Excerpt: "what Greek experience actually shows is that while running deficits in good times can get you in trouble - which is indeed the story for Greece, although not for Spain - trying to eliminate deficits once you're already in trouble is a recipe for depression."
Portrait, New York Times columnist Paul Krugman, 06/15/09. (photo: Fred R. Conrad/NYT)
What Greece Means
12 March 12
o Greece has officially defaulted on its debt to private lenders. It was an "orderly" default, negotiated rather than simply announced, which I guess is a good thing. Still, the story is far from over. Even with this debt relief, Greece - like other European nations forced to impose austerity in a depressed economy - seems doomed to many more years of suffering.
And that's a tale that needs telling. For the past two years, the Greek story has, as one recent paper on economic policy put it, been "interpreted as a parable of the risks of fiscal profligacy." Not a day goes by without some politician or pundit intoning, with the air of a man conveying great wisdom, that we must slash government spending right away or find ourselves turning into Greece, Greece I tell you.
Just to take one recent example, when Mitch Daniels, the governor of Indiana, delivered the Republican reply to the State of the Union address, he insisted that "we're only a short distance behind Greece, Spain and other European countries now facing economic catastrophe." By the way, apparently nobody told him that Spain had low government debt and a budget surplus on the eve of the crisis; it's in trouble thanks to private-sector, not public-sector, excess.
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Bypass the money and look at what this is like. You have a farm, and you've screwed up the planting by eating a lot of the seed corn and scattering more on rocks. Now you are in trouble -- so you do 'austerity' and refuse to invest the effort to plant anything more. We know what the result of that would be.
Now, bringing money into it, and the economy, we have squandered it and instead of maintaining the infrastructure and manufacturing, we let the rich people have it, and they sit on what they don't throw away on bombing people, living high on the hog, and doing stupid things with it. The real wealth goes down while the money goes up by playing financial games and deceptions.
The good news? We know where the seed is -- it's sitting on the rocks and we can collect it and replant it. The trick is fight off the 'don't tax the rich' vultures to get it.
The debt has now grown to $15.5 trillion and its interest cost $454.4 billion in fiscal year 2011 (despite historically low interest rates). Indeed, since Reagan's 1981 inauguration, the debt's interest has totaled nearly $9 trillion. If the U.S. is indeed the world's richest country, its federal government should be debt-free and not, e.g., owing the Social Security Trust Fund $2.5 trillion.
I've long respected Paul Krugman but if he continues to downplay the risk of our government defaulting on its debt to private lenders, Social Security, foreign central banks, etc. then he must be aware of a miraculous fiscal solution/plan for eventually bailing out the government from its projected ultimate debt (currently unprojected) and should share it with us so we can all sleep better.
And just as a reminder, being in debt is not a problem, and it does not affect current expenditures as long as you increase revenue and continue to pay at least the interest. As revenue increases you pay more of the debt's principal.
One other point. The revenue increase can come from nearly any legal source as well as inflation. Most of the doom and gloom about the US defaulting are by people that have an anti-Obama agenda first.
You say, "being in debt is not a problem, and it does not affect current expenditures as long as you increase revenue and continue to pay at least the interest. As revenue increases you pay more of the debt's principal."
But the debt's interest is an annual "current expense," has totaled nearly $9 trillion since Reagan's 1981 inauguration, and is probably responsible for that amount of the federal debt.
Moreover, government tax revenues have increased with the economy's growth for decades but haven't even managed to balance the budget, let alone "more of the debt's principal."
And, how much inflation will it take to mitigate the debt you seem willing to see grow indefinitely, i.e, if bond investors will continue buying the government's bonds. But, the Fed's QE bond purchases indicate bond investors (e.g., China) aren't purchasing all the bonds that are currently being auctioned by the Treasury Dept.
I suspect that you know why Obama is happy to have China overtake us. I would like to know and in particular would love to be able to discuss what facts support your thesis.
Thanks
I did not mean to imply that you are ant-Obama.
While it is true that debt interest is an annual expense, it is a fixed expense. It can be reduced by paying off the principal. In fact that was actually Clinton's Balanced Budget. Through increased revenue, he was able to create a budget where the debt would stop increasing and therefore increased revenues were going to be used to decrease the debt. Instead of decreasing the debt we returned the excess to the wealthiest persons.
Now, Obama has effectively managed the debt by decreasing the rate of growth in the debt. As you know, before you change directions of a big object, you need to slow it down first. Otherwise centrifugal forces rip it apart.
The only way that debt grows for an exceptional long time is if we follow the "Austerity path to riches". Unfortunately the path, due to austerity itself is littered with broken glass, sinkholes and other dangers that make it impossible to navigate. However, if we increase via taxation and adding workers, we can pave the path using those workers and rename it "Investment path to prosperity", spice the added revenues with a little inflation and we are well on our way back.
BTW - The QE was intended to build back the US money supply and create a slow rate of inflation. And just as Krugman predicted, it helped a tiny bit, but not enough to make a large difference.
http://cpc.grijalva.house.gov/index.cfm?sectionid=70
It sounds very good but, as you say, it has only been "presented," not adopted. Until the White House, Congress and both political parties jointly adopt it as a strategy and commit to aggressive plans to execute it, the risk of the "economic disaster" Mitch Daniels predicted only increases.
During periods of inflation, salaries also tend to increase. Also any outstanding debt is effectively reduced. And lastly Social Security payments to the Disabled and the elderly are pegged to the rate of inflation. That lowers the hardships on some of the most vulnerable.
An Economic turnaround relies on the government to use all the tools it can responsibly. Removing some or any of those tools make the task much, much more difficult. The Republicans only want Obama to have one tool, a saw.
Unfortunately, this is only theory. Actually wages don't rise much and banks are staying tight-fisted and not lending, even to good risks. Regulation is missing.
I'll be curious to see if Greece makes use of this strategy, considering that they don't have many alternatives.
Greece just got fucked. This time it is fucked to death.
Why doesn't Krugman seem to know that.
Greece loses any control of its economy and nation.
Zero percent inflation is an almost impossible target to maintain and may not even be desirable. Of the two, inflation and deflation, some small amount of the former is more desirable. It drives people to invest while deflation drives people to hold on to their money and let it safely accrue value under their mattress.
Deflation, the inverse of inflation, is also synonymous with hard times. The only justification for deflationary policies, which are anti-growth, is to reign in high inflation, which is presently not the case.
Also, going to a gold standard, as Rep. Paul has proposed is counter productive, because it negates the possibility of increasing the money supply. As I understand it Custer's massacre and the grab for gold in the Black Hills of S. D. was precipitated to increase the money supply, which could only be done with gold as the US was on the gold standard, to counteract a vicious recession.
It is also worth noting that when the Spanish shipped massive amounts of purloined gold from the Americas, it did not make the Spainiards very richer as it caused inflation due to an expansion of currency (gold) beyond what was required by the market.
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