Home > Main > WSJ and prominent University economists routinely claim U.S. Default is possible

WSJ and prominent University economists routinely claim U.S. Default is possible

May 17, 2011

I make some wild claims about debt around here.  But it seems to me that people with huge, professional platforms make far more outrageous claims as a matter of course.

Here is recent Default mongering from the WSJ:

The U.S. government, which carries a highly-coveted triple-A credit ratings, has never defaulted on its debt in modern history. But the debt ceiling issue has always been a political hot potato. It became a flashpoint back in 1995-1996 during the Clinton administration.

Default is impossible. It is impossible for the U.S. to be insolvent in its own currency.  This article misleads people, because any mass market article that talks about a potential U.S. default without flatly stating that a default is impossible is missing the most important fact about the debate over default.

It’s like talking about the Chicago Bulls winning 6 championships in the 1990’s and never mentioning Michael Jordan.  Or giving an brief summary of WWII and not mentioning the United States.  The omission is not just a minor issue – it misses an essential element that leaves people less informed.

A U.S. default is a political choice and not an economic choice.  The only possible way we could default is through a choice not to pay the bills.  Saying it’s up for debate doesn’t clarify the issue – it confuses people needlessly.

And yet that is what the Wall Street Journal does in this paragraph.  Is there even one sentence in the article that makes it 100% clear the U.S. cannot default?  Nope.

Bloomberg is guilty too, by publishing Laurence Kotlikoff. Here is the Boston University economics professor in Bloomberg:

“Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.”

That’s the first line of an op ed in Bloomberg.  And it is demonstrably, factually wrong.

Our public discourse is festering with factually incorrect claims. Our most respected financial news sources routinely claim it is possible for the U.S. to default.

[Update: Detroit Dan points out the “experts” know little, and Niall Ferguson is horrible again.

“Was the oracle really suggesting that there is no chance that the U.S. will ever experience a Greek-style debt meltdown where it couldn’t get financed and would have to turn to outsiders like the International Monetary Fund for help? Apparently, he was.

Harvard University historian Niall Ferguson, who has written extensively on debt, is aghast at what he calls Buffett’s highly simplistic view. “Buffett,” he says, “must know this is nonsense.” Ferguson continues, “Britain had complete monetary sovereignty in the mid-1970s and yet the IMF had to be called in. I could give numerous other examples. And then there is the inflation risk, which is implicit in his statement. We won’t have a debt crisis because we can print unlimited quantities of paper dollars. If that’s the good news, I don’t want to hear the bad.”

Other experts are similarly amazed by Buffett’s assertion.”

Yeah, that U.K crisis was really bad:

“The new policies worked quickly, in part because the forecasts of worsening deficits proved too pessimistic. Within one year, Britain beat its IMF budget deficit target, the current account was back in the black and the government was trying to restrain the pound’s rise.””

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  1. Detroit Dan
    May 17, 2011 at 8:52 am

    Here’s a good one: Buffett’s silly talk about the U.S. debt. Excerpt:

    At Berkshire Hathaway’s annual meeting in Omaha, Chairman Warren Buffett raised more than a few eyebrows when he said that, “The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency. The only thing we have to worry about is the printing press and inflation.”

    Was the oracle really suggesting that there is no chance that the U.S. will ever experience a Greek-style debt meltdown where it couldn’t get financed and would have to turn to outsiders like the International Monetary Fund for help? Apparently, he was.

    Harvard University historian Niall Ferguson, who has written extensively on debt, is aghast at what he calls Buffett’s highly simplistic view. “Buffett,” he says, “must know this is nonsense.” Ferguson continues, “Britain had complete monetary sovereignty in the mid-1970s and yet the IMF had to be called in. I could give numerous other examples. And then there is the inflation risk, which is implicit in his statement. We won’t have a debt crisis because we can print unlimited quantities of paper dollars. If that’s the good news, I don’t want to hear the bad.”

    Other experts are similarly amazed by Buffett’s assertion.

  2. Detroit Dan
    May 17, 2011 at 9:25 am

    I found out a little about the IMF loan to Britain in the 1970s. From Wikipedia – The 1976 Sterling Crisis:

    James Callaghan came to power in 1976. He was immediately told the economy was facing huge problems, according to documents released in 2006 by the National Archives.[16] The effects of the 1973 oil crisis were still being felt, with inflation rising to over 27% in 1975.[17] Financial markets were beginning to believe the pound was overvalued and in April of that year The Wall Street Journal advised the sale of sterling investments in a story titled “Good-bye Great Britain”. At the time the UK government was running a budget deficit and Labour’s strategy emphasised high public spending. Callaghan was told there were three possible outcomes: a disastrous free fall in Sterling, an internationally unacceptable siege economy or a deal with key allies to prop up the pound while painful economic reforms were put in place. The US government feared the crisis could endanger NATO and the EEC and in light of this the US Treasury set out to force domestic policy changes. In November 1976 the IMF announced the conditions for a loan included deep cuts in public expenditure.[18]

    The Conservatives arrived in power in 1979, on a programme of fiscal austerity. Initially, the pound rocketed, moving above the $2.40 level, as interest rates rose in response to the monetarist policy of targeting money supply. The high exchange rate was widely blamed for the deep recession of 1981. Sterling fell sharply after 1980; at its lowest, the pound stood at just $1.03 in March 1985, before returning to the US$1.70 level in December 1989.

    So the loan was taken to try to prop up the value of the pound (and, obviously, not to deal with possible default). This was accompanied by fiscal austerity which backfired disastrously…

    • TC
      May 17, 2011 at 11:14 am

      Thanks Dan. Ferguson just make stuff up and nobody challenges him.

  3. Detroit Dan
    May 17, 2011 at 11:26 am

    Agreed with regard to Ferguson. ARGHHHH!

  4. beowulf
    May 17, 2011 at 9:54 pm

    “an internationally unacceptable siege economy”

    He’s referring to the proposal of Lord Kaldor and Wynne Godley to use protectionism to (effectively) tax foreign sector to subsidize private domestic sector.
    http://books.google.com/books?id=YamJGlX2_vkC&pg=PA150&dq

    Why does that sound familiar, oh yes…
    Import Certificates are a proposed mechanism to implement balanced trade, and eliminate a country’s trade deficit. The idea was proposed by Warren Buffett in 2003 to address the U.S. trade deficit.
    http://en.wikipedia.org/wiki/Import_Certificates

  5. May 18, 2011 at 4:16 am

    Sorry. But Laurence Kotlikoff is a clueless idiot and his department should be shut down ASAP due to his incompetence. Some weeks ago in an interview with Frankfurter Allgmeine Zeitung he “informed” the German readers: The US debt problem is even worse than the Greek debt problem comparing the US with Greece, which is utter nonsense given Greece is member of the Eurozone and not sovereign in its monetary affairs. Next he claimed the actual debt of the US federal government is 200 trillion US$ meaning 1,300% of GDP? This figure and his calculations are only ridiculous and I’ve really no idea how such an idiot can get hold of a tenured position with a respectable university?

    I’m now waiting for a Laurence Kotlikoff initiative writing any new born baby a letter saying: Welcome to the United States of America. I wish you luck. The bad news is: right now you’ve incurred debt of 500.000 US$. Yours, … (Because during its lifetime the baby will most probable have a student loan, purchase a home, buying several cars, help finance college education of its children, … and won’t have any income and assets at all.)

    • TC
      May 18, 2011 at 11:00 am

      “’m now waiting for a Laurence Kotlikoff initiative writing any new born baby a letter saying: Welcome to the United States of America. I wish you luck. The bad news is: right now you’ve incurred debt of 500.000 US$. Yours, …”

      This is a great column idea for him. It’s a standard trope.

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