Is California (or the United States) Greece? Is the Dollar a worthless currency in far worse shape than the Euro?
The more time I spend in Switzerland, the more painfully aware I am of the strange blend of admiration, resentment, antipathy, and love of the United States one encounters. It's difficult to measure, but always seems there at some level, expressed usually in a "yes, but" sentence. Yes, the United States is the world's largest economy, but all great economies fall (look at Rome). Yes, the United States helped win World War II through its extraordinary industrial and economic output as well as the courage of so many of its citizens who died far from home to settle an ethnic and geographical catastrophe that began and ended in Europe, but Switzerland would have done just fine had Hitler decided to invade, thank you very much. Yes, the United States currency remains one of the most secure on the planet, with foreigners (including the Swiss and Chinese) willing to snap up $1 billion of our debt every day, lending us money for over a decade at less than 1.5%, but that won't last forever and one day the Chinese will commit economic suicide by shifting their money from the dollar to another currency (perhaps the Swiss Franc?), watching the trillions they already have invested in dollars collapse perhaps to worthlessness. Yes, American-made iPhones, iPads, and iPods revolutionized our world and are as ubiquitous in Lausanne as they are in Los Angeles, helping propel Apple to its current position of the largest and most profitable company on the planet, perhaps in human history, but other companies were #1 and Apple won't be #1 forever (and by implication other great American brands such as Coca Cola and Disney and Google will also suffer their come-uppance).
Apple stores are as crowded in Zurich as in New York City and American performers such as Bruce Springsteen can fill a stadium here as easily as they can in New Jersey, but somehow, there is a giant shoe waiting to drop, a bubble waiting to burst, an unwinding of a 200-year-old experiment in economic and technological innovation that has gone parabolic in the last century or so. Drawing perhaps on some Newtonian equal-and-opposite law that they feel must be at work in the universe, or perhaps some Icarus and the sun poetic blowback for progressing so far so fast, for challenging the very gods at some level, all this prosperity, wealth, innovation, and freedom has to come with a terrific price, doesn't it?
Put me firmly in the I Dunno school. The roots of agnostic mean exactly that (literally not knowing) and although I have to agree that all good things must end and no doubt some country, perhaps some country no one today could imagine ever being an innovative and economic juggernaut, will one day take the United States' place as the world's largest and by many measures most productive and innovative economy, that truism is about as useless as predicting on a beautiful, sunny day that one day it will rain. OK, but this is quite different than stating that because today is sunny, tomorrow (or perhaps sometime next week) there must be a flood in direct proportion to the beauty of today.
I have been studying and trading in markets long enough to know that no one really knows anything, that if there is any constant in this world, it is our ability to be surprised. Everyone today "knows" that program trading caused the 1987 stock market crash but hardly a mention of it was made prior to the event (according to a Lexus Nexus search). The greatest risk envisioned prior to the American invasion of Iraq was that those dastardly weapons of mass destruction would be deployed against the invading forces, not the idea that not a single trace of weapon of mass destruction would be uncovered.
So yes, something inevitably will derail the United States - and by extension the intricately interwoven Western European - economies, but the usual suspects thrown about by our system's greatest critics are probably not going to be the cause of that derailment, if for no other reason than most of the "causes" they cite do not really exist, certainly not to the extent they breathlessly warn us about them.
While visiting the Zurich area, we stopped by a friend whose opinion and generosity I greatly admire, but I was saddened to hear him rattle off a series of what on our side of the Atlantic are Tea Party talking points:
To be fair, the Tea Party almost never uses such large words and probably does not understand the difference between monetary and fiscal policy or exactly what a fiat currency is, nor would they ever say anything positive about Europe, which they view as a socialist hellhole with a job-crushing cradle-to-grave welfare state, but you get the idea. I believe these are most of the Tea Party economic talking points, essentially a warmed-over Austrian school libertarian platform. I will sidestep the fact that they rarely mention von Hayek with his dire predictions of a Road to Serfdom that would inevitably follow a progressive income tax, universal healthcare, and providing social security for the elderly and disabled, but as soon as the shooting stopped in World War II, he was hard at work warning us all about these threats which he viewed as greater than Hitler and Hirohito combined.
Dick Cheney and Justice Scalia like duck-hunting, shooting disoriented, unarmed birds out of the sky for fun. I prefer shooting down weak, histrionic arguments, point-by-point. So let's go hunting, metaphorically speaking by targeting each of the arguments, fact-by-fact, premise-by-premise, conclusion-by-conclusion. This is a bit redundant, since if you can demonstrate that the basic facts of a case are wrong (finding an alleged murder victim alive and unharmed, for example), you need not proceed further in disproving an argument (such as that a neighbor must be guilty of a murder that did not actually happen), but since the conclusions are weak and who knows, one day history might be kinder to the Tea Party and throw them some factual bones they need not fabricate or distort, it's both amusing and useful to dismantle these also so that they can never harm anyone again.
I jest of course for as long as people can form crowds, they will form lunatic ideas from phrenology to humoral theory to supply side economics and never let messy reality prevent them from making a cartoon-like argument, complete with Goodies and Baddies and single variable explanation of Everything. As Sarah Palin once asked her debate coach while waving her hand over the soon-to-be-filled debate audience seats, "does any of those [facts] really matter to these people?" The sad answer is no, but to those of us in the reality-based community who believe that we can use reason and not raw emotion to decide the truth, let's proceed. To make it simpler to follow, I will put the arguments and counter-arguments in a Question and Answer format.
To make things a bit more interesting, I will throw in a concrete example, a specific claim made by my host, namely that California, thanks to run-away government spending, was bankrupt and worse off than Greece.
Question: Is California bankrupt?
Answer: Believe it or not, this is not the easiest of questions to answer since one must first define "California." Are we talking about the entire state, including all of its citizens, public and private, and the sum total of all of their economic activities? If so, then the answer is a most definite No. If we are talking about the state government, then the answer is also No. If we are talking about some counties (by chance you would anticipate that in a country with thousands of counties each with independent tax revenue and spending policies, that some at any point in time would be "bankrupt"), then Yes, Sort Of.
The numbers follow but it is helpful also to think about what we mean by Bankrupt. It is a dirty word, with heavy overtones of thrifty British, German, or Swiss bankers frowning down at some poor soul whose business for which he borrowed money was not successful at generating enough to income to service his debt. In a society in which chance and the accidents of one's birth are generally downplayed and those who have much money like to tell anyone who will listen that they had no more opportunities than anyone else, they were just smarter or thriftier or worked harder than their deadbeat competition, being poor is a step away from being a criminal. In fact, until quite recently, historically speaking, being in debt and unable to service that debt for whatever reason was criminal, landing you in debtor's prison or on a ship bound to the Americas or later Australia (the fact that both of these former penal colonies now have such thriving economies should be strong evidence against the Victorian moralism about what essentially is a cash flow crunch).
The word bankrupt, with all its historical and cultural baggage, is thrown away quite loosely, but it is useful to narrow it down to what it actually means. If it meant having a high debt relative to one's income, then every medical student, law student, and entrepreneur starting a new business is bankrupt. Most of my medical student classmates accumulated debts several hundred percent greater than their starting salaries as interns and infinitely greater of course than their nonexistent medical school incomes, but is as meaningful to apply this term to a medical school class as to a failing company such as Enron or Worldcom?
The critical difference between indebtedness and bankruptcy is the ability to repay one's debt. Few doubt that medical students will not repay their loans and earn over their lifetimes many multiples of what they borrowed, but the same could not be said of Worldcom or perhaps some countries that are now struggling. Can it be said of the United States in general or California in particular?
Question: is California an economic basket case (and therefore incapable found generating the revenue to repay its debts)?
Answer: I report, you decide. Let's look at some basic facts publicly available and not in dispute:
California, home to Silicon Valley, Hollywood, and some of the most agriculturally productive acreage on the planet, is an economic powerhouse, with a GDP of $1.9 trillion, 10% that of the United States. On a per person basis, this translates to almost $52,000 per resident per year (in 2010). If California were a country, it would rank as the 8th largest economy in the world. The state exports over $134 billion, including $48 billion in computers and electronics. Its agriculture is also thriving, worth $36.6 billion and generating perhaps $100 billion in related economic activity. It is the leading dairy state. If California were such a failed state, then the Japanes, British, Swiss, French, and German (who last time I checked knew a thing or two about banking and investing) would not invest so much money directly or indirectly in the state and its industries.
If the state were bankrupt or approaching it, it would at least be a net recipient of federal aid. As it turns out, this solidly red (Democratic) state is, like its economic red-state rival on the East Coast (New York), sent $3.65 billion net to Washington, meaning it paid $3.6 billion more in taxes than it received in federal grants, aid, or direct investment.
So at the aggregate California the idea that the state is bankrupt is about as likely as the assertion that music sales of yodelers will overtake American hip hop artists anytime soon.
But what about the government of California? Isn't it true that it is bankrupt?
No, not really. Here a brief economics 101 digression is necessary since such a massive misinformation campaign was launched by the Tea Party and its corporate backers that Americans know even less about economics today than they did a few years ago (which is pretty sad considering that economics vies with history and geography for the topics Americans find most challenging).
Economically-speaking, a government budget is pretty simple. Government takes in money (revenue) through taxes and spends that money either by giving it away directly (through transfer payments to individuals such as contractors or corporations through subsidies). If it collects more in revenue than it spends, it is in surplus. If it spends more than it collects in taxes than it is in deficit. Since things tend to cost more than initially believed and lowering taxes and the true cost of running government is almost always politically popular, most governments run deficits if allowed to (some state governments have constitutional amendments prohibiting deficit-spending). These deficits are added to the government debt which must be financed the same way any of us finance our deficit spending such as when we buy a house or go to college: the shortfall must be borrowed. As hard as it might be to believe today, the idea that the government has the power to borrow money by issuing bonds was once controversial. Thomas Jefferson, who was never particularly good with money himself (he died deeply in debt forcing his estate to be liquidated and his slaves to be sold off, separating families forever) believed in a government that was more thrifty than he was. John Adams and Alexander Hamilton believed that the government should be able to borrow money to launch long-term projects such as canal building or constructing a Navy whose benefits were long-term but whose costs were immediate. Limiting a government only to what it could spend with cash on hand was a fierce argument in its time and had Hamilton lost it, no doubt the United States would have been a much smaller and poorer country. There never would have been an Erie Canal, trans-continental railroad, or NASA moon shot. The poor and disabled would have lived or died (mostly died) based on where they happened to live and whether the coffers of the local government were full or empty at the time they needed the money. The power to borrow would dramatically boost the power and reach of the federal government and change the type of country we would become.
But Hamilton was better at winning arguments than duels and before he was shot dead by Aaron Burr in a field in New Jersey, he oversaw the launch of what has become the most wildly successful investment instrument perhaps in world history, United States Treasury bonds, bills, and notes.
Any Tea Party apologist alive today would no doubt take heart in reading the dire warnings of the evils of debt, how it would surely crush our young Republic shortly after its birth, how it would lead to tyranny, the end of our country, etc. Or perhaps not, since history showed those financial Chicken Littles were wrong as rain. Thanks to an efficient, safe, liquid Treasury bond market international investors lend our government a billion dollars a day at less than 1.5% interest. No, this can't go on forever unless of course the government is able to invest that money and get a return higher than 1.5% (this return need not be monetary or even measurable, by the way; investing in the education of our children will pay off trillions of times over, for example, in increased productivity and competitiveness of tomorrow's workers, researchers, and creators).
So the argument was settled centuries ago: our government has the power to borrow and has used that power for all of its existence except for some brief periods when it bought up debt previously issued.
The difficulty with debt as any debtor knows is that even small deficits over time are added to an ever-compounding debt that must be serviced. Common sense and some simple calculations make it clear that indefinite deficits are unsustainable. One way or another, the debt must be paid off and even the interest on that debt becomes a problem, increasing our deficit and by extension our debt. So the question is at what point does a healthy leveraging of a growing and expanding country become a problem, even a threat to the existence of that country?
Philosophers can argue this question all they want, but there is a simpler way: at what point are people no longer willing to lend the government money? Bond investors are some of the smartest, most conservative people on the planet. The idea that they are all suffering from some massive delusion driving them to park trillions in an IOU returning less than 2% a year for 10 years or longer strains credulity. When governments do run into trouble, they don't do it when their creditors are willing to lend them money for free (after inflation).
And by the way, if the United States is really in trouble and no one except for the Tea Party knows it, then this should be an argument for borrowing more not less since if the Chinese are so much stupider than Sarah Palin, shouldn't we take as much of their money as possible at such ridiculously undeserved (per the Tea Party) rates? As the joke goes, if you owe someone a million dollars, you have a problem. If you owe them a trillion dollars, they have a problem.
The bond market has generally done an excellent job of signalling impending doom and - by choking off the borrowing and creating a crisis - preventing catastrophe. For example, when President Reagan's massive tax cuts turned out not to pay for themselves and the budget deficit - despite what Cheney famously cited the Spirit of the Gipper as teaching us - do matter - bond investors refused to lend our government money unless they got credit card levels of interest - 16 to 18% at the short end! One could have argued that the United States government under Reagan was clearly in trouble, so much so that his successor would have to violate his read-my-lips campaign pledge not to raise taxes, but of all the problems the United States might face today, high borrowing costs is simply not one of them. The idea that a government that can borrow money for free is not creditworthy requires a radical redefinition of creditworthy.
At any rate, returning to the budget deficit and debt, the argument goes that the United States has suffered an unsustainable explosion of debt. It is true that no president since Clinton has run a surplus, but the idea that
The more time I spend in Switzerland, the more painfully aware I am of the strange blend of admiration, resentment, antipathy, and love of the United States one encounters. It's difficult to measure, but always seems there at some level, expressed usually in a "yes, but" sentence. Yes, the United States is the world's largest economy, but all great economies fall (look at Rome). Yes, the United States helped win World War II through its extraordinary industrial and economic output as well as the courage of so many of its citizens who died far from home to settle an ethnic and geographical catastrophe that began and ended in Europe, but Switzerland would have done just fine had Hitler decided to invade, thank you very much. Yes, the United States currency remains one of the most secure on the planet, with foreigners (including the Swiss and Chinese) willing to snap up $1 billion of our debt every day, lending us money for over a decade at less than 1.5%, but that won't last forever and one day the Chinese will commit economic suicide by shifting their money from the dollar to another currency (perhaps the Swiss Franc?), watching the trillions they already have invested in dollars collapse perhaps to worthlessness. Yes, American-made iPhones, iPads, and iPods revolutionized our world and are as ubiquitous in Lausanne as they are in Los Angeles, helping propel Apple to its current position of the largest and most profitable company on the planet, perhaps in human history, but other companies were #1 and Apple won't be #1 forever (and by implication other great American brands such as Coca Cola and Disney and Google will also suffer their come-uppance).
Apple stores are as crowded in Zurich as in New York City and American performers such as Bruce Springsteen can fill a stadium here as easily as they can in New Jersey, but somehow, there is a giant shoe waiting to drop, a bubble waiting to burst, an unwinding of a 200-year-old experiment in economic and technological innovation that has gone parabolic in the last century or so. Drawing perhaps on some Newtonian equal-and-opposite law that they feel must be at work in the universe, or perhaps some Icarus and the sun poetic blowback for progressing so far so fast, for challenging the very gods at some level, all this prosperity, wealth, innovation, and freedom has to come with a terrific price, doesn't it?
Put me firmly in the I Dunno school. The roots of agnostic mean exactly that (literally not knowing) and although I have to agree that all good things must end and no doubt some country, perhaps some country no one today could imagine ever being an innovative and economic juggernaut, will one day take the United States' place as the world's largest and by many measures most productive and innovative economy, that truism is about as useless as predicting on a beautiful, sunny day that one day it will rain. OK, but this is quite different than stating that because today is sunny, tomorrow (or perhaps sometime next week) there must be a flood in direct proportion to the beauty of today.
I have been studying and trading in markets long enough to know that no one really knows anything, that if there is any constant in this world, it is our ability to be surprised. Everyone today "knows" that program trading caused the 1987 stock market crash but hardly a mention of it was made prior to the event (according to a Lexus Nexus search). The greatest risk envisioned prior to the American invasion of Iraq was that those dastardly weapons of mass destruction would be deployed against the invading forces, not the idea that not a single trace of weapon of mass destruction would be uncovered.
So yes, something inevitably will derail the United States - and by extension the intricately interwoven Western European - economies, but the usual suspects thrown about by our system's greatest critics are probably not going to be the cause of that derailment, if for no other reason than most of the "causes" they cite do not really exist, certainly not to the extent they breathlessly warn us about them.
While visiting the Zurich area, we stopped by a friend whose opinion and generosity I greatly admire, but I was saddened to hear him rattle off a series of what on our side of the Atlantic are Tea Party talking points:
The dollar as a fiat currency no longer backed by the gold standard is worthless, propped up artificially by a government that can delay but not prevent its inevitable collapse.
Expansion of money supply ("printing dollars") is always and everywhere inflationary and will lead to a collapse of the currency being expanded.
The dollar is far worse off than the Euro since only a handful of European states are in trouble, but most United States states are (meaning their governments are deficit spending and accumulating debt).
Government spending has risen exponentially in the recent past thanks to tax-and-spend politicians who love to make promises that must be financed with other people's money, creating a crushing debt that essentially means that the United States (either in aggregate or state-by-state) are "bankrupt."
Government cannot create jobs or stimulate an economy; only shrinking government (and by implication taxes) can the "free market" expand, leading to ever-greater prosperity for everyone, but since democracies are so hostile to this idea and politicians so enamored of spending on pet projects, this rosy reality will instead become a nightmare as the United States collapses under the crushing weight of its debt.
To be fair, the Tea Party almost never uses such large words and probably does not understand the difference between monetary and fiscal policy or exactly what a fiat currency is, nor would they ever say anything positive about Europe, which they view as a socialist hellhole with a job-crushing cradle-to-grave welfare state, but you get the idea. I believe these are most of the Tea Party economic talking points, essentially a warmed-over Austrian school libertarian platform. I will sidestep the fact that they rarely mention von Hayek with his dire predictions of a Road to Serfdom that would inevitably follow a progressive income tax, universal healthcare, and providing social security for the elderly and disabled, but as soon as the shooting stopped in World War II, he was hard at work warning us all about these threats which he viewed as greater than Hitler and Hirohito combined.
Dick Cheney and Justice Scalia like duck-hunting, shooting disoriented, unarmed birds out of the sky for fun. I prefer shooting down weak, histrionic arguments, point-by-point. So let's go hunting, metaphorically speaking by targeting each of the arguments, fact-by-fact, premise-by-premise, conclusion-by-conclusion. This is a bit redundant, since if you can demonstrate that the basic facts of a case are wrong (finding an alleged murder victim alive and unharmed, for example), you need not proceed further in disproving an argument (such as that a neighbor must be guilty of a murder that did not actually happen), but since the conclusions are weak and who knows, one day history might be kinder to the Tea Party and throw them some factual bones they need not fabricate or distort, it's both amusing and useful to dismantle these also so that they can never harm anyone again.
I jest of course for as long as people can form crowds, they will form lunatic ideas from phrenology to humoral theory to supply side economics and never let messy reality prevent them from making a cartoon-like argument, complete with Goodies and Baddies and single variable explanation of Everything. As Sarah Palin once asked her debate coach while waving her hand over the soon-to-be-filled debate audience seats, "does any of those [facts] really matter to these people?" The sad answer is no, but to those of us in the reality-based community who believe that we can use reason and not raw emotion to decide the truth, let's proceed. To make it simpler to follow, I will put the arguments and counter-arguments in a Question and Answer format.
To make things a bit more interesting, I will throw in a concrete example, a specific claim made by my host, namely that California, thanks to run-away government spending, was bankrupt and worse off than Greece.
Question: Is California bankrupt?
Answer: Believe it or not, this is not the easiest of questions to answer since one must first define "California." Are we talking about the entire state, including all of its citizens, public and private, and the sum total of all of their economic activities? If so, then the answer is a most definite No. If we are talking about the state government, then the answer is also No. If we are talking about some counties (by chance you would anticipate that in a country with thousands of counties each with independent tax revenue and spending policies, that some at any point in time would be "bankrupt"), then Yes, Sort Of.
The numbers follow but it is helpful also to think about what we mean by Bankrupt. It is a dirty word, with heavy overtones of thrifty British, German, or Swiss bankers frowning down at some poor soul whose business for which he borrowed money was not successful at generating enough to income to service his debt. In a society in which chance and the accidents of one's birth are generally downplayed and those who have much money like to tell anyone who will listen that they had no more opportunities than anyone else, they were just smarter or thriftier or worked harder than their deadbeat competition, being poor is a step away from being a criminal. In fact, until quite recently, historically speaking, being in debt and unable to service that debt for whatever reason was criminal, landing you in debtor's prison or on a ship bound to the Americas or later Australia (the fact that both of these former penal colonies now have such thriving economies should be strong evidence against the Victorian moralism about what essentially is a cash flow crunch).
The word bankrupt, with all its historical and cultural baggage, is thrown away quite loosely, but it is useful to narrow it down to what it actually means. If it meant having a high debt relative to one's income, then every medical student, law student, and entrepreneur starting a new business is bankrupt. Most of my medical student classmates accumulated debts several hundred percent greater than their starting salaries as interns and infinitely greater of course than their nonexistent medical school incomes, but is as meaningful to apply this term to a medical school class as to a failing company such as Enron or Worldcom?
The critical difference between indebtedness and bankruptcy is the ability to repay one's debt. Few doubt that medical students will not repay their loans and earn over their lifetimes many multiples of what they borrowed, but the same could not be said of Worldcom or perhaps some countries that are now struggling. Can it be said of the United States in general or California in particular?
Question: is California an economic basket case (and therefore incapable found generating the revenue to repay its debts)?
Answer: I report, you decide. Let's look at some basic facts publicly available and not in dispute:
California, home to Silicon Valley, Hollywood, and some of the most agriculturally productive acreage on the planet, is an economic powerhouse, with a GDP of $1.9 trillion, 10% that of the United States. On a per person basis, this translates to almost $52,000 per resident per year (in 2010). If California were a country, it would rank as the 8th largest economy in the world. The state exports over $134 billion, including $48 billion in computers and electronics. Its agriculture is also thriving, worth $36.6 billion and generating perhaps $100 billion in related economic activity. It is the leading dairy state. If California were such a failed state, then the Japanes, British, Swiss, French, and German (who last time I checked knew a thing or two about banking and investing) would not invest so much money directly or indirectly in the state and its industries.
If the state were bankrupt or approaching it, it would at least be a net recipient of federal aid. As it turns out, this solidly red (Democratic) state is, like its economic red-state rival on the East Coast (New York), sent $3.65 billion net to Washington, meaning it paid $3.6 billion more in taxes than it received in federal grants, aid, or direct investment.
So at the aggregate California the idea that the state is bankrupt is about as likely as the assertion that music sales of yodelers will overtake American hip hop artists anytime soon.
But what about the government of California? Isn't it true that it is bankrupt?
No, not really. Here a brief economics 101 digression is necessary since such a massive misinformation campaign was launched by the Tea Party and its corporate backers that Americans know even less about economics today than they did a few years ago (which is pretty sad considering that economics vies with history and geography for the topics Americans find most challenging).
Economically-speaking, a government budget is pretty simple. Government takes in money (revenue) through taxes and spends that money either by giving it away directly (through transfer payments to individuals such as contractors or corporations through subsidies). If it collects more in revenue than it spends, it is in surplus. If it spends more than it collects in taxes than it is in deficit. Since things tend to cost more than initially believed and lowering taxes and the true cost of running government is almost always politically popular, most governments run deficits if allowed to (some state governments have constitutional amendments prohibiting deficit-spending). These deficits are added to the government debt which must be financed the same way any of us finance our deficit spending such as when we buy a house or go to college: the shortfall must be borrowed. As hard as it might be to believe today, the idea that the government has the power to borrow money by issuing bonds was once controversial. Thomas Jefferson, who was never particularly good with money himself (he died deeply in debt forcing his estate to be liquidated and his slaves to be sold off, separating families forever) believed in a government that was more thrifty than he was. John Adams and Alexander Hamilton believed that the government should be able to borrow money to launch long-term projects such as canal building or constructing a Navy whose benefits were long-term but whose costs were immediate. Limiting a government only to what it could spend with cash on hand was a fierce argument in its time and had Hamilton lost it, no doubt the United States would have been a much smaller and poorer country. There never would have been an Erie Canal, trans-continental railroad, or NASA moon shot. The poor and disabled would have lived or died (mostly died) based on where they happened to live and whether the coffers of the local government were full or empty at the time they needed the money. The power to borrow would dramatically boost the power and reach of the federal government and change the type of country we would become.
But Hamilton was better at winning arguments than duels and before he was shot dead by Aaron Burr in a field in New Jersey, he oversaw the launch of what has become the most wildly successful investment instrument perhaps in world history, United States Treasury bonds, bills, and notes.
Any Tea Party apologist alive today would no doubt take heart in reading the dire warnings of the evils of debt, how it would surely crush our young Republic shortly after its birth, how it would lead to tyranny, the end of our country, etc. Or perhaps not, since history showed those financial Chicken Littles were wrong as rain. Thanks to an efficient, safe, liquid Treasury bond market international investors lend our government a billion dollars a day at less than 1.5% interest. No, this can't go on forever unless of course the government is able to invest that money and get a return higher than 1.5% (this return need not be monetary or even measurable, by the way; investing in the education of our children will pay off trillions of times over, for example, in increased productivity and competitiveness of tomorrow's workers, researchers, and creators).
So the argument was settled centuries ago: our government has the power to borrow and has used that power for all of its existence except for some brief periods when it bought up debt previously issued.
The difficulty with debt as any debtor knows is that even small deficits over time are added to an ever-compounding debt that must be serviced. Common sense and some simple calculations make it clear that indefinite deficits are unsustainable. One way or another, the debt must be paid off and even the interest on that debt becomes a problem, increasing our deficit and by extension our debt. So the question is at what point does a healthy leveraging of a growing and expanding country become a problem, even a threat to the existence of that country?
Philosophers can argue this question all they want, but there is a simpler way: at what point are people no longer willing to lend the government money? Bond investors are some of the smartest, most conservative people on the planet. The idea that they are all suffering from some massive delusion driving them to park trillions in an IOU returning less than 2% a year for 10 years or longer strains credulity. When governments do run into trouble, they don't do it when their creditors are willing to lend them money for free (after inflation).
And by the way, if the United States is really in trouble and no one except for the Tea Party knows it, then this should be an argument for borrowing more not less since if the Chinese are so much stupider than Sarah Palin, shouldn't we take as much of their money as possible at such ridiculously undeserved (per the Tea Party) rates? As the joke goes, if you owe someone a million dollars, you have a problem. If you owe them a trillion dollars, they have a problem.
The bond market has generally done an excellent job of signalling impending doom and - by choking off the borrowing and creating a crisis - preventing catastrophe. For example, when President Reagan's massive tax cuts turned out not to pay for themselves and the budget deficit - despite what Cheney famously cited the Spirit of the Gipper as teaching us - do matter - bond investors refused to lend our government money unless they got credit card levels of interest - 16 to 18% at the short end! One could have argued that the United States government under Reagan was clearly in trouble, so much so that his successor would have to violate his read-my-lips campaign pledge not to raise taxes, but of all the problems the United States might face today, high borrowing costs is simply not one of them. The idea that a government that can borrow money for free is not creditworthy requires a radical redefinition of creditworthy.
At any rate, returning to the budget deficit and debt, the argument goes that the United States has suffered an unsustainable explosion of debt. It is true that no president since Clinton has run a surplus, but the idea that
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