Here’s another fine bit demonstrating why Obama doesn’t have Krugman as an advisor:
Last week Bill Gross of Pimco, the giant bond fund, warned that the U.S. government may lose its AAA debt rating in a few years, thanks to the trillions it’s spending to rescue the economy and the banks. Is that a real possibility?
Well, in a rational world Mr. Gross’s warning would make no sense. America’s projected deficits may sound large, yet it would take only a modest tax increase to cover the expected rise in interest payments — and right now American taxes are well below those in most other wealthy countries. The fiscal consequences of the current crisis, in other words, should be manageable. - The New York Times
As you can see, Krugman lives in some imaginary world. In the real world, our trillion dollar deficits are leading us to the point where our national debt will EQUAL our GDP, which on its own would be reason to downgrade our debt rating from AAA. This on its own is bad, but the way we finance that debt is worse.
You might think at the current rates treasuries are offered at that there’s no harm in deficit spending. Here are a couple of things to think about. First, most of the debt is due in the short term. Next year when an x-year treausury matures we have to pay it off, and we pay it off by auctioning off more treasuries at whatever rate the market will bear. Simply put, we have an Adjustable Rate National Debt. Second, we won’t be able to sell treasuries as easily. This fall two things happened that allowed us to finance our deficit spending that aren’t likely to occur again. When Lehman collapsed in September and Reserve Primary Fund broke the buck, there was a flight from money market funds to treasuries. The other reason we were able to finance the national debt was the Chinese and other foreign entities, who had a total of $1.3 trillion in Fannie and Freddie debt/”assets”, were drawing down those holdings and transferring them into treasuries.
Add to this the fact that we’re devaluing our currency and you’d be scratching your head as to why we would have a AAA rating in a “rational world”. In March, Dollar Bill Bernanke created over A TRILLION DOLLARS out of thin air to buy $300 billion in U.S. debt* and $750 billion in mortgage securities - and he’s given strong indications that he’s ready to print more money. This is roughly equivalent to stock dilution - so China and Japan have their trillions in U.S. Treasuries but we’ve effectively made them worth less. In effect, we are welshing on our debts, even if we pay them. And the Chinese and every other nation but America knows and admits that.
I’m sure that Krugman is scratching his head as to why reality differs from his theories about massive deficit spending with only positive or no consequences, but that’s exactly the point, and precisely why I’m glad that Obama may invite him to dinner but not let him anywhere near the kitchen.
* Ostensibly to lower interest rates but in reality because the market for treasuries has dried up. Reference Reserve Primary Fund and China’s treasury transfer above.
