Friday, June 1, 2012

Reading articles


Here is an article I read during my lunch break today. Needless to say I disagree entirely.

"By Stephen J. Rose and William T. Dickens

Peter Schiff in The Real Crash and others see the U.S. as having the same problems as Greece and that what we see now in Greece is just a prelude to much larger problems in the United States. This is a false analogy that misrepresents the effects of large deficits as well as the specific problems that Greece faces. (make your case)

While large government deficits can lead to economic distress, the relationship is weak and complicated. Before the financial crisis began in 2008, most of the countries that now need bailouts in Europe had relatively small levels of government debt (e.g., Italy, Spain, and Ireland). In fact, it was the collapse of housing and other asset bubbles and the economic problems caused by the crisis that led to the debt problems in these countries today. So for the U.S. and others, it was the economic problems that caused rising debt and not the other way around. (Here is the problem with this comparison. First off, those nations may have a relatively low debt levels prior to the crisis because those debt levels were measured as a percentage of GDP.  Those nations, Italy, Spain, and Ireland had economies that largely grew because of property and other asset bubbles. When those bubbles popped their GDP shrank, yet, the debts levels remain unchanged. Meaning their debt levels only appeared relatively low, in actuality they were not. E Each government reacted to their collapsing bubble the way any other did, enact stimulus programs in an effort to prevent recessionary collapse. It didn’t work and all these nations have to show for it is a balance sheet swollen with debt.)
Move upMove d
Further, history shows many examples of high levels of debt not causing problems when circumstances are different (for example, in Japan today or the U.S. after World War II). A sign that debt problems are becoming economic problems occurs when the interest rates on a country’s debt rise. This indicates that investors are nervous about default and demand a premium to hold this debt. Of course, rising interest costs make the problems worse and put more pressure on the affected country. (This is also wrong. Japan has suffered from their exceedingly high debt levels. Those debt levels, and the sluggish two decade growth Japan has experienced, reflect the anchor that their debt level has been on their economy. Moreover the continual servicing of debt, often acquired for infrastructure projects that now yield a negative ROI, only drags their economy further down the drain as good money has to service the bad.  The only reason there hasn’t been ‘problems’ is because of Japanese possess a unique cultural mindset that allows their society to remain orderly. There is no way the United States or Western Europe would be half as collected in the same situation that Japan faces.)

Most countries that face rising interest costs on their debt will see the value of their currency decline. But, as a member of the European Monetary Union (EMU), Greece does not control its own currency (whose value of the euro by Germany and France). The United States has its own currency and its own monetary policy.
Not only does the U.S. have its own currency, its debt is denominated in dollars. Over the past three decades, many people have predicted that foreigners would stop buying our debt, or at least demand higher interest rates for the extra risk of currency devaluation. But this has not happened. Instead, when the world financial crisis exploded, investors flocked to US debt, driving rates down to very low levels. Repeatedly the market has disagreed with prognosticators of doom for the US. (This is like a crowd of people rushing to the tallest building in a valley while everything else floods around them.  Eventually the water will rise enough that investors will see that there are no real safe havens except for commodities and hard tangible assets. This will happen.)
Part of the reason for the strength of U.S. government debt is that our competitors are in worse shape than we are. If not the dollar, then what? The euro? The pound? The Chinese renminbi? (That would be difficult, because the Chinese restrict foreign investment.) (You mean like gold, silver, land, and other tangible assets? Or is the author going to completely ignore the rash buying of gold by various central banks around the world?) Economic factors matter, and the size, stability, openness, and productivity of the US economy still make it the obvious currency of choice. The U.S. Gross Domestic Product (GDP) is 50 times as big as that of Greece, seven times the size of Great Britain’s, five times the size of Germany’s, and almost four times the size of Japan’s GDP. (Yes, Greece is inconsequential. America is not.  Greece going under causes mild discomfort, while if America goes under it is a global catastrophe. There is no such thing as too big to fail. If that were the case then Rome would never have gone to the grave.)
The future of the U.S. economy must be assessed on its own merits, and the experience of Greece has little relevance to our situation. Greece is less like the U.S. than one of its 50 U.S. states. (Fair enough) But U.S. states have more protection by being part of a long standing political union than Greece, which is loosely connected to the rest of Europe. When times are tough here, federal aid is very responsive to local business conditions, due to shared federal funding of unemployment compensation, Temporary Assistance to Needy Families, and Medicaid. In total, the federal government provides 20 percent of state and local budgets. In some states, total federal payments are 40 percent greater than the total federal taxes paid by the state’s residents. (The author thinks this is a positive. I argue that it is a negative. Federal aid doesn’t help anyone. That money would have been better put to use if it had never left the states in the first place. Just because a few states may benefit from it doesn’t make it good policy on the whole.  Breaking every window in my neighborhood is great for the local repairman, not so much for all the homeowners.) For Greece, aid is more modest and given grudgingly. Some Greeks are living, but it is much harder to start over in another country with another language than it is to move from one state to another.
While high deficits during economic downturns aren’t a major problem now, continuing high deficits are unsustainable in the long run. If Congress does not agree on some combination of spending cuts and revenue increases, (Increasing taxes has never helped solve a deficit problem. There have been many studies done that show just that. If you really want to increase revenue increase the size of the economy.) deficits after the economy recovers will only fall to five to six percent of GDP rather than the two to three percent that is sustainable. This will have negative consequences on growth and will probably lead to a rising debt to GDP ratio and then larger deficits as interest payments on the debt grow. Ultimately, no country can continue to increase its debt faster than its ability to pay that debt and at some point credit markets will demand larger and larger premiums to lend that country money.

We are not Greece, but we could face unnecessary short and long term economic problems if our political leaders don’t come to sensible compromises. (We already have. Last decade we saw a pitiful 1.5% annual growth over ten years.)"
What frustrates me the most about the whole situation is that often it is the highly educated, or credentialed I should say, that is the most wrong about what is going on.  It is amazing how many logical hurdles and hoops smart individuals are willing to go through to rationalise a bad situation and discount the obvious.  This is the same thing many 'highly intelligent and credentialed' individuals did while our property bubble was in the middle of exploding.  

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Seattle resident whose real name is Kevin Daniels. This blog covers the following topics, libertarian philosophy, realpolitik, western culture, history and the pursuit of truth from the perspective of a libertarian traditionalist.