“It’s a farce, it’s a sideshow, it really shouldn’t happen”

On Friday I spoke to RT America about the mockery of a sham that is US public discourse on the debt ceiling issue. First of all, the US government creates dollars. They can always manufacture more if they so choose. It’s a rubbish argument to suggest the US is going bankrupt because of its deficit spending. Second, If people want to reduce deficits, cut spending or increase tax revenue by creating jobs or raising tax rates. It’s as simple as that. The debt ceiling issue is "a farce It’s a sideshow. It really shouldn’t happen." It is politics pure and simple –cynical and dangerous politics to be sure. I say a deal will be reached but only after an irresponsible period of posturing and pandering for the 2012 elections. Of course, the tail risk – default – is there.

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On the debt issue, the concept that the Chinese are going to dump dollars is ridiculous. They have pegged their currency to the U.S. dollar. Revalue the currency and the accumulation of dollar reserves goes away. It’s as simple as that. The reason the Chinese are not revaluing more aggressively is because they know doing so would cause a massive disruption which would imperil their economy, already wracked by a massive capital investment bubble. Moreover, a massive revaluation is the path to mutual economic annihilation as surely as the old Soviet-US mutually assured destruction on the nuclear front was. Call it murder-suicide. It won’t happen.

Video below.

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11 Comments
  1. Anonymous says

    Edward … I truly understand the decision to do so … but seriously … you’re so much better than appearing on Russia Today America.

    Not sure if that will translate well into the compliment that I mean it to be.

  2. Anonymous says

    Edward … I truly understand the decision to do so … but seriously … you’re so much better than appearing on Russia Today America.

    Not sure if that will translate well into the compliment that I mean it to be.

  3. Anonymous says

    Edward,

    You are delusional. Sure the US can print money till the cows come home, and never default on any debt, and never have to worry about interest rates if the FED buys it all, but look what happened to the $ FX and commodity prices for a fairly small amount of money printing. If you think there is no cost to money printing, then you are comatose. There is a serious cost to money printing (it’s called inflation) and/or debt (it’s called interest). Are you old enough to remember the 70’s? I am and I assure you their was a serious cost to even the moderate inflation back then of ~15%. Don’t waste your time mumbling about core inflation being low – that dog won’t hunt. Excluding food and energy makes the core CPI numbers cynical at best, and not a reasonable reflection of reality. If we use the same method of calculating inflation as in 1980, the inflation rate is 10%, and that number fits the real world I live in.

    1. Edward Harrison says

      That’s exactly the point! It is not a solvency issue, it’s about inflation and currency depreciation as I have said many times.

      “When I read Bill Gross’ latest monthly letter to investors, this quote from a post last year came to mind. I was talking about the sovereign debt crisis and how to get rid of all the debt developed economy governments have been accumulating. Regardless of whether you believe sovereign currency nations like the U.S. or the U.K. can finance huge deficits indefinitely while users of currency like Portugal and Ireland are facing the music, you have to think that these debt burdens will reduce long-term growth.

      So how do you deal with that as a government? Option #1 is an excruciating slow-growth semi-depressionary path. No politician wants that. Options 3 and 4, default, will also be avoided because that’s the last refuge of banana republics and failed states. Look at how the euro zone countries resist this outcome. So that leaves one with option #2, inflation and currency depreciation. In America that has meant negative real yields on T-bills. You are paying government to borrow from you.”
      http://pro.creditwritedowns.com/2011/03/bill-gross-on-fiscal-profligacy-and-dumping-the-negative-real-yields-of-treasuries.html

      1. Anonymous says

        Edward,

        OK I guess it depends on definition of terms. The US is insolvent if it tries to follow path of actually honoring it’s debts without resorting to effective (if not actual) default via the printing press. Unlike individuals it can (at least for now) devalue via “printing” instead of defaulting (the national equivalent of bankruptcy).

        To me, that says the USA is insolvent in a practical sense, there is no way it can payback it’s debt in real terms, only default/restructuring, or printing (default a different way in a practical sense).

        If we stay on option#2 we know where this leads, and it isn’t pretty, or desirable.

        1. John Sanford Newman says

          If the labor participation rate was where it was in 1998 we would be running a surplus because all those employed people would be making wealth and using all the capital stock sloshing around looking for some hint of future profitability to justify investment.

          Had the deficits of the last three years been used to put people to productive use not only would future deficits be lower but we would be approaching a labor utilization rate where deficits might no longer be necessary.

          Instead, because we are obsessed with inflation, convinced it goes from zero to hyper faster than light despite Japans now generation long effort to demonstrate the opposite, we continue to let idle workers suffer and capital accumulations slosh around with no real prospects for utility.

          The three part post on alternate reserve currencies Ed ran last week sums up the problem in it’s third part: money is valuable to the extent that it supports the flows of commerce that make and distribute wealth, when it doesn’t, it isn’t. Ours is doing little of either at present because our institutions are more concerned with measuring the relative value of our currency to others than the relative productivity of our economy to others.

          The most likely route to hyper-inflation for the US is to continue current policies until most productive capacity is liquidated from demand deficiency and then try to stimulate with fiscal policy. In Weimar first you had to have the French occupy the Ruhr valley and then turn on the money spigot to get to hyper, in Zimbabwe you first had to take farming, the main economic activity there and destroy it by carving up farms and giving little pieces to people who had no idea what to do with it to get to hyper.

          Were the Spanish defaulting every time the galleon from Potosi arrived with a belly full of gold?

          1. Anonymous says

            Inflation slams the poorest to hardest. It is true that the “stimulus” could have been more productively spent, but would still result in a Minskian Ponzi-speculative economy. There is no way we would have such a large increase in employment without balanced trade. There is no way we would have balanced trade without dropping the cost of production in the US to make imports less competitive and exports more competitive. The only way to achive a lower cost of production is either high inflation resulting $ weakness, WHILE NOT PASSING THROUGH the inflation in terms of wages (otherwise the cost of production is not changed), or large-scale deflation with simultaneous drop in nominal wages resul;ting in lower cost of production.

            The only other way is strict import tariffs, and that has yet different big costs to the economy and the standard of living for the majority.

    2. Johnson Stingleheimer says

      Are you serious?

      “the inflation rate is 10%, and that number fits the real world I live in.”

      As someone who lived during that time period, I can tell you today is nothing like that. Stop looking at just your high-frequency purchases and take into all that you spend. My personal inflation rate will probably be about 4% this year, at the most.

      Please look at how much interest is actually paid on debt as a percentage of GDP… less than 2%

      1. Edward Harrison says

        I don’t buy the 10% number either, although I know that John Williams of Shadow Stats has numbers like this and a lot people follow him. Directionally, his analysis makes sense. Inflation is a lot higher than the official numbers. But this is not the 1970s, just yet.

        1. DavidLazarusUK says

          It does depend on your level of income. If you are on a low income then your spending will be on rents/mortgage (going up) and food (up a lot) and energy (also up a lot) either for heating for travelling to work. All of which are excluded from core inflation figures. These are much higher than for core inflation.

          Do not forget that inflation is based on a basket of goods, many of which will not be applicable to low income households like 50″ Plasma TV’s which are falling in price and so drive down overall inflation figures. Few people find that their personal inflation rate matches the official figures. Most will find theirs being higher than official figures.

  4. Anonymous says

    Edward,

    You are delusional. Sure the US can print money till the cows come home, and never default on any debt, and never have to worry about interest rates if the FED buys it all, but look what happened to the $ FX and commodity prices for a fairly small amount of money printing. If you think there is no cost to money printing, then you are comatose. There is a serious cost to money printing (it’s called inflation) and/or debt (it’s called interest). Are you old enough to remember the 70’s? I am and I assure you their was a serious cost to even the moderate inflation back then of ~15%. Don’t waste your time mumbling about core inflation being low – that dog won’t hunt. Excluding food and energy makes the core CPI numbers cynical at best, and not a reasonable reflection of reality. If we use the same method of calculating inflation as in 1980, the inflation rate is 10%, and that number fits the real world I live in.

    1. Edward Harrison says

      That’s exactly the point! It is not a solvency issue, it’s about inflation and currency depreciation as I have said many times.

      “When I read Bill Gross’ latest monthly letter to investors, this quote from a post last year came to mind. I was talking about the sovereign debt crisis and how to get rid of all the debt developed economy governments have been accumulating. Regardless of whether you believe sovereign currency nations like the U.S. or the U.K. can finance huge deficits indefinitely while users of currency like Portugal and Ireland are facing the music, you have to think that these debt burdens will reduce long-term growth.

      So how do you deal with that as a government? Option #1 is an excruciating slow-growth semi-depressionary path. No politician wants that. Options 3 and 4, default, will also be avoided because that’s the last refuge of banana republics and failed states. Look at how the euro zone countries resist this outcome. So that leaves one with option #2, inflation and currency depreciation. In America that has meant negative real yields on T-bills. You are paying government to borrow from you.”
      http://pro.creditwritedowns.com/2011/03/bill-gross-on-fiscal-profligacy-and-dumping-the-negative-real-yields-of-treasuries.html

      1. Anonymous says

        Edward,

        OK I guess it depends on definition of terms. The US is insolvent if it tries to follow path of actually honoring it’s debts without resorting to effective (if not actual) default via the printing press. Unlike individuals it can (at least for now) devalue via “printing” instead of defaulting (the national equivalent of bankruptcy).

        To me, that says the USA is insolvent in a practical sense, there is no way it can payback it’s debt in real terms, only default/restructuring, or printing (default a different way in a practical sense).

        If we stay on option#2 we know where this leads, and it isn’t pretty, or desirable.

        1. John Sanford Newman says

          If the labor participation rate was where it was in 1998 we would be running a surplus because all those employed people would be making wealth and using all the capital stock sloshing around looking for some hint of future profitability to justify investment.

          Had the deficits of the last three years been used to put people to productive use not only would future deficits be lower but we would be approaching a labor utilization rate where deficits might no longer be necessary.

          Instead, because we are obsessed with inflation, convinced it goes from zero to hyper faster than light despite Japans now generation long effort to demonstrate the opposite, we continue to let idle workers suffer and capital accumulations slosh around with no real prospects for utility.

          The three part post on alternate reserve currencies Ed ran last week sums up the problem in it’s third part: money is valuable to the extent that it supports the flows of commerce that make and distribute wealth, when it doesn’t, it isn’t. Ours is doing little of either at present because our institutions are more concerned with measuring the relative value of our currency to others than the relative productivity of our economy to others.

          The most likely route to hyper-inflation for the US is to continue current policies until most productive capacity is liquidated from demand deficiency and then try to stimulate with fiscal policy. In Weimar first you had to have the French occupy the Ruhr valley and then turn on the money spigot to get to hyper, in Zimbabwe you first had to take farming, the main economic activity there and destroy it by carving up farms and giving little pieces to people who had no idea what to do with it to get to hyper.

          Were the Spanish defaulting every time the galleon from Potosi arrived with a belly full of gold?

          1. Anonymous says

            Inflation slams the poorest to hardest. It is true that the “stimulus” could have been more productively spent, but would still result in a Minskian Ponzi-speculative economy. There is no way we would have such a large increase in employment without balanced trade. There is no way we would have balanced trade without dropping the cost of production in the US to make imports less competitive and exports more competitive. The only way to achive a lower cost of production is either high inflation resulting $ weakness, WHILE NOT PASSING THROUGH the inflation in terms of wages (otherwise the cost of production is not changed), or large-scale deflation with simultaneous drop in nominal wages resul;ting in lower cost of production.

            The only other way is strict import tariffs, and that has yet different big costs to the economy and the standard of living for the majority.

    2. Johnson Stingleheimer says

      Are you serious?

      “the inflation rate is 10%, and that number fits the real world I live in.”

      As someone who lived during that time period, I can tell you today is nothing like that. Stop looking at just your high-frequency purchases and take into all that you spend. My personal inflation rate will probably be about 4% this year, at the most.

      Please look at how much interest is actually paid on debt as a percentage of GDP… less than 2%

      1. Edward Harrison says

        I don’t buy the 10% number either, although I know that John Williams of Shadow Stats has numbers like this and a lot people follow him. Directionally, his analysis makes sense. Inflation is a lot higher than the official numbers. But this is not the 1970s, just yet.

        1. Anonymous says

          It does depend on your level of income. If you are on a low income then your spending will be on rents/mortgage (going up) and food (up a lot) and energy (also up a lot) either for heating for travelling to work. All of which are excluded from core inflation figures. These are much higher than for core inflation.

          Do not forget that inflation is based on a basket of goods, many of which will not be applicable to low income households like 50″ Plasma TV’s which are falling in price and so drive down overall inflation figures. Few people find that their personal inflation rate matches the official figures. Most will find theirs being higher than official figures.

  5. Karthik Natarajan says

    My only concern is this – if the U.S. does print too much money, we could get into a potential hyperinflation scenario. I know, Mr. Harrison, you mentioned in a post last month that hyperinflation is a political issue, however, if enough money is printed where month-over-month inflation is 30% or higher or if the dollar becomes weak enough where it is dropped as the world’s reserve currency, then such a high inflation rate could occur, effectively creating a near-hyperinflation spiral.

  6. Karthik Natarajan says

    My only concern is this – if the U.S. does print too much money, we could get into a potential hyperinflation scenario. I know, Mr. Harrison, you mentioned in a post last month that hyperinflation is a political issue, however, if enough money is printed where month-over-month inflation is 30% or higher or if the dollar becomes weak enough where it is dropped as the world’s reserve currency, then such a high inflation rate could occur, effectively creating a near-hyperinflation spiral.

  7. John Sanford Newman says

    Another great post. It continues to amaze me the effort people put into not getting this. The willful ignorance in the face of incredibly obvious and durable evidence in Japan for twenty years and in the US now for three blows me away. The fundamental difference between commodity money which is finite and external to government and fiat money which is infinite and internal to government is that the government sets the interest rate in the fiat world while holders of commodities that back such currencies in commodity money systems set the rates there. We are in a fiat system. Period.

    Of course the people who have managed to extract tons of dollars from a corrupt political economy don’t like the idea that the government is holding down rates, these people view the economy as an extractive resource only paying lip service to the distributive potential of markets to justify their “free market” theology. They would much rather be able to jack up rates and be guaranteed rents without having to make any effort whatsoever, and to depend on the governments taxing ability to complete the degradation of those not similarly obsessed with money. Once you commit to the Gipper’s notion that government is the problem, I guess the idea that money only has value to the extent that government is effective for society at large is too much to take. But the same people who insist that government is the problem refuse to consider how six to ten billion people are going to continue to exist without it. When they begin to discuss how billions and billions who live off of cash flow from work will subsist in a world drained of both, I’ll consider their arguments.

  8. John Sanford Newman says

    Another great post. It continues to amaze me the effort people put into not getting this. The willful ignorance in the face of incredibly obvious and durable evidence in Japan for twenty years and in the US now for three blows me away. The fundamental difference between commodity money which is finite and external to government and fiat money which is infinite and internal to government is that the government sets the interest rate in the fiat world while holders of commodities that back such currencies in commodity money systems set the rates there. We are in a fiat system. Period.

    Of course the people who have managed to extract tons of dollars from a corrupt political economy don’t like the idea that the government is holding down rates, these people view the economy as an extractive resource only paying lip service to the distributive potential of markets to justify their “free market” theology. They would much rather be able to jack up rates and be guaranteed rents without having to make any effort whatsoever, and to depend on the governments taxing ability to complete the degradation of those not similarly obsessed with money. Once you commit to the Gipper’s notion that government is the problem, I guess the idea that money only has value to the extent that government is effective for society at large is too much to take. But the same people who insist that government is the problem refuse to consider how six to ten billion people are going to continue to exist without it. When they begin to discuss how billions and billions who live off of cash flow from work will subsist in a world drained of both, I’ll consider their arguments.

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