Posts Tagged ‘impossible’

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

May 17, 2011 7 comments

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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Winning the War, losing the Battle and the Red Queen

April 11, 2011 2 comments

'I daresay you haven't had much practice,' said the Queen. 'When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast. There goes the shawl again!'

After a re-read of the last post, I don’t think I was very clear about why the distinction between solvency and debasement is so important.

Using the words “inflation” over “going broke” moves the debate into much friendlier territory – because we have empirical and observable data to use.  When people are talking about “going broke”, but there is no way to tell when we go broke, we are dealing with something that is unprovable and unknowable and ultimately impossible. Anyone can then make up their own facts or reasons and there is no way to tell who is right or wrong.  So you can make up your own reasonings and insist people accept them.  There is no way to disprove your points, because the very foundation of the logic rests on an impossibility.

And with practice, there can be an entire edifice of logic built upon an impossibility.  That’s what most of economics has done, either through direct assumptions, or through closeted ones like the Government budget constraints.

But with inflation, we can look at the data.  Yes, the data might be up to debate. But we can win this debate.  That’s why I spend time crushing John Williams Shadow Stats and pointing out for Shadow Stats to be true, people must be paying the U.S. Government huge sums of money to be allowed to lend money.  That’s why I spend time showing people that the amount of demand destruction required to reduce the price of energy is so gigantic that anyone would be a fool to try it.

Putting the debate to debasement over solvency puts the debate into winnable territory.  Leaving the debate to be over solvency in the popular culture is a sure way to lose the larger war.  This is why the language change by Bill Gross is hugely important. This was pointed out as a huge change by some people doing the daily grind work over at Mosler’s place:

Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.

When Bill Gross – the most widely followed bond manager on the planet – can no longer claim ‘the governments will go broke’ lest he be considered an idiot, we are shifting the argument to a debate we can win.

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