Crisis of the West

In one very important sense, the Standard & Poors downgrade of the United States credit rating is spot on. The debt ceiling debacle that preceded the ratings action showed an extraordinarily destructive political culture at work in Washington. To take the Federal Government within inches of default for no apparent reason was beyond infantile and warranted a re-rating of sovereign risk. S&P basically downgraded all of Washington. From the S&P rationale:

We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

I am not terribly fearful that the downgrade will have an immediately damaging effect on markets. The downgrade was telegraphed and contingency plans will be in place. The Federal Reserve has already neutralised much of the impact with an ongoing commitment to Treasuries as collateral, as well as offering a string of funding lines for those that suffer a hiccup. As well, Moodys and Fitch still offer a AAA rating.

The fallout from the downgrade is at once less obvious and far more damaging. What matters most is that the rerating was of a discredited leadership by an institution whose own credibility remains stuck firmly in the S-bend. Who can, or should, forget the rating agencies disgraceful behaviour in the years leading up to the GFC. S&P and its peers were responsible for a Himalyan sized pile of AAA ratings that, as one analyst put it, could have been issued by cows. The importance of the downgrade is that it was administered to a discredited government by a discredited watchdog institution. Both of whom now appear, to my eye, to be even further discredited.

Indeed, if anything, the importance of the downgrade is better captured by the events that transpired following the announcement. The US Treasury examined the S&P rationale and discovered a $2 trillion arithmetic error. The US government’s future fiscal position was to be $2 trillion better than S&P had calculated. S&P paused for a few hours after the US Treasury challenge then admitted its mistake and went ahead with the downgrade anyway.

The symbolism is pointed. What matters most about the downgrade is the discredit it showers upon the current iteration of the liberal democratic market system. We now face the ludicrous circumstance in which the United States government holds the same credit rating as New Zealand, a lower rating than Microsoft, despite issuing its own currency (the world’s reserve), being able to raise taxes when it chooses, owning a printing press and possessing no fewer than eleven nuclear-powered aircraft carriers (ten of which are Nimitz class). Yet it has neither the nous, wherewithal or power to see off a failed company.

Precisely the same dance is transpiring across the pond in Europe. There, as we know, the ratings agencies have been tormenting European nations with downgrades as politicians squabble over how to restore liquidity to their various bond markets. This morning we have a mad scramble by European leaders to catch up, again.

Liberal democracy is now at war with the market that it spawned and both are losing. The war is working on three fronts and each merges with the other to form one giant battlefield. The three are ideas, markets and politics.

The last thirty years of global economic policy has been dominated by a blend of Keynesianism and libertarianism. That has resulted in two very large changes to national economies.

First, we  now have  a global financial market that is vast, fast moving and integrated. It has very few internal mechanisms of control. It relies on asset inflation, momentum and sentiment for strength.

Second, this system has been complimented by the national Keynesian urge to stimulate whenever economic growth stalls. Increasingly over the last fifteen years, that stimulus has also taken on the job of bailing out the underlying financial system whenever its excesses periodically peak. This has undermined the most important and final hurdle in the rampaging market’s way: fear of failure.

The underlying financial system has crossed borders and shifted savings from surplus countries to Western consumers. In doing so it has created an enormous pile of private debt. The same underlying system has also fed easy money to governments, who have returned the favour by borrowing and spending whenever economies have taken a blow. This has created an enormous pile of private debt. The culmination of which was the GFC, when the entire shaky edifice came crashing down. It was again saved by governments but its credibility was fatally damaged. Consumers across the Western world turned about face, shunned debt and began saving money as fast as they could.

Now, the Austrian school of economic ideas is rising. Rightly enough, it’s notions of creative destruction, capital misallocation and purging the system of excesses each business cycle suddenly makes sense. Except for one small problem. It’s too late. Bringing austerity to economies with giant debt-loads only makes those debt-loads more difficult to service. Nonetheless, the Austrian banner has been taken up by politicians on both sides of the Atlantic. A new breed of Brown Shirt politics has emerged in which government debt is viewed as an intrinsic evil. These political forces demand austerity at all costs. The inappropriate application of these ideas by the political process is clouding the role that government should play in regulating the private economy. Government itself is now losing credibility.

The conclusion of it all is a loss of faith in liberal democratic market structures generally. That is the real problem and its slowly but surely engulfing global markets.

Perhaps this morning some politicians are beginning to sense the earth moving beneath their feet with hastily convened G7 and other meetings. Such efforts may stimulate a new rally. Somehow, however, I doubt it will be more than crisis management, as it has been from the beginning.

What the world needs is s new Bretton Woods. A new global agreement on how to balance debt management against growth objectives and how to do so in a new framework that returns stability, transparency and credibility to the global financial market. But if nations can’t even do that internally, what hope is there that they can do so in concert?

To help you understand and prepare for the outcomes of this Crisis of the West, today we offer a MacroBusiness special. Each of the senior bloggers has prepared his view of the likely direction and fallout of events. Delusional Economics presents his take on the European end-game. The Unconventional Economist examines China’s growth model and its global linkages to determine its fate if (when) the Western powers slide back into recession. The Prince and Q Continuum offer a paradigm through which to view equity markets and the great volatility ahead. Deus Forex Machina looks at the growing currency chaos and diagnoses where the Australian dollar fits. Finally, I have a piece despairing at the absolute failure of the baby boomer controlled Australian media to understand what is going on. I hope you enjoy the special and it brings you greater prosperity in troubled times.

72 Responses to “ “Crisis of the West”

  1. PFH007 says:

    For what it is worth the MB credit rating remain AAA.

    • tanmedia says:

      Yes, MB is still Trip A. Let’s home it doesn’t sell out to the highest bidder. Unfortunately, most people are consuming mainstream media junk bonds.

      • Stavros says:

        MB has is on downgrade alert to AA+ in my books…how they can continue to ignore the political naivety of the Australian politic elite (have a post on Wayne Swan for christs sake! He is a moron and the man that will determine how Australian responds…) while calling the US right and tea party (maniacs and trouble makers) shows a clear ideological bias and unwillingness to upset readers who are obviously big fans of Government.

      • Care to address the substance Stav? How is austerity going to get any heavily indebted economy out of its hole?

        I reckon Austrian economics ha a lot to offer business cycle management. But applied now it;s only making a bad situation worse.

      • Petervm says:

        If Austrian Economics is based on rational & logical thought/facts then how can you pick and choose when to apply it ?

      • Stavros says:

        What is the hole HnH? Its a hole caused by:
        1) Central bankers causing housing bubbles (Government)
        2) Welfare-Bribing tactics used by Governments at every election to maintain short terms support at the expence of long term fiscal soundness (Government)
        3) Finacial class – creaming profits with the assistance of Government policies that stimulate things just long enough for them to get their next bonus.

        Since 2008, the Governments of the world have shown they are only making matters worse.

        They were instrumental in creating this mess and this is something that only the far-Right have been willing and able to point out.

        Any talk about solutions to this crisis must admit this fact…otherwise we will get nowhere as people turn their blame to specualtors, greed, bond vigalantis…etc.

        Ask Ben BErnanke, Stevems, Gillard, Bush, Obama…not one of them will ever admit the mistakes they have made.

      • The Prince says:

        Stavros – the austerity we require is the austerity politicians are not enacting. Austerity should be applied during boom times, not during busts.

        Further, the debt that can’t be repaid, won’t be repaid and should be written off , and those who took the risks lose their shirts (the banksters, the ratings agencies, the shareholders and bondholders).

        How is this anti-austerity and pro-government?

      • Stavros says:

        I totally agree with you Prince…the Government did waste tax receipts during the “boom” and this was when Keynesians should have been making more noise…

        …but the Government also created the mirage of a boom by flooding the market with cheap credit and pump priming through electoral bribes…They were happy for the boom to be frittered away as it helped them get relected by creating a sense of financial bliss in the electorate.

        I agree debt forgiveness is part of the solution. I think that is in many ways an Austrian solution. The lender who lent recklnessly suffers a loss…no matter what the consequencesv!

      • Mark says:

        Austerity to you is simply what governments should of been doing all the time – i.e spending only so much in the medium term that budgets are balanced in the long run. Of course this is while only taking in the max amount of tax that won’t undermine the incentive to work and drag the economy unnecessarily (i.e cost/benefit analysis on tax intake and govt spending). I do agree that debt should be written off but that doesn’t mean austerity shouldn’t be applied either. They aren’t mutually exclusive.

        The problem with the MB commentary is that government itself does not work the way you assume – our governmental system and our economic system is flawed. It discounts future prosperity all too heavily. Short term fixes, treat the symptoms not the cause, lobby to get my bonus, etc are all part of the current system. To dismiss this as corruption is irrelevant – the system is designed so that corruption that will occur eventually will be rewarded. Regulation will not fix this – the system is designed unfortunately where reward for the individual is there when they do these things and regulation itself has a lot of vested interests that shape policy.

        If austerity will cause too much pain that is the fault of keynesian policies that dictate we stimulate every time there is a recession. Basically what this system of economics is – a bailout for any misallocation of capital that would of otherwise failed and caused a temporary slowdown. Keynesian economics undermines the “fear of failure” as I pointed out in the last comment. A system should be designed with greed, fear and other human emotions in mind. i.e if a system isn’t designed for humans iot could be the perfect system but it doesn’t fit its purpose and therefore as a system/product it is a failure.

        Of course this is the engineer coming out of me. I could design the perfect system – if it doesn’t suit the culture of users/stakeholders then it is a primary failure.

      • Q Continuum says:

        For the record Stav, I am no fan of big government and have stated so several times on MB. The Tea Party are loopy ideological purists, but I agree with their underlying premise of smaller government and balanced budgets.

      • Torchwood1979 says:

        Agreed. The US needs to balance it’s budget but now is definitely NOT the time. The difference between the 2000′s and previous booms is that the governments of many countries spent up big during the boom times. The Blair and Bush Governments (to name a few) spent money like there was no tomorrow during the boom and the current crises are the aftermath of that profligacy.

        “You run a surplus during the boom and a deficit during the bust, balancing out over the cycle. In the long run you can’t spend what you don’t have”. Old school wisdom (aka responsibility) that got ignored during the unbridled greed and stupidity of the previous decade.

      • Stavros says:

        I agree Q Cont that te right wing certainly has a lunatic element to them. So does the left though…

        And I cant help admiring the Tea Party for their central message (Smaller Government) and their passion to implement change (they are the ones keeping a vigil with their protests and grass roots organisations). The lefties seem to be happy reading Krugman and deploring the right wing nutjobs at their local coffee house.

      • Wildebeest says:

        The USA, like Australia, runs persistent current account deficits. A balanced budget means, as a matter of accounting, that the private sector must be indebted. If that is what people want then I guess it is one view, but I’d prefer the private sector to be accumulating wealth and using it productively.

      • wtf says:

        +1 Wildebeest

      • Wildebeest says:

        …and further on that. This is from the naked captilism post that someone here linked:

        Thus, that the federal surpluses in the United States’ budget in the late 1990′s implied unsustainable private debts was clear to those working in this tradition at the time.

        So balanced budgets and even worse, surpluses, may sound nice but advocates of these things need to accept that, by way of accounting, it means big private sector debt.

      • Torchwood1979 says:

        Wildebeest, explains why the Federal Government ran so many deficits through the 50′s and 60′s without any problemo. Thanks for clarifying, now I’m off to study more than the bare basics of public vs private deficits we covered in Economics 101.

      • Wildebeest says:

        …and in the treasury projections for a (pigs might fly) surplus in a couple of years, you’ll see the same modelling shows the private sector deficit ballooning (which it must due to accounting).

        We basically need to reduce private sector debt (i.e. housing bubble) and that needs to be done over a very long time otherwise it would crash the economy.

      • Julius says:

        Stavros,

        Further down you say:

        “Any talk about solutions to this crisis must admit this fact…otherwise we will get nowhere as people turn their blame to specualtors, greed, bond vigalantis…etc.”

        I couldn’t respond down there, as there is no “Response” button.

        I entirely agree with what you are saying, but I’d just like to add to your list of scapegoats – “Baby Boomers”.

        It appears that Houses and Holes has clearly identified in an earlier article that Baby Boomers, and their paid Economic Commentariat lackeys, are also to blame for the mess in which the world finds itself.

      • Mav says:

        A joke to explain the austerity and tea party nuttiness for you:
        .
        “A public union employee, a tea party activist, and a CEO are sitting at a table with a plate of a dozen cookies in the middle of it.
        .
        The CEO takes 11 cookies, turns to the tea partier and says, ‘Watch out for that union guy. He wants a piece of your cookie.’ ”
        .

      • Weimar Republic says:

        +1

      • Stavros says:

        Who provided the plate of cookies?

      • Mav says:

        “Who provided the plate of cookies?”
        .
        Democracy and a mixed market economy?

      • Stavros says:

        Mixed (rigged) market and democracy has only created massive asset bubbles and unsustainable private and now public debt…

        But your vague response about who provides the cookies shows you dont understand wealth creation and the underlying point I was making.

        The cookies were made by the private sector. Everything of value first comes from the private sector.

        So identifying who has the right to those cookies is dependant on who has property rights to the cookies…

        Its a stupid joke that fails on every level (i.e. its not funny and the point it is trying to make is juvenile).

      • Thats superb Mav.

      • Mav says:

        I wasn’t being vague at all – who/what system ensures that wealth creation happen and property rights are respected? a democratic government and a mixed market economy.
        .
        By limiting government regulation of the “free” market, you think you will get a Utopian free market state – What you will end up getting, is anarchy.
        .
        If you don’t agree and insist that everything in this world is a result of private innovation – will you please stop using the internet – because it is basically an invention of various bureaucrats/scientists in government agencies (DARPA/CERN/CSIRO).

      • littleguy says:

        “Everything of value first comes from the private sector.”

        I’m sorry Stavros but that is a flat out lie.

      • Mav says:

        Don’t expect any response from Stavros. I think he stopped using the internet – a product of public-private collaboration
        .
        (j/k)

      • Petervm says:

        Mav the money to pay the scientists first came from private enterprise, the former wouldn’t exist without the later. Also it’s a bit of a stretch to claim that private enterprise couldn’t come up with something similar to the internet. I think if you where to look at all the technologies that now run the internet most are the result of private enterprise, it certainly wasn’t bureaucrats governments that have made the technologies so cheap and accessible to millions of people.

        internet – because it is basically an invention of various bureaucrats/scientists in government agencies (DARPA/CERN/CSIRO).

      • Stavros says:

        I nearly fell off my chair when I read that Mav…we wouldnt have the internet if we didnt have the Government…

        That will do me..

        Petervm nailed it in one…Government doesnt exist without the private sector first creating goods, trading them for profit and then paying tax.

        I suppose Google should be thankful for the Government too? A private company created by a few blokes that has made the internet 1000 times more useful and assecible. What about the breakthroughs related to wireless and fibre internet speeds…Government too I suppose. And my laptop…the light I am using, the fish I just ate…all of it private sector provided.

        The only thing the Government did for me today was provide the roads and traffic lights that got me to work. And this is something the private sector would provide anyway.

        Collective organisations doesnt need a State that sucks in nearly 40% of wealth (State tax, Fed tax and other revenue streams)

        And as someone that went to a crappy public school…I can assure you that the worst thing the Government does is pretend to run an education system. A system where crap teachers cant get fired, where community and parent involvment is shunned and where the education union dictacte the curriculum. Its not surprising they dont teach economics in most public high schools…they dont want people understanding how wealth is created. They want people to economically ignorant..and they seemed to have suceeded

      • indo says:

        “Mav the money to pay the scientists first came from private enterprise”

        This is basicaly a very erroneous concept!. Money is created by three processes as far as I know. Government deficit spending , when government purchases its own bonds and then spends money in the real economy

        When people take out loans , private banks create money out of thin air and then go looking for reserves and capital.

        When you export something the reserve bank may supply money to the forex market for exchange rate stability.

        People who assume that the private sector can provide all the basic needs should shipped off to an island where they can create their fantasy anarchist economic system and devour themselves to death.

        For instance let us privatise the police, whose revenue comes from solving crimes and it wouldnt be in their best interest to have no crime at all.

        Accepted there are crappy governments, but this does not change operational realities of a government and what it can do. You cant have a true free market under a democracy , this can exist only in an anarchist political setup. I rather have crappy governments which I can boot out rather under private monopolies that can last for half a century and price gouge me to death!.

        Finally you get the government you deserve.

      • Mav says:

        “Mav the money to pay the scientists first came from private enterprise, the former wouldn’t exist without the later.”
        .
        What is money? I wont go there because it has already been covered.
        .
        Private enterprise tend to invest money in things where they see a return. So government has a role in routing investments into areas where private enterprise don’t see any profit. It can later lead to public-private partnerships. Also, consider who enforces private property rights, intellectual property rights, the rule of law and contracts? Can it be enforced by private entities?
        .
        I am not suggesting we should have communism – As I said, a democratic form of government and a mixed market economy will do nicely for me. But Stavros refuses to accept a world where government has a role in the market or exist in a dominant form.
        .
        Somalia seems to be stuff of Stavros’s Ayn Randian utopian dreams.

      • Stavros says:

        http://mises.org/daily/5260/The-UpsideDown-World-of-MMT

        I dont want to speak about MMT…you guys call Austrian lunatics – what is the point of MMT, how does it suggest we get out of this mess?

        The Austrians have a clear solution – how can MMT offer a solution, it just seems to be a bunch of accounting tricks that as Murphy points out – changes the definition of savings to ignore the role of private investment, which is the sole purpose of savings in the Austrian school

      • The_Mainlander says:

        awesome light relief… err ythe ciikies were dite friendly right and fad free?

      • indo says:

        MMT proposes that the government uses fiscal policies and progressive taxation instead of monetary policies so that such excesses in the private sector do not happen in the first place.

        As for government spending , MMT proposes that government runs a deficit just to enough to maintain full employment nothing more. It is best it chooses jobs that generates the highest social equity to do this.

    • Adrian says:

      Correct, as Moody’s, and Fitch still rate the US AAA. FOMC meeting tomorrow, and more monetary policy probably to come.

      H&H my view on the Aussie baby boomer newspapers is that they reflect generation of government policy. Look at the banks loan books and housing loans are much greater than business and that’s the tragedy.

      Not all the BB’s are wealthy due to property either, well my dad and his mates aren’t.

      • No, of course. I don’t hate boomers so much as boomerism. Gimme everything and gimme it now!

      • tanmedia says:

        Boomerism is the disease. The problem is that the boomers think it’s good for all of us, while others think it is potentially as lethal as terminal cancer.

      • Adrian says:

        Yeah agree. It’ alive and well in my daughters generation, and mine.

      • Stavros says:

        The amount of boomers that have encouraged (forced!) their kids into Australia’s housing market is recent years is scary..this goes beyond just an economic issue. This will tear families apart.

      • Adrian says:

        Stavros that’s true from what I’ve seen as well, but our government is complicit, and it kills so much potential in our country. My daughter is 16 and I’m showing her what’s going on so she’s under no illusions about housing. I look at some Gen Y’s in my suburb, and they are so leveraged in the house, two 4WD’s, and the houses are like display homes. If this current situation does turn nasty there are a lot of people who’ll get educated real quick.

      • Julius says:

        Adrian,

        Yes, it’s amazing isn’t it? When you get out of the office and actuallty meet some real Boomers, you find that most of them wouldn’t know an investment property if it jumped up and bit them on the arse.

        Last night, “Which Bank” ran an ad on TV – first part of the ad, full-screen text with voiceover, was for their extra cheap home loans.

        Second part of the ad, full-screen text with voiceover – text said, in so many words: “Come and talk to us and find out how much easier it is to own an investment property than you think”.

        Both parts of the ad were clearly aimed at the same market.

        Guess that must be the Boomers fault as well, eh?

  2. john cage says:

    how long before S&P “downgrade” by US government?

  3. Deep T says:

    All great H&H and fortunately I agree with most of what you and the other senior bloggers have said even though I squeeze into boomer territory. But a couple of points.

    The S&P action is nothing more than a continuance of Wall St firms throwing their weight around trying to demonstrate that they are more important than the government or the people. Its self justifying chest puffing that the markets will shrug off very quickly. S&P’s opinions although discredited may matter when rating a bank but not the USA. Any other reaction would be a farce. For those who may want to understand what a rating is please go to http://www.understandingratings.com/

    Capitalism in USA, Australia and many parts of the western world has morphed into cronyism. Until that is somehow rectified our standards of living will continue to decrease. Unless you are a crony of course. Viva la revolution.

    I will never agree that a new tax is a solution to any issue. New taxes promote corruption and cronyism!!

  4. GG says:

    “Nonetheless, the Austrian banner has been taken up by politicians on both sides of the Atlantic. A new breed of Brown Shirt politics has emerged in which government debt is viewed as an intrinsic evil. These political forces demand austerity at all costs.”

    I don’t understand how you can include US politicians in this statement. Germans, maybe. But who else (apart from the US fringe Tea Party) in the world is demanding austerity?

    • Mav says:

      Have you been asleep?
      .
      Nearly every right-wing conservative political party (more so, if they are in the opposition!) including the Republican party, the centrist/blue-dogs in the Democratic party including Obama, IMF, European Commission.. the list goes on.. of the institutions that are demanding austerity.

      • Stavros says:

        But are they engaging in stimulus? They are talking about it, but most countries are still racking up debt. Even the US debt deal isnt austerity…its just not as reckless as is used to be. Greece and Portgugal didnt engage in austerity – they had it imposed upon them.

        The only nation that I know that has voluntarily enacted a stimulus package a while back are the Pommies…if only we had a leadership team like Clegg and Cameron..we would be getting somewhere.

  5. Lori says:

    One of the greatest economic philosophers had predicted the dead of the state and its government. The global corporations don’t need governments anymore, this crisis is just one of the first symptoms of this huge global restructuring. The governments can’t work for the people anymore, because they are very strongly tied and dependent on the big capitals, which don’t have national consciousness anymore. They are global, they are detached from their national economies and slowly they are forming a separate and self-centered class, which has very different interests from what are national or regional or local interests of working average people. Not seeing this hard reality is playing dangerous game with closed eyes. The politicians work to please and feed the wolves, but want to keep the sheep herd alive. This is impossible task and the sheep is always eaten by the wolves. Who can afford to offend and to punish the Too Big To Fails? It is too late to fight against the monsters. When they were manageable, no one would even dare to listen to the wise men. It is dangerous to point to the real causes and the deepest roots of today’s problems and the crisis. The future won’t be like the Japanese tsunami, it will be long and painful engulfment of what has been left from the “belle epoque” of delusional prosperity and growth (obviously only of the western debt). This crisis is and will continue to be the greatest redistribution of the global wealth, after which the inequality of the past centuries
    will be looking like the communist equal distribution. At the end of this century the percentage rate of the governments in GDP will be as much as at the beginning of the last century (around 10% or less), but the structure of tax revenues will be the opposite – the highest tax burden will be on wage income and there won’t be taxes on business and any rent incomes. The expenditure side will evolve to very few groups: defense expenditures, interest payments on public debt and general government (where there is still some left). People have to be hammered harshly as to realize what is going on and what is needed to be done. With what today’s financial market is there is no free market anymore, it doesn’t exist. What we have is a highly sophisticated highly detached from the real economy, highly speculative and fictive financial sector, which created a monstrous tools for sucking the body of real economy and which became extremely parasitic, that it is now itself the disease of the global economy, because instead of helping the productive business to develop, it sucks like a vampire their blood and the blood of the entire global economy. It is like e cancer growing and invading slowly every healthy part of the body and its blood cells. Either we have to cut it deeply to save the healthy tissues or we all are going to die with it. Everything else like homeopathy or other herbal remedies won’t work to save the body of the global economy. For cancer there is only one way for survival – surgery.

  6. Torchwood1979 says:

    It’s OK because Australia is different when it comes to leadership; except we aren’t *sigh*

    http://www.theaustralian.com.au/national-affairs/treasury/economy-can-weather-crisis-imf/story-fn59nsif-1226110763359

    So even if the world economy goes belly up again Swann will still aim for a surplus within two years? Howard and Costello are dead and buried but they still have these guys by the short and curlies thanks to the way they framed economic debate during their time in office.

  7. Weimar Republic says:

    …a lower rating than Microsoft…

    My understanding, which I mentioned somewhere the other day (as PBF) is that a downgrade of the USA also means a downgrade of everyone else within the USA. In other words if the sovereign has AA+ a company based within the country can’t have a higher rating. If that is the case then all or corporate america current holding AAA will have to be re-rated. This in turn effects the borrowing coast of these corporations and impact on their bottom line. It also presumably means that states and municipalities, many of whom are like Greece, now have increased borrowing costs. …and so on.

  8. wtf says:

    Interesting article over a NAked Cap regarding the S&P policy agenda: http://goo.gl/g4vCg

  9. Romsey says:

    The following quote that was issued by Greenspan this morning :

    “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default,” says Former US Federal Reserve Chairman Alan Greenspan.

    That statement he made reminds me of Argentina in 1989, though the US has more paper and ink than they did at the time.

    And in 1989 the outcome was still the same.

    • Weimar Republic says:

      Argentina’s debts were not in its own currency. Ditto Greece, Italy, Portugal, Spain …

      Greenspan is correct (for once in his life).

      • Romsey says:

        But again if the creditors lose faith it makes no difference, the printed paper is still worthless.

        Since it is the “trust” that is the real value, not the paper.

      • Weimar Republic says:

        re: “creditors”

        Please read the other article posted on this site today about China, and in particular the comment by Petervm who posted an assessment of all of this by Michael Pettis.

        Also the majority of US debt is owned by the US. So those creditors are actually themselves. Treasuries are essentially savings accounts for large entities within the USA.

      • pete says:

        Greenspan is not correct.

        It is technically correct that the US does not have to default, as it can print its own currency. However, that does not mean that there is a zero chance of default.

        The default of a sovereign nation occurs when the expected economic damage done by currency debasement is greater than the perceived damage that would be done by defaulting. Default is a choice that is made, even if it technically cannot occur according to theory, and hence the probably of default is greater than zero over time for ANY sovereign.

        This is why in the past sovereign nations that control their own currency have defaulted. They would rather take the pain of credit problems than Weimar or Zimbabwe. Default for a sovereign is voluntary, but also a real option in times of economic hardship.

        However it seems that many people just arent willing to understand how this works in practice. As per usual in economics, reality here is different to theory. LTCM learned that the hard way.

      • Weimar Republic says:

        You’re confusing inflation risk with sovereign risk. There is no sovereign risk.

      • Stavros says:

        You are not appreciating that inflation risk contrasints the ability of Government to print their way out of this and that is where the soveriegn risk lies.

        Greenspan saying US cannot default is not reassuring when you consider some of his other confident predictions – which incidentaly came down to his ego and belief he could control the economy with the flick of a few switches.

        Are you seeing a pattern here? These guys are dangerous ego maniacs who overestimate their ability to ‘fix things’.

        The market doesnt listen to Greenspan…not in the long run

      • JPK says:

        The issue is not default but what you can buy for the money that the US government will pay you back. How much oil, copper or gold your repaid USD will get you. When panic abates their lower credit rating will have to translate into higher yield of US gov bonds.

      • pete says:

        No, i am not. Re-read my post, default is a choice made by a sovereign (the choice between default and inflation), it is a non-zero probability. Inflation risk is distinct and separate.

    • 3d1k says:

      ‘Greenspan speaks the truth about default’, Sunday’s Meet the Press:

      http://www.economicpolicyjournal.com/2011/08/must-see-video-alan-greenspan-speaks.html

  10. david says:

    Greenspan is right in a way that doesn’t matter. The fact of the matter is the US Congress, by showing it is more interested in debt as a matter of political gaming than as the sum of all the promises the US has ever made, has downgraded itself.

    Regardless of what bankers and governments say, the US has thrown away its good standing with people from all walks of life right around the globe.

    We now know, on the strength of their own statements, that the US is not to be trusted. They just want a permanent free ride. They have become the world’s biggest bludger-state.

  11. countryboy says:

    It’s obvious, what we need to distract the public and boost economic growth in the Us and Europe is a ‘War on Ratings Agencies’.

  12. Dingo says:

    “A new breed of Brown Shirt politics has emerged in which government debt is viewed as an intrinsic evil.”

    I think you should withdraw the comment about “brown shirt politics”.

    It’s a slur and get’s the facts wrong anyway.

    Let’s be clear. Hitler was not a small government liberal. He was not some sort of low tax, low regulation, libertarian. Neither was he an Burkean conservative who was reluctant to meddle with traditional institutions and civic associations.

    If anything his economic policies are best characterized as Keynesian. But to be clear – I am not saying that everyone who supports Keynesian policies is engaging a Nazi or engages in “brown shirt politics”.

    • That’s a fair point. I meant more blockade politics and ideological extremism than specific policy…

      • Stavros says:

        They do have a specific policy…Government should not play such a big role in the economy.

        Taxes should be lower, as should Government spending…that is why they refused to any tax raises. They dont believe this is an issue of not enough Government revenue being collected, they think its being caused by the electorate demanding (and being given) too much for too long from a Government that has not learnt how to say NO!

        To say that it is too late to apply Austrian economics is like saying it was too late to save Europe in 1938 from Hitler (sticking to the Hitler theme)…we know capital has been misallocated, we know this was caused through Greenspan and other central bankers keeping rates at some aribtrary and artificial level and we know Governments do not hae the long-term incentives to make fiscal cuts that are needed.

        What more are we waiting for…some magical recovery brought on by the pepole that caused the crisis?

      • Dingo says:

        Thanks. Have enjoyed the rest of today’s postings a lot. Paul Coughlin – what a legend. We salute you!

      • Stavros says:

        Was this to me Dingo?

  13. jack says:

    Debts can be written off, the only way I see it occuring is for the banks that own the FED take the hit that they should have had in 2008.

  14. Steven Shaw says:

    David, great post but got to say that it’s pretty superficial to say that “austrian economics” is the same as “austerity”.

    You go on to say “Bringing austerity to economies with giant debt-loads only makes those debt-loads more difficult to service”. That is certainly true but I’d imagine that any “Austrian” resolution to the crisis would involve mass bankruptcy, which would at least reduce if not remove those debt-loads.

    That said, I have some similar concerns about the Austrian school political ideology. As I’ve said elsewhere:

    “The Austrian school folks’ solutions to the crisis, are – simply put – to let the failing banks fail and go back to sound money i.e. a gold standard. There do seem to be some terrible consequences of this though like deposits insurance running out and massive deflation. This is fine if you’re an informed Austrian economist and have been preparing for the collapse of the international banking system for decades and have your personal horde of gold, silver and probably food and weapons. And I do agree that, had we remained on the gold standard, that this crisis would have either been avoided or been reduced tremendously in it’s severity. Also, if the government had – many years ago – been clear that it would not prop up failing financial institutions, then that would have been a great help in avoiding the moral hazard that has been a catalyst in the run up to the crisis. However, with all that said, the Austrians’ solutions seem too much to be talking their own book – with their hordes of gold they have become a vested interest, planning to win when the system collapses.

    My own ideas about a solution to the Great Recession are to have some kind of debt jubilee/forgiveness of both public and private debt followed by abolishing the legal tender laws, allowing precious metals to be lawfully used as money once again. Most government programs would need to be abolished also since tax revenues will be severely reduced (even as they have been already). This solution would still be painful and very politically difficult. Therefore, I presume that we (and our governments) will keep kicking the can down the road until complete financial ruin is upon us. Even though, strictly, I’m agnostic — I can only recommend prayer.”

    David, do you know of a credible plan to resolve the crisis? It does seem like we need to reduce/forgive debt and have a new monetary/financial system. That’s big. If we wait for it to collapse, we’ll only have barter, charity and probably violent theft. Maybe our political leaders are smarter than we think and that after much consideration have decided that it’s best to pretend that everything will be alright, kick the can down the road in any way you can and hope that the magic pudding comes through with something :).