The debt bomb
A bomb is something that contains explosive material,
material which contains a great deal of stored energy,
waiting for its detonation when it will release the energy,
causing destruction.
The accumulation of debt,
under conditions of low interest rates,
but with the realistic expectation that
the debt will need to be “rolled over” or refinanced
when the initial note comes due
seems like a tolerable analogy to a bomb.
The “detonation” will come when the debt needs to be refinanced
under interest rates that can be arbitrarily high.
Who can predict what interest rates will be in the future?
Not even Paul Krugman has that capability,
and certainly not your average newspaper columnist.
by E.J. Dionne Jr.
Washington Post, 2011-03-14
“We’re broke.”
You can practically break a search engine
if you start looking around the Internet for those words.
They’re used repeatedly with reference to
our local, state and federal governments,
almost always to make a case for slashing programs —
and, lately, to go after public-employee unions.
The phrase is designed to create a sense of crisis
that justifies rapid and radical actions
before citizens have a chance to debate the consequences.
[Wrong, E.J.
The goal is to ensure a debate actually does occur,
and to make sure the debate is not a one-sided one,
where only "needs" of the needy are presented,
while the consequences of ever-rising debt are ignored or minimized.]
Just one problem: We’re not broke.
Yes, nearly all levels of government face fiscal problems
because of the economic downturn.
But there is no crisis.
There are many different paths open to fixing public budgets.
And we will come up with wiser and more sustainable solutions
if we approach fiscal problems calmly,
[I agree with that.]
realizing that we’re still a very rich country
[Just how can a nation which is $14 trillion and rising in debt
be considered a "very rich country"?
In the well-chosen words of Arnold J. Toynbee (remember him? You should),
we have been "resting on our oars"
while America's manufacturing and industrial strength has been destroyed
by the demands of those who have made America an uneconomical place to make things.]
and that the wealthiest among us are doing exceptionally well.
[Here I agree with where Dionne is headed.
The wealthiest among us, in particular, the financial sector, needs to pay more.]
Consider two of the most prominent we’re-brokers,
House Speaker John Boehner and Wisconsin Gov. Scott Walker.
“We’re broke, broke going on bankrupt,”
Boehner said in a Feb. 28 Nashville speech.
For Boehner, this “fact” justifies
the $61 billion in domestic spending cuts House Republicans passed
(cuts that would have a negligible impact on the long-term deficit).
Boehner’s GOP colleagues want reductions in
Head Start, student loans and scores of other programs voters like,
and the only way to sell them is to cry catastrophe.
...
Bloomberg News looked at Boehner’s statement and declared simply:
“It’s wrong.”
As Bloomberg’s David J. Lynch wrote:
What will the interest rate be two years from now
when that note needs to be refinanced?
(Unless, of course, the political and economic system reverses course
and puts the government into surplus.)]
Financial products that pay off if Uncle Sam defaults
aren’t attracting unusual investor demand.
And tax revenue as a percentage of the economy is at a 60-year low,
meaning if the government needs to raise cash
and can summon the political will,
it could do so.”
[Two problems with that last statement:
First, the entire government, from the president to both houses of Congress,
was controlled by the Democrats in 2010,
yet explicitly voted to continue the Bush tax cuts,
yielding to the argument that to raise taxes would damage the economy.
If that argument was valid in 2010,
why would it not be equally valid in the future?
Second, that argument implicitly assumes that
a debt crisis would not in and of itself damage the economy,
leading itself to lower taxes.
But there is considerable evidence, not to mention theory, that
once the debt crisis begins,
the whole economy goes into a death spiral.
The economists call that a "debt trap."
Too bad Dionne didn't point that out.]
Precisely.
A phony metaphor is being used to hijack the nation’s political conversation
and skew public policies
to benefit better-off Americans and hurt most others.
[This is, frankly, delusional.
The metaphor is not "hijacking" anything.
Rather, it is merely showing how serious the situation is,
and reminding people of the consequences of
piling up more and more debt indefinitely.
Now as to the need to raise taxes as well as reduce benefits,
I agree with Dionne on that.]
...
By STEVEN ERLANGER
New York Times, 2011-04-09
...
Greece, Ireland and now almost certainly Portugal
have access to hundreds of billions of dollars in emergency European aid
to help them avoid defaulting on their debt.
But the aid is really just more loans,
and the interest rates the countries are paying,
if a little lower than what the private market would charge,
are still crushingly high.
Their pile of debt gets bigger with every passing day.
Moreover, the price of these loans has been
a commitment to slash government spending far more drastically than
domestic leaders would have the desire or the political power
to accomplish on their own.
And
Economists call this “the debt trap.”
Escape from the trap generally requires devaluation of the currency,
which cannot happen among countries that use the euro
as their common currency,
or strong economic growth, which none of the three have,
or some kind of bankruptcy process, which all three forswear.
Add to that the likelihood that
all three countries will continue to have unstable governments
until they figure a way out,
and Europe’s financial crisis has no end in sight.
[Here the situation of the United States diverges from the above narrative.
The United States will have the option of devaluation.
But our leaders, media and political, need to warn the citizenry of
the drastic consequences of such a devaluation,
how it will make items that now must be imported,
due to the hollowing out of American industry,
correspondingly more expensive, indeed, unaffordable to many.]
“What has been missing, in the debate about
how countries can restore their finances to some kind of sustainability,
is the limit of how much they can cut in a period of austerity,”
said Simon Tilford, chief economist for the Center for European Reform in London.
“There is a limit of how much any government
can cut back spending and survive politically
unless there is a light at the end of the tunnel,
a route back to economic growth.”
...
António Nogueira Leite, a former Portuguese secretary of the treasury
and an adviser to the center-right opposition,
said that the bailout packages
“don’t really take into account the arithmetic of the debt.”
The experiences of Greece and Ireland show, he said,
...
material which contains a great deal of stored energy,
waiting for its detonation when it will release the energy,
causing destruction.
The accumulation of debt,
under conditions of low interest rates,
but with the realistic expectation that
the debt will need to be “rolled over” or refinanced
when the initial note comes due
seems like a tolerable analogy to a bomb.
The “detonation” will come when the debt needs to be refinanced
under interest rates that can be arbitrarily high.
Who can predict what interest rates will be in the future?
Not even Paul Krugman has that capability,
and certainly not your average newspaper columnist.
Miscellaneous articles
2011-03-14-Dionne
What if we’re not broke?by E.J. Dionne Jr.
Washington Post, 2011-03-14
“We’re broke.”
You can practically break a search engine
if you start looking around the Internet for those words.
They’re used repeatedly with reference to
our local, state and federal governments,
almost always to make a case for slashing programs —
and, lately, to go after public-employee unions.
The phrase is designed to create a sense of crisis
that justifies rapid and radical actions
before citizens have a chance to debate the consequences.
[Wrong, E.J.
The goal is to ensure a debate actually does occur,
and to make sure the debate is not a one-sided one,
where only "needs" of the needy are presented,
while the consequences of ever-rising debt are ignored or minimized.]
Just one problem: We’re not broke.
Yes, nearly all levels of government face fiscal problems
because of the economic downturn.
But there is no crisis.
There are many different paths open to fixing public budgets.
And we will come up with wiser and more sustainable solutions
if we approach fiscal problems calmly,
[I agree with that.]
realizing that we’re still a very rich country
[Just how can a nation which is $14 trillion and rising in debt
be considered a "very rich country"?
In the well-chosen words of Arnold J. Toynbee (remember him? You should),
we have been "resting on our oars"
while America's manufacturing and industrial strength has been destroyed
by the demands of those who have made America an uneconomical place to make things.]
and that the wealthiest among us are doing exceptionally well.
[Here I agree with where Dionne is headed.
The wealthiest among us, in particular, the financial sector, needs to pay more.]
Consider two of the most prominent we’re-brokers,
House Speaker John Boehner and Wisconsin Gov. Scott Walker.
“We’re broke, broke going on bankrupt,”
Boehner said in a Feb. 28 Nashville speech.
For Boehner, this “fact” justifies
the $61 billion in domestic spending cuts House Republicans passed
(cuts that would have a negligible impact on the long-term deficit).
Boehner’s GOP colleagues want reductions in
Head Start, student loans and scores of other programs voters like,
and the only way to sell them is to cry catastrophe.
...
Bloomberg News looked at Boehner’s statement and declared simply:
“It’s wrong.”
As Bloomberg’s David J. Lynch wrote:
“The U.S. today is able to borrow at historically low interest rates,
paying 0.68 percent on a two-year note
that it had to offer at 5.1 percent
before the financial crisis began in 2007.
What will the interest rate be two years from now
when that note needs to be refinanced?
(Unless, of course, the political and economic system reverses course
and puts the government into surplus.)]
Financial products that pay off if Uncle Sam defaults
aren’t attracting unusual investor demand.
And tax revenue as a percentage of the economy is at a 60-year low,
meaning if the government needs to raise cash
and can summon the political will,
it could do so.”
[Two problems with that last statement:
First, the entire government, from the president to both houses of Congress,
was controlled by the Democrats in 2010,
yet explicitly voted to continue the Bush tax cuts,
yielding to the argument that to raise taxes would damage the economy.
If that argument was valid in 2010,
why would it not be equally valid in the future?
Second, that argument implicitly assumes that
a debt crisis would not in and of itself damage the economy,
leading itself to lower taxes.
But there is considerable evidence, not to mention theory, that
once the debt crisis begins,
the whole economy goes into a death spiral.
The economists call that a "debt trap."
Too bad Dionne didn't point that out.]
Precisely.
A phony metaphor is being used to hijack the nation’s political conversation
and skew public policies
to benefit better-off Americans and hurt most others.
[This is, frankly, delusional.
The metaphor is not "hijacking" anything.
Rather, it is merely showing how serious the situation is,
and reminding people of the consequences of
piling up more and more debt indefinitely.
Now as to the need to raise taxes as well as reduce benefits,
I agree with Dionne on that.]
...
2011-04-09-NYT-Erlanger-Death-trap
In Portugal Crisis, Worries on Europe’s ‘Debt Trap’By STEVEN ERLANGER
New York Times, 2011-04-09
...
Greece, Ireland and now almost certainly Portugal
have access to hundreds of billions of dollars in emergency European aid
to help them avoid defaulting on their debt.
But the aid is really just more loans,
and the interest rates the countries are paying,
if a little lower than what the private market would charge,
are still crushingly high.
Their pile of debt gets bigger with every passing day.
Moreover, the price of these loans has been
a commitment to slash government spending far more drastically than
domestic leaders would have the desire or the political power
to accomplish on their own.
And
for countries that depend a good deal on
government spending to generate growth,
rapid decreases in spending have meant
sustained economic stagnation or outright recession,
Economists call this “the debt trap.”
Escape from the trap generally requires devaluation of the currency,
which cannot happen among countries that use the euro
as their common currency,
or strong economic growth, which none of the three have,
or some kind of bankruptcy process, which all three forswear.
Add to that the likelihood that
all three countries will continue to have unstable governments
until they figure a way out,
and Europe’s financial crisis has no end in sight.
[Here the situation of the United States diverges from the above narrative.
The United States will have the option of devaluation.
But our leaders, media and political, need to warn the citizenry of
the drastic consequences of such a devaluation,
how it will make items that now must be imported,
due to the hollowing out of American industry,
correspondingly more expensive, indeed, unaffordable to many.]
“What has been missing, in the debate about
how countries can restore their finances to some kind of sustainability,
is the limit of how much they can cut in a period of austerity,”
said Simon Tilford, chief economist for the Center for European Reform in London.
“There is a limit of how much any government
can cut back spending and survive politically
unless there is a light at the end of the tunnel,
a route back to economic growth.”
...
António Nogueira Leite, a former Portuguese secretary of the treasury
and an adviser to the center-right opposition,
said that the bailout packages
“don’t really take into account the arithmetic of the debt.”
The experiences of Greece and Ireland show, he said,
“that once austerity sets in,
the country doesn’t generate the means to be able to pay for
the already incurred debt.”
...
posted by KHarbaugh at 16:45
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