Robert Samuelson discusses the fiscal cliff in "The deal we need":
The American economy resembles a sick patient who's been put on a powerful drug: budget deficits. If the drug is withdrawn too abruptly, the patient relapses. That's the fiscal cliff. But if the drug is never withdrawn, the patient may face highly toxic side effects. That's a future financial crisis that occurs if lenders refuse to lend at low interest rates. It seems confusing, because it is confusing.The other day on NPR, Senator Patty Murray was asked why negotiations would succeed now when the deficit supercommittee - which she chaired - couldn't reach an agreement. Her answer was that we're much closer to the cliff so action is urgent. I found this to be so depressing. It means that every critical issue is going to be a model of brinkmanship. We're going over the cliff not only because the parties can't agree but because there's no getting around the math anyway.
Curb those deficits -- but not too fast. No one has adequately explained the messy choices to Americans. Not the president. Not major economists. Not congressional leaders.
4 comments:
Forbes:
No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever
http://www.forbes.com/sites/pascalemmanuelgobry/2012/10/19/no-the-united-states-will-not-go-into-a-debt-crisis-not-now-not-ever/
The reason why it’s not true is because we live in a fiat currency system, where the United States government can create an infinite number of dollars at no cost to meet its obligations. A Treasury bill is a promise that the government will give you US dollars–something that the United States government can produce infinitely and at no cost.
That’s the reason why interest rates on United States debt have only gone down even as the debt has ballooned. That’s the reason why Great Britain has very low rates on its debt despite having very high debt-to-GDP. That’s the reason why Japan has an astounding debt-to-GDP ratio and still enjoys some of the lowest rates ever. Investors have bet for so long that there would be a run on Japanese debt and have ended up so ruined that in financial circles that trade is called “the Widowmaker”...
Well, what about Argentina? Argentina had to default on its debt because it had pegged its currency to the US dollar. It wasn’t sovereign with regard to its currency since it had to maintain its currency’s peg. It wasn’t Argentina’s debt that caused it to default, it was its currency peg.
What about Greece? Same thing. Greece hasn’t used its own currency for ten years. Of course it’s going bankrupt.
You don’t have to take my word for it. How about Alan Greenspan? He said: ”[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”
...The US has an even bigger advantage than just being sovereign in its own currency (hi Greece), it also holds the reserve currency. The US dollar is the main currency that is used in most international transactions, it is held by all of the world’s central banks, and so forth.
Why is this important? Well, another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it’s highly unlikely that this will change soon–being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.)
In other words, while in theory printing tons of money could create inflation, in practice demand for the dollar is so high–and for structural reasons that have very little to do with how the US economy is doing at a particular point in time–that it’s hard to imagine a circumstance under which the US government would have to print so much that it would cause significant inflation.
...It’s already common knowledge among economists, Fed officials, and an increasing number of sophisticated investors. Maybe so, but it’s still not common knowledge among politicians and among the general public. A lot of people still think that the US is under some risk of one day becoming like Greece, and it’s distorting our public debate.
It’s especially distorting it on the Right, where hysteria about deficits, and debt, and becoming like Greece has reached a fever pitch. Paul Ryan, especially, has framed his entire message on entitlement-cutting on the flawed premise that the US needs to cut its entitlement or it will suffer a debt crisis. This message, in turn, has infected broad swathes of the conservative movement (including very smart people in it), a movement that I consider myself a member of and want to see in strong intellectual health. But very few liberals–certainly no Democratic elected officials that I’m aware of, certainly not the President and the Vice President–are disputing the premise that the US is in any danger of a debt crisis.
I find this la-dee-dah attitude towards debt much like the guy who jumped off a building, passed the 20th floor, and said "so far I'm OK."
Every year that passes the debt balloons along with interest on that debt. Do you know what the federal government gets in exchange for that widening expense? Nothing.
I've said it for years and years: the federal government is on a glide path to become nothing more than a fund-transfer way station. Money comes in and then goes out to interest and entitlements. There will be no "government."
I find this la-dee-dah attitude towards debt much like the guy who jumped off a building, passed the 20th floor, and said "so far I'm OK."
That's not an apt image for various reasons, starting with the fact that gravity is a constant that man cannot change, and debt isn't. But should we still want to pursue the metaphor, Greece jumped off the top of a 7-Eleven, and the U.S. has jumped off the Petronas Towers in Kuala Lumpur.
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