen has accurately illustrated, our
governments are already insolvent – what’s “off balance sheet” (Social
Security, Medicare, etc.) dwarfs current White House projections, which
just account for liabilities “on the balance sheet.”
The Wolf declares that “there is no
reason to balance budgets in a country whose nominal GDP grows at up to
5% a year in normal times.
-
Let’s ignore for a moment the comical
claim that “there is no reason to balance budgets” and stick with the 5%
growth projection in normal times. To be sure, these are not normal times.
And while 5% nominal growth may have been normal in a past era of
credit-driven growth, that party has left the building. In fact, Wolf
even correctly quotes both a McKinsey report and a paper by Carmen
Reinhart and Kenneth Rogoff, which both clearly demonstrates that median
growth rates fall dramatically once public debt to GDP exceeds natural
limits.
The Wolf explains that “huge
increases in fiscal deficits were appropriate to the circumstances.”
- We generally agree. Although as we’ve
voiced before – quickly pumping out a massive dose of fiscal stimulus
may have played a part in avoiding Financial Armageddon. But it has in
no way guaranteed a sustainable recovery. Unfortunately, to have any
chance of doing so, fiscal stimulus must be thoughtfully drafted and
focused on those projects best suited to drive productivity and
innovation, thus generating a multiplier effect on future growth.
Instead, we got “cash for clunkers” and a tax credit on home purchases,
encouraging over-spent and over-leveraged American consumers to take on
more debt and continue to spend. As our childhood friend C.B. might say
. . .
»
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Not to mention inflation...which according to Stiglitz' running dog Paul Krugman, "only hurts the rich." Since these people are demonstrably not stupid, there is only one alternative explanation: they are evil, and actively seek a catastrophe.
Lovely. Another fool who thinks that government can spend our way out of debt....as long as we spend it on his specific agenda. I long for the day when reasonable folks agree that government can not, ever, function as a prudent investor of the people's capital. Sure, there have been successes, but even a blind hog can spend $3 trillion a year and buy a good acorn or two.
Wolf is delusional, even with respect to the on budget number; Stiglitz doesn't understand that printing money to avoid default is worse than default, and the author thinks that throwing money in the street, mostly to pay off pols and unions, is a proper response to a debt driven financial crisis. What is going on here?
Stiglitz of course understands THAT. However, he is an academic. If you ask him "will the US default?", he'll say "no, it will print". As long as he's not asked "what will the outcome of printing be?" - that's okay.
However, I have a problem with what Wolf is saying. It seems he's taking sides. His argument that “huge increases in fiscal deficits were appropriate to the circumstances” is political, not analytical, because whether something is done with good or bad intentions makes no difference for the final outcome.
Wolf is far from political. In the article he states that the swing of the private sector balance went from -2.1% of GDP to 6.7% of GDP, that is an 8.8% swing
Without foreign demand, fiscal stimulus is the only course we had. And as you say of Stiglitz, Wolf is also an academic. He simply sees GDP = C + G + I + (X-M). So he will always will refute the idea than G would not need to go up when there is nothing else
I agree with the post that government spending was mis-allocated but it has smoothed the transition from Financial Armageddon to recovery better than markets would've allowed
Wasting public resources only not to allow GDP decline beyond a certain level is a 100% political decision.
Note that neither US Gov't (or almost any government for that purpose) nor the Fed are mandated to "maintain economic growth".
The voodoo science of econometrics has finally defeated common sense.
"Mr. President, we must not allow a mineshaft gap!"
Interesting. Another Anonymous Keynesian. Who believes, I take it, that pushing on the "aggregate demand" string will result in that string stiffening right up, filling up the hole in the bubble, and then reinflating it.
Or perhaps we live in Topsy-Turvey World, where effects precede causes? Oh, wait. I get it. This is quantum mechanic economics. No WONDER everything is so backward and weird.
Will wonders never cease.
The author states:
"It does not take a wild imagination to see that ballooning debt levels on government balance sheets pose a grave systemic risk to the global economy and capital markets."
Wrong!
It is absurd to state that the wildly unsustainable fiscal path being followed by every major national government poses a systemic "risk", as that implies that the outcome of this course is uncertain. In fact, there is no "risk" --- the inevitable outcome, currency and financial collapse, is at this point a CERTAINTY. The only questions left to answer are the timing and speed of those collapses.
"huge increases in fiscal deficits were appropriate to the circumstances"
horsecrap....this mental midget exercise prolonged and codified the decay of the usa financial infrastructure as well as sectors dependent upon it....
how much new technology, innovation, and progress were suffocated and killed by pumping blood into a corpse? lots....
crises are for getting out the leaf blower and pavement sweepers to remove the crud....but we saved the crud because we like the smell of rotting flesh....
In the vein of good grief,
can we get a video of Lucy yanking the football away from Charlie?
That seems at least as appropriate.
Ask and ye shall receive:
http://www.youtube.com/watch?v=dlzVDDSfeeA