As we watch the various markets react to recent events, it’s essential we keep our heads straight on some basics, because the media, and particularly the “news” reporters and editors of the New York Times, have got almost everything backwards.
You can ignore almost everything you’re hearing from Washington politicians, including the White House, and Beltway media. Here’s what knowledgeable economists are telling us.
1. The US government is not about to default on its debts. A nation with it’s own currency and whose debts are all in its own currency cannot be forced to default unless crazy people force it to default. The US can always print or mint more dollars to pay off debts denominated in dollars. S&P ignored this fact. The only way the US can be forced to default is if the government is taken over by crazy people. Unfortunately, there are a lot of them, but S&P mumbled when it should have clearly called out the crazies. But S&P and the non-crazies have also bought (or are trying to sell) other economic snake oil.
2. The markets do not believe in the S&P fairy tale that the US is in danger of defaulting on its debts. The markets are saying just the opposite. Forget the stock market; it’s the bond markets that matter here. In those markets, bond prices are rising and interest rates are falling to very low levels. That tells us investors all over the world think US Treasury bonds are safe, so they are buying more bonds, not selling them. S&P’s analysis is gibberish.
3. The stock market is signaling the economy is in trouble; it’s not saying we have a debt crisis. [See Krugman links here] The Commerce Department revisions to GDP signaled that the US economy was falling into a depression in 2008 and only barely escaped in 2009, after the stimulus and Federal Reserve actions started to kick in. The recent jobs numbers tell us unemployment is not likely improve much for several years, which leaves parts of the economy in a near depression. The debt debates are telling markets there’s no rational discussion in Washington about how to boost the economy. Given that and more, it makes sense for stocks to be tanking.
4. The debt reduction hysteria is making the economy worse and is self-defeating. The debt hysteria is the economic snake oil everyone from the President and his advisers to Pete Peterson and Simpson-Bowles to the Tea Party are selling. With the economy still on the edge of recession, and parts in near depression, the only thing keeping the economy afloat is federal spending. It may need that support for years, because the recession was much deeper than everyone thought. But if federal spending declines, as the debt hysterics are demanding, and state/local government spending continues to tank, then GDP must fall. It’s just math. As the economy declines, there will be less collected in taxes, and more paid out in safety net spending — unless a cruel nation slashes that too — so the net result could be higher deficits, or at least less debt reduction than they expected.
5. Today’s consumers can’t revive the economy by spending more, because they’re still recovering from losing $6-7 trillion in housing wealth. Housing prices pumped up during the bubble are still falling (why hasn’t Greenspan been banished?). And lately, the private sector has lost trillions more in 401k etc, savings as stocks crash due to expectations of a continuing weak economy. Only the federal government can raise spending to boost the economy.
6. Enhanced trade can’t revive the economy either, because other nations are also struggling. We’re running huge trade deficits, buying more from others than we sell to others. But our trading partners are also struggling to keep their economies from declining, and they’re making it worse with their own austerity. Many of Europe’s banks are essentially insolvent from the 2008 burst, and covering for them has pushed weaker governments towards insolvency. We’d like to keep the value of our dollar cheaper, to allow us to export more. But other countries are also trying to keep the value of their currencies lower so that they sell more and buy less; if everyone does that, they cancel each other out.
7. All this means federal deficits are unavoidable, as long as the private sector is also not spending more. If the Feds spends less, the accounting identity from Econ 101 tells us the private sector would tank. Slashing government spending could cause a another severe recession or depression.
8. The S&P credit rating rationale is based on a bogus economic view. There is no accepted theory that says the debt to GDP ratio must be below some percentage, such as 75 percent, to be “sustainable” or conducive to growth. Yet S&P and Moody’s are both saying that Congress must achieve a $4 trillion down payment to debt reduction over 10 years in order to keep the ratio from rising about this arbitrary 75 percent. Even if the average ratio for some economists’ preferred outcomes in other countries was 75 percent, that does not mean that number is the correct benchmark for any single country, let alone the US now. Every country is different, and there is no reason to believe the US cannot handle debt to GDP ratios much higher than some historic international average and still be “sustainable” or conducive to growth.
9. The financial industry has a strong incentive to create debt hysteria. Severe government budget cutting creates ample opportunities to force state and local governments to privatize public assets and to create conditions requiring the social safety net to become privatized. But the financial sector can gather wealth even in a downturn, because, they’ve learned, government will back stop them. S&P is paid by the financial sector. And then there’s S&P’s role in helping the financial sector pull off massive fraud. Any Democrat, such as my millionaire Senator, John Kerry, who engages in debt hysteria, should be shamed and pushed out of office.
10. President Obama and his advisers own this mess. It was the President who insisted that we needed to slash the debt by $4 trillion over ten years, who said that was a precondition for “sustainability” and getting our fiscal house in order. He told the nation we can’t even have a useful conversation about growing the economy or creating jobs until we did that. All his advisers echoed him. [Even DeLong would replace the entire team, but Summers for Fed Chief? You were also for Bernanke, Prof.]
It was all gibberish. But when S&P and Moody’s use the $4 trillion trigger and no one says, “huh?”, it’s because the White House validated that completely arbitrary number. Thus S&P’s $2 trillion “error” may reveal they’re incompetent and pursuing their own ideological agenda, but its still true that the debt limit bill got just over $2 trillion and left us $2 trillion short of the arbitrary $4 trillion. It’s all gibberish, but it’s the White House’s gibberish. Worse, it’s forced every timid Democrat, including the entire leadership and millionaires like John Kerry,” to echo the same gibberish. Shame on them all.