Many market analysts, commentators and economists claim to be having a hard time finding a metric in which the US is in better financial shape than Greece. Ken Rogoff, for example, recently warned that a Greek default would usher in a series of sovereign defaults, and suggested recently on NPR that the crisis also had implications for the US. The historian Niall Ferguson made a similar claim a few months ago in the Financial Times. The cries of the deficit hawks grow louder: Repent all ye fiscal profligates, before the "day of reckoning" comes.
Let's dial down the Biblical hysteria a wee bit while there's still time for rational debate. The market's recent response to the intensifying pressures in the euro zone suggests that investors are beginning to differentiate between countries that are sovereign issuers of currency, such as the US or Japan, and non-sovereign issuers, such as Greece or any other nations in the euro zone. The US dollar is rising in value, notwithstanding the federal deficit, while debt distress in the so-called "PIIGS" countries, especially Greece, are intensifying, thereby driving down the euro to fresh 12 month lows against the dollar.
The relative performance of various currencies against the US dollar is highly instructive in this regard. Over the past 3 months, the Australian, New Zealand and Canadian dollars have all registered gains of some 4% against the greenback. The worst performer? Not surprisingly, the euro, down 6.3% over that period. Whether consciously or not, the markets are demonstrating that they understand the distinctions between users of currencies (who face an external funding constraint), and those nations that face no constraint in their deficit spending activities because they are creators of currency.
That the US has the reserve currency is an irrelevant consideration here. The key distinction remains user vs. creator. The euro zone nations are part of the former; Canada, Australia, the UK, Japan and the US are representatives of the latter.
Using "PIIGS" countries as analogues to the US or the UK, as Rogoff, Ferguson and countless other commentators do, is wrong. Their faulty analysis comes as a result of the deficit critics' failure to distinguish between the monetary arrangements of sovereign and nonsovereign nations. Any sovereign government (none within the EMU enjoy that status any longer) can deal with a collapse in revenue and an increase in outlays from a financial perspective without invoking the sort of deadlocks that are now crippling the EMU zone. That is why, for example, the Japanese yen is not in freefall against the dollar, despite having a public debt to GDP ratio in excess of 200%, almost 2.5 times that of the US. In fact, over the past few days the yen has actually appreciated against the dollar. Now why would that be, if the lesson we were supposed to learn was the evils of "unsustainable" government deficit spending?
Fiscal sustainability has no relevance in a system where there are no operational constraints on the ability of a government to spend. US Social Security checks will not bounce. Nor will the Canadian or Japanese equivalents. Similarly, their bonds will always be able to pay out interest.
Note that this doesn't mean that there are no real resource constraints on government spending. Let's be clear: anyone who advances the use of fiscal policy as an effective counter-stabilization tool is always careful to point out that these interventions can come at a cost. That cost could well be inflation if, as a result of the fiscal expansion, we reach full employment, resource constraints begin to appear, but the government continues to spend. But if the economy recovers, tax revenues will increase and safety net spending will fall. In the US, that means we will likely be back to "normal," with deficits around 2-4% depending on the state of the economy, which is where we've been for the past 30 years aside from 1998-2001.
Why won't these deficits be inflationary? As Professor Scott Fullwiler noted in a recent email correspondence with me, once the recovery is underway and the economy gets to a significantly higher capacity utilization where price pressures could emerge, the deficit will be declining substantially. It will also be at least a partially offset by a fall in discretionary spending on social welfare. It's axiomatic that the faster the economy grows, the smaller the deficit becomes, unless the government continues to spend recklessly-which we certainly do not advocate.
And by the time we get to a point where we might have inflation, the deficit is back to 2-3%, which again is where we've been for the past 30 years, while average inflation has been about 2%. Note: inflation does not equal default. You and I could well buy credit default swaps on any country in the world, but we are unable to collect if any of the relevant countries register a positive rate of inflation -- even a double digit rate of inflation -- because inflation is not tantamount to default. Nor do the ratings agencies recognize default in this manner. Default is defined as a failure to perform a task or fulfill an obligation, especially failure to meet a financial obligation. Inflation is not incorporated into the definition when it comes to questions of national insolvency.
By contrast, the talk of Greek default is prevalent across the markets, and that is a reasonable concern in the context of the euro zone. The default option is considered a foregone conclusion, even allowing for the massive 110 billion euro bailout, which was designed to inspire "shock and awe" among investors but instead has simply engendered shock. If Greece costs 110 billion euros to bail out, how much next time for Spain, Italy, or even France?
If the markets have concerns about national solvency, they won't extend credit. And that is the problem facing all of the euro zone countries. Greece, Portugal, Italy, France, and Germany are all users of the euro-not issuers. In that respect, they are more like any American state or municipality, all of which are users of the US federal government's dollar.
And deficits per se will not create the conditions for default in the US. If the US continues to run net export deficits (all the more likely given the ongoing fall in the value of the euro), and the private domestic sector is to net save, the US government has to net spend-that is, run deficits. That is a basic accounting identity, nothing more, nothing less. If the US government tries under these circumstances to run surpluses, it will first of all force the private domestic sector into deficits (and increasing debt) and ultimately fail because the latter will eventually seek to increase their saving ratio again.
And the same logic applies for Greece. The call is for the IMF/EU package to reduce its budget deficit as a percentage of GDP from the current 13.6% to 8.1% in 2011. How will they achieve that? Trying to engineer a reduction in the deficit via austerity programs (or freezes or whatever else one might like to call them) at a time when private spending is still insufficient to maintain adequate real GDP growth is a recipe for disaster. It will increase the deficit.
Consider Ireland as Exhibit A in this regard. Ireland began cutting back deficit spending in 2008, when its banking crisis began to spread and its budget deficit as a percentage of GDP was 7.3%. The economy promptly contracted by 10% and, surprise, surprise, the deficit exploded to 14.3% of GDP. We would wager heavy odds that a similar fate lies in store for Greece, given the EU's inability to understand or recognize basic financial balances and the interrelationships among the various sectors of the economy. Neither a government, nor the IMF, can predict with any certainty what the outcome will be-ultimately private saving desires will drive the outcome, as Bill Mitchell has noted repeatedly.
Why do we have huge budget deficits across the globe? It's not because our officials have all suddenly become Soviet-style apparatchiks. It is largely because the slower global economy has led to lower revenues (less income=less taxes paid, since most tax revenue is based on income, and lower tax brackets) and higher spending on the social safety net. Gutting this social safety net because we extrapolate the wrong lessons from the euro zone's particular (and self-imposed) predicament constitutes the height of economic ignorance. It also reflects a transparently political agenda, which the US would be ill advised to embrace. The rescue packages, the IMF intervention and all the talk about orderly defaults cannot overcome the EMU's fundamental design flaw. Let neo-liberalism die with the euro.
Assuming that the U.S. Federal Reserve would be at the center of monetary theory, I would very much like to see them forced to answer a couple of questions in light of some of these points:
- Why is current policy failing so miserably to meet the Fed mandate and stated goal of minimizing unemployment?
- Why does the Federal Reserve consistently attempt to dissuade government spending on nation building (infrastructure, education, etc.) in even the most stressed economy, whereas profligate unfunded spending that seems designed to simply transfer government funds to the private sector goes uncensured?
It now appears that Greece had 12 times the debt it reported to the European Central Bank - a state secret that was supported by its financial underwriters and debt manager, G.S. Greece has extensive experience with soverign debt defaults, and this crisis was one that should have been easily forseeable, as noted in an excellent paper by Reinhard & Rogoff (see http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf which has been expanded into book that is a must read, at least on my list).
Real wealth, jobs, industry, and real monetary value is created and/or acquired ONLY when the members of a family (or a nation, city-state, island, tribe, etc.) plant, grow and/or harvest something of commercial value from the earth, extract something of commercial value from the earth, provide professional services (medical, legal, dental, engineering, architecture, accounting, land surveying, technology, etc.) and/or manufactures or constructs something of commercial value that is consumable (or permanently useful for income or rent) and then sells, leases or rents these items and/or services to parties outside of their family, in return for a net transfer of gold, currency or commodities from other parties outside of their family into their own family. The members of that family can reflect their real wealth and financial security with the net positive accumulation of grain, gold, cattle, jewels, land, buildings, factories, jobs, commodities and/or other marketable products for reserve use in times of emergency and/or also to raise the standard of living for the members of that family.
Why cannot the US government continously borrow money to pay for wars, military jets with active duty military USAF pilots for the personal use of specially privileged members of congress (Pelosi), government bureaucrat payrolls, government retirement checks, courts, federal police, failed business bailouts, cash bonuses to the various Wall Street forgers of SEC documents that contributed to political campaigns, Las Vegas corporation junkets for failed corporation employees, foreclosed house mortgages for big spenders with bad credit, new multi-million dollar French manufactured personal corporate jets for political contributor's bankrupt corporations, pork barrel projects, high speed rail projects, research contracts, Welfare, Social Security, Medicare, Medicaid, SSI, expensive corporate vacations, new infrastructure, wealth re-distribution, mental health services, foreign aid and any other thing that congress and the president decides to use taxpayer US dollars to acquire, build or just give to their political campaign contributors and various other privileged individuals.
Is the US also reliable to pay for General Motors union retirement obligations since the US government now owns most of the company? I guess that we can just borrow more money back from the industrial nations and hand this money out to everybody that asks for some.
Why should I have to work when I can get onto some government program?
I'm reminded of a director at Apple who scolded me for some code I wrote that fixed a long standing problem. He said "You are violating the (software) architecture". My response, "It needed violating". EMU, recognize that it is a crisis of structure more so than a crisis in fact, and help us get deficit ideologues off our collective backs.
It doesn't require a degree to be a right winger. Just a personality disorder.
http://www.electricpolitics.com/podcast/2010/05/i_euro.html
Greece did provide their population with all sorts of free government provided services, place almost everybody onto government payroll jobs or government retirement payrolls, and then pay for all of these government expenses with "borrowed" funds (actually selling freshly printed paper Greek Bonds)? I believe that the Greeks stopped working to generate any net national wealth (Trade Deficit), and then decided to start deficit spending to mimic the US financial operations that appeared to be very successful? Will the US face similar consequences when foreign individuals will no longer purchase any of the freshly printed paper US Bonds at the periodic US Federal Reserve (FED) auctions to continue our US government operations. Germany is asking Greece to sell some of its islands to pay off some of their (worthless) paper bonds. A gold standard would not let the USA and other countries print and sell paper bonds to raise funds for the government expenses (to buy votes).
The value of the outstanding US debt of $12 Trillion in Bonds and T-bills plus $829B in currency will equate to very little buying power of the US dollar if foreign nations stopped buying our freshly printed US T-Bills, US Bonds, or other US Securities and/or wanted the US government to redeem our currency in gold (just like other nations).
Any family, tribe, country, etc. and its individual members can prosper or become debt ridden in accordance with their industrial behavior, government spending behavior, and/or other economic actions of the leaders of that family.
These freshly printed paper US Bonds, T-Bills, Dollars and other security instruments that the US government sells to people in industrialized nations have no value, except that they are redeemable for title to privately owned businesses, factories, casinos, hotels, farms, land, ports, breweries, refineries, forests, ports, breweries, refineries, and other privately owned assets located in the USA that were created by previous US generations instead of Gold.