November 29, 2012

“Krugman: National default ‘can’t happen’”

Bill Wilson, ALG, responds:

In the past 30 years, the national debt has increased 1,328 percent from $1.1 trillion to $16.3 trillion.

[...]

What will the national debt be in 2042? An historically “modest” tripling to $50 trillion? Or perhaps a mind-boggling $100 trillion?

But not to worry, says New York Times pundit Paul Krugman. No matter how large it gets, we can’t default on our debt.

“[W]e have our own currency,” Krugman reassured the American people in a Nov. 25 column, and the government “literally can’t run out of money. After all, it can print the stuff,” unlike Greece, whose currency is controlled by the European Union.

Besides, he writes, interest rates are low and there is no sign investors are about to flee from the relative safety of treasuries.

That may be so — for now. Yet, for all of Krugman’s happy talk of investors continuing to buy U.S. bonds, he understates the degree to which the government is already resorting to the printing press to meet its weekly funding obligations.

Some $1.65 trillion of the debt is held by the Federal Reserve. Another $4.84 trillion of debt is held in the Social Security, Medicare, and other trust funds.

That means 39.7 percent of the debt — some $6.5 trillion — is held by government agencies. So, yeah, we can print it. But it is hardly a sign of fiscal health or of high demand for treasuries when just to refinance the current level of debt, the government must borrow 40 cents of every dollar from itself.

The share of government debt held by the government itself will only grow this decade. The Office of Management and Budget projects debt held by the trust funds will rise to $6.3 trillion by 2022 alone. As for the Fed, there is no telling how much it will print to finance Washington, D.C.’s insatiable appetite for more spending.

But this is no evidence that a default “can’t happen”.

It merely proves if it were not for the printed money, the government would have apparently defaulted on its obligations years ago. But that is no reason to celebrate.

Even though the national debt soared 10 percent last year alone, countries like China held back on any net purchases of debt — indicating that demand overseas may be beginning to wane.

The basis for the dollar’s reign as the world’s reserve currency rests on the willingness of overseas partners to continue to transact in dollars. But if we print too much to refinance our growing debts — in the process exporting inflation to our own creditors — suddenly the dollar becomes less attractive as a means of exchange.

And that is where the danger lies.

Not that suddenly one day in the near future there will be a run on dollar-denominated assets — although that is certainly always a risk, if only a remote one. But, that over the coming years, the dollar will continue to lose backing in the global economy amid severe financial strain, leading to its eventual collapse as the reserve currency.

At that point, a run on treasuries and an ensuing default would certainly not be out of the question. The foreign bailout would come to an end. Krugman has an apparent belief that the rest of the world will continue to paper over our debts without question for posterity. But that assumption is awfully risky and may prove to be fatally wrong.

When the other shoe drops, or how large the debt will be then is anyone’s guess. But to pretend that it “can’t happen” shows a remarkable lack of foresight — akin to middle-of-the-pack lemmings that follow the crowd over the cliff to their own demise.

Well, that’s all fine and dandy. But Krugman has awards. And awards trump logic, math, common sense, and the modesty some of the Hobbits show by not pretending we can read the minds of other countries in perpetuity, countries who (because they aren’t the US, and so cannot be evil) would of course never ever try to maybe crash the US / global economy and then rush into the vacuum with a solution to the completely impossible crisis that can never ever never happen!

Weimar Republic? Toxic inflationary levels? A myth invented by people who still believe in the Holocaust.

Posted by Jeff G. @ 10:04am
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Comments (27)

  1. Krugynesianism has a naturally ally: The Omnipotent State.

    Detlev Schlichter:

    As part of Obamacare the state now boldly assumes the power to force citizens into commercial transactions, the purchases of health insurance, under a rather generous interpretation of the constitution that was recently approved by the Supreme Court. And while the government forces Americans to enter some contracts it also appropriates to itself the power to arbitrarily rip up others. When Obama bailed out Chrysler he simply tossed aside the legal rights of a group of bondholders that – entirely legally and perfectly justifiably – wanted to enact bankruptcy proceedings to protect their investments. Rather than protecting private property and securing legally binding contracts, as is one of the acknowledged primary tasks of any civil government, Obama chose to break contracts and to take money from bondholders to give it to the auto workers union. Political expediency and the wishes of the executive branch of government now trump the sanctity of private contracts in America.

  2. Krugman at some point crossed from being an economist to Democratic partisan hack. That’s one thing–we’ve seen it happen among many of the “elite” in various areas–but now he’s tripped over the line into delusion. Either that or he’s willfully ignorant and wants to see the whole thing collapse. No serious person with even a limited knowledge of economics could believe this shell game can go on ad infinitum.

  3. Why bother printing currency? Why not use leaves instead? It’s Gaia friendly, all natural, and has the same effect that Krugman desires through heating up the printing presses to 110% utilization.

    Right?

    Besides, I’ve got an Oak across the street that dumps at LEAST two Ferraris worth on my lawn each fall.

  4. I can’t be broke! I still have checks!

  5. I can’t be broke! I still have checks!

    That one cracks me up every time. Times may change, but standards must remain…

  6. Pablo wins the internet!

  7. What pisses me off more than Krugman’s failings of intellect is the tone of the article. “Watch out, you guys. Some day in the future, 2042 maybe, foreign countries may stop treating Americans as adults.”

    Jackass, that’s happening right now. Add in some “!” at least. The question is not “When, you guys?” the question is 2014 or 2015, and just how many riots will take place before then because you thought the end of the world as we know it requires a slight nudge on the shoulder to the American people.

    And what we become after that depends a lot of the nature of the 49%.

  8. Some people just want to see the world burn. I put Paul Krugman in this category.

  9. The problem with Krugman’s argumentation, such as it is, is exactly what Ron Paul pointed out a while back: you are saving the present at an expense, which is initially borne by anyone who has been fiscally responsible. That cost is devaluation of savings as a result of deflating the currency.

    Plus, Krugman pays no attention at all to what happens when we can’t find anyone to finance our debt at low interest rates. We then have to pay higher rates, not just on our new debt, but on all of our old debt when it rolls over. For instance, if we have (for instance) a lot of debt with a 5-year payout, then when that payout period is new, we have to re-float it at current, higher, interest rates.

    Krugman may well be the dumbest smart guy in the history of the planet.

  10. I don’t follow you, Slart.

    Everyone knows you ask weathermen to forecast the weather in the past, and economists to forecast the markets in the present.

  11. Jay Carney concurs, William.

  12. Dang it. And that was funnier than my joke too.

    Stupid Orwellian times.

  13. Krugman knows better, or at least he did when Bush was President, but since the current Administration wears the Jackass logo, he argues otherwise.

    He has always been at war with Eastasia.

  14. …you are saving the present at an expense, which is initially borne by anyone who has been fiscally responsible. That cost is devaluation of savings as a result of deflating the currency.

    The thing is, right now we’re shackling our grandkids with tremendous debts, in order to keep people fat and happy today. By making everybody’s savings worthless, we guarantee that today’s savers will die just as destitute as everyone else, leaving nothing behind to help their progeny climb out of the hole that Congress has dug for them. This puts everybody’s kids and grandkids on an equal footing at the bottom of the well. And equality is the Proggies’ Prime Directive.

  15. Republicans, the party of the nation’s entitled rich, are holding a knife to the throat of America’s frail recovery.

    The GOP sore losers have America up against a wall. Republicans don’t care that the majority of the country voted for a candidate who promised to raise taxes on the rich. Republicans don’t care that an even larger majority—60 percent—told election day pollsters they wanted those taxes raised. Republicans don’t care about majority-rule democracy at all. They’re demanding ransom—extension of tax cuts for the rich. If Americans don’t submit, Republicans will slash the nation’s economy.

  16. the government “literally can’t run out of money. After all, it can print the stuff,”

    As long as the coyote never looks down, he’s on solid ground.

  17. So, um, why did the Weimar Republic fall? I mean, they could print money too.

  18. If Krugman truly equates money with wealth, he should have his nobel rescinded and be run out of town on a rail.

    Money represents wealth, which is created by human labor. One cannot create human labor out of thin air.

  19. Arbeit macht frei

  20. Sometimes what Economists present as economics is NOT economics.

    Sometimes what scientists present as science is NOT science.
    Sometimes what Ethicists present as ethics is NOT ethics.
    Sometimes what psychologists present as psychology is NOT psychology.
    Sometimes what logicians present as logic is NOT logic.

    Etc.

    Malpractice is a thing.

  21. Love that clip. No matter how many times I’ve seen it.

  22. “One cannot create human labor out of thin air.”

    Well, Cranky-D, maybe not out of “thin air”; but zey haf other vays.

  23. Shorter idiot: “But there’s still checks in the checkbook!”

  24. Yah, printing valueless money is a GREAT idea. It always works. Just ask Zimbabwe. Or Argentina.

  25. Don’t cry for us Argentinaaaaaa

  26. Pingback: “Krugman: National default 'can't happen'” | protein wisdom – Current National Debt – Focus On World Finances

  27. Money is a measure of wealth, but it isn’t wealth. I would bet Krugman subscribes to the Marxist labor theory of value.

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