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Paul Krugman is Dead Wrong: Debt Matters
Paul Krugman, the Princeton University economics professor, Nobel Prize winner, and regular New York Times op-ed contributor says, "Debt matters, but not that much."
Not only is he off the reservation on this one, but he's completely fallen off his high horse.
In the real world, debt actually matters a lot.
In a Houston Chronicle opinion piece last week, Krugman, riding his horse – whose name might as well be Liberal Conscience – trampled conservatives under the guise of an economics lesson that derided "deficit-worriers" for wrongly seeing "America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments."
According to Krugman, that's a bad analogy and "the way our politicians think about debt is all wrong, and exaggerates the problem's size."
Decide for yourself. Either debt matters a lot, or not that much…
The World According to Paul Krugman
Professor Krugman calls all the conversation in Washington about debt and deficits a "misplaced focus" and says all of the economic experts "on whom much of Congress relies have been repeatedly wrong about the short-run effects of budget deficits."
He derides the fears that deficits will cause interest rates to soar by pointing out that they haven't moved.
What he doesn't say is that they haven't moved because they're not free to move.
The fact is that the U.S. Federal Reserve has corralled the free market in interest rates by knocking short-term rates to almost zero through successive open market operations and extraordinary quantitative easing measures.
Mr. Krugman mocks those waiting for rates to rise and notes that while they wait "rates have dropped to historical lows."
Maybe what he doesn't realize is that the Fed's actions themselves have been nothing short of historical.
The crux of Mr. Krugman's supposition that debt doesn't matter much is based on his bashing of the popular analogy comparing America's debt problems to those of a mortgaged homeowner.
All of which Krugman claims is "a really bad analogy in at least two ways."
He says, "First, families have to pay back their debt. Governments don't – all they need to do is ensure that debt grows more slowly than their tax base."
"Second," he says, "an over-borrowed family owes the money to someone else; U.S. debt is, to a large extent, money we owe ourselves."
He goes on to say that the debt from World War II was never repaid and didn't make postwar America poorer.
In fact, the Professor points out, "the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history."
Krugman is Flat Out Wrong
First off, the homeowner analogy is excellent–not irrelevant.
Mr. Krugman is wrong when he says that homeowners have to pay back their debt. The truth is they don't have to.
Why America Hates Congress
Everybody knows that screwing up a critical assignment at work will almost surely get you fired.
That is, unless you work as a member of the U.S. Congress.
After more than two months of bickering, the six Republicans and six Democrats on the "super committee" tasked with finding at least $1.2 trillion debt reduction savings over the next decade have thrown in the towel.
They have no debt reduction plan.
Analysts agree that despite the urgency of addressing America's fiscal issues, both sides are more interested in scoring political points than solving problems.
Meanwhile, the federal debt continues to grow. It eclipsed $15 trillion last week.
With representatives pocketing salaries of $174,000 a year despite their failures, it's no wonder U.S. citizens are down on Congress. A recent New York Times/CBS poll showed Congressional approval sinking to just 9%.
Even some members of Congress admit it.
"The politicians care more about their parties and getting reelected than they do the very real problem," Sen. Tom Coburn, R-OK, said Sunday on C-SPAN's "Newsmakers" program. "[The super committee] was Washington's answer to kicking the can down the road."
According to the law passed as part of the debt ceiling deal over the summer, failure of the super committee to come up with a debt reduction plan is supposed to result in $1.2 trillion in automatic cuts, known as "sequestration."
Half of those cuts, $600 billion, are to come from defense spending, with the other half coming from such areas as education, the environment, transportation, housing assistance and veterans' healthcare.
But just because that's what the law says doesn't mean it will happen. Congress, don't forget, can undo any laws it creates. Ideological opposites Sen. John McCain, R-AZ, and Rep. Maxine Waters, D-CA, among others, are already working on this.
It's just more evidence of a disingenuous Congress.
Pointing Fingers
Instead of developing a deficit reduction solution, lawmakers have tried to convince the American people that the super committee's failure is the other party's fault.
Democrats had called for a "balanced" approach of some higher taxes, mostly on the wealthy, and spending cuts. Republicans eschewed any increase in taxes, preferring instead to reach debt reduction goals entirely through spending cuts.
"The wealthiest of Americans, those who earn more than $1 million every year, have to share, too. And that line in the sand, we haven't seen any Republicans willing to cross yet," super committee co-chair Sen. Patty Murray, D-WA, said on CNN's"State of the Union."
"I don't understand the economics that says that if we raise taxes on my employer, or my boss, somehow they're going to go out and hire my unemployed brother-in-law," Rep. Jeb Hensarling, R-TX, another committee co-chair, countered on "Fox News Sunday."
Why so much rhetoric and no action?
The main reason is that the automatic cuts don't kick in until January 2013 – after the key 2012 elections. Both sides hope to pin the blame on the other side to secure election victories next November that will empower them to solve the debt problem their way.
Washington's Debt-Ceiling Debate – A Political Sham
[Editor's Note: If you want to understand how business and politics interact, nobody can explain it better than Money Morning's Martin Hutchinson. Today the former global merchant banker employs some of Washington and Wall Street's own financial tricks to prove that the looming debt-ceiling debate is a political sham - and to show you that our elected leaders are attacking the wrong problem.]
I have to tell you that – as a former international merchant banker – I want to laugh out loud when I hear the dire predictions of how the United States will have to default if Congress doesn't raise the nation's debt ceiling.
With a little Wall Street-style creative financing – even when the government's outstanding debt level reaches the official limit of $14.3 trillion sometime around the end of March – there's no reason why the country can't go on borrowing as if nothing has changed.
The debt-ceiling debate is something you're going to hear a lot about in the days and weeks to come. The Obama administration just yesterday (Monday) introduced its fiscal 2012 budget proposal – a spending plan that's certain to ignite a firestorm of debate between Democrats and Republicans. And those arguments about next year's spending plan will absolutely feed into a heated showdown over the federal debt ceiling.
But the two sides are arguing about the wrong thing: It's the country's debt load – not the debt ceiling – that has to be addressed. And I can prove it to you.
Like a consumer who's in over his head, Uncle Sam has several alternatives available before his creditors arrive to repossess his vehicles and cut up his credit card. By highlighting some of the "debt dodges" that are available, I will show you that the dire near-term predictions aren't anything to fear. Long-term, however, this country really does need to slash its debt-load. But that requires a real commitment, not political maneuvering.
2011 U.S. Debt Forecast: Five Simple Ways to End America's Spiraling National Debt
By 2020, U.S. debt could reach 90% of the United States' annual economic output. That's more than $20 trillion in national debt, which would mean Americans are on the hook for more than $65,000 per person. Just by paying the interest on that much debt, the United States could become incapable of repairing its own [...]
Investing Strategies: How to Protect Yourself if the U.S. Economy Catches the "Japan Disease"
[Editor's Note: Is the United States in the midst of a Japan-like "Lost Decade?" If that's the case, how can investors protect themselves? Money Morning's Martin Hutchinson, a noted commentator, author and longtime international merchant banker, answers both those questions in today's report.]
Grim unemployment figures, growing worries about crushing debt loads and the apparent absence of any inflation are causing many investors to ask a tough question: Is the U.S. economy catching the "Japan disease," the dreaded and dreadful malaise that has left the onetime Asian powerhouse in a stagnant state since 1990?
It's a crucial question.
And the answer will guide your investment decisions for the next 20 years.
To find out the best investments to be making right now, please read on…
EU Widens Scope of Bank Stress Tests to Include More Banks, Government Debt
Under pressure from investors to provide more transparency, European Union (EU) officials are widening the scope of banking stress tests to include more national and regional banks and to assess sovereign-debt risks when calculating how lenders would perform against shocks to the banking system.
The moves come as investors have been increasing pressure on the EU to provide complete transparency while conducting stress tests on the banks.
EU leaders have already agreed to publish stress test results for 26 banks next month – mainly big, cross-border institutions – to address concerns about the Eurozone's exposure to sovereign debt.
Top Profit Plays for a Defensive-Investing Portfolio
[Editor's Note: In this latest installment of Money Morning's ongoing "defensive investing" series, Chief Investment Strategist Keith Fitz-Gerald explains how inverse funds, oil and other commodities, dividend-paying securities and "sin stocks" should be part of any well-crafted "defensive-investing" strategy.]
Prussian military theorist Carl von Clausewitz once said that "the best defense is a good offense." Although that bit of wisdom has been used everywhere from the battlefield to the gridiron, it could just as easily be deployed as part of a "defensive investing" strategy.
And in today's markets – whipsawed by worries emanating from virtually every major market around the globe – a defensive-investing plan needs to include protective stops, inverse funds, high-yielding dividend shares, "sin stocks, and investments in oil and other value-storing commodities," Keith Fitz-Gerald, the best-selling author who is Money Morning's chief investment strategist, said in an interview this week.
With the world markets in flux, Fitz-Gerald sat down with Money Morning Executive Editor William Patalon III to talk about defensive-investing strategies. What follows is the full text of that interview.
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