By William K. Black
Bloomington, MN: January 12, 2015
David Leonhardt came to my attention because of his column purporting that liberals were wrong about families and education. Given my colleagues’ expertise in macroeconomics, money, and jobs, I decided to look at what views Leonhardt was presenting on austerity. Leonhardt lauds himself for avoiding what he dubs the “safe” approach to journalism and instead “providing a service to readers when we’re willing to make analytical judgments.” What kind of “analytical judgments” does he make about austerians and debt hawks in light of their track record of repeated predictive failures? He loves them.
Leonhardt Proselytizes for Pete Peterson
I discovered that Leonhardt’s obsession is U.S. government debt. Leonhardt is not someone with expertise in economics. Pete Peterson is finance billionaire. His great goal is to privatize Social Security, which is the finance industry’s fondest hope for it would mean hundreds of billions of dollars in fees for them. Peterson’s means of trying to achieve that goal is to spread panic about U.S. debt. Leonhardt’s proselytizes for Peterson about the diabolical nature of U.S. government debt. Peterson’s numerous front groups have provided the key support for Leonhardt’s efforts to panic the people.
Leonhardt’s Incoherence about Austerity
At times, Leonhardt writes about why austerity has harmed the U.S. recovery from the Great Depression. At other times, Leonhardt attacks stimulus. He has consistently urged President Obama to agree to the Grand Betrayal (which he views as the Grand Bargain) and begin to undo the safety net. Leonhardt does not even attempt to explain his contradictory positions.
Leonhardt’s Bizarre Ode to the Great Depression
On October 8, 2011, Leonhardt authored one of the most bizarre columns of all time – an ode to the Great Depression entitled “The Depression: If Only Things Were That Good.”
“The closest thing to a unified explanation for these problems is a mirror image of what made the 1930s so important. Then, the United States was vastly increasing its productive capacity, as Mr. Field argued in his recent book, ‘A Great Leap Forward.’ Partly because the Depression was eliminating inefficiencies but mostly because of the emergence of new technologies, the economy was adding muscle and shedding fat. Those changes, combined with the vast industrialization for World War II, made possible the postwar boom.”
I won’t waste time responding to a presentation that describes mass misery as “shedding fat.” I include the passage only to demonstrate how fully Leonhardt fails in his history, economics, and empathy. As a proselytizer for Peterson, Leonhardt is apoplectic about a phantom, hypothetical debt crisis while viewing the Great Depression as driving “the postwar boom.” Debt dementia leads Peterson’s platoons to take fantastic positions. Yes, they know that “balancing the budget” will cause gratuitous recessions and depressions, so they claim that we should pine for another Great Depression (“If Only Things Were That Good” again). Great Depressions are “good” because they lead to “shedding fat” (firing millions of workers) and cutting tens of millions of worker’s wages, setting the stage for large increases in corporate profits, particularly in finance.
Leonhardt’s Ode to the Need to “Force” Greece into a Great Depression
One month after expressing his nostalgia for the “good” Great Depression in the United States, Leonhardt wrote a November 5, 2011 column supporting the desirability of inflicting austerity on Greece in order to lengthen a depression that has proven worse than the Great Depression in Greece. His title shows his continuing obsession with debt: “The Gridlock Where Debts Meet Politics.”
“With Greece struggling to form a government that can force harsh austerity measures onto a weary public, Europe is in usual form, taking a couple of steps toward solving its fiscal crisis and then a couple of steps backward.”
The next sentence of the article claimed that all of “Washington” was hoping that Congress and President Obama would agree to the Grand Betrayal that would begin to rip open the safety net and embrace austerity.
“Washington, meanwhile, is hoping that the latest deficit-reduction committee in Congress can succeed where others have failed.”
I’m not sure how one interviews “Washington,” but Leonhardt is apparently able to commune with it mystically. As I explained above, Leonhardt had written a column on July 8, 2011 explaining how destructive austerity was in the U.S. but logical consistency on important issues is not part of Leonhardt’s self-proclaimed bravery and unique competence in making sound “analytical judgments” about economic issues.
Leonhardt then bemoans the fact that democracy makes it hard for some nations to “force austerity upon angry voters.”
“Playing to those sentiments, the presidential contenders in the United States and France seem unlikely to force austerity upon angry voters.”
Yes, it is sad when democracy blocks self-destructive economic policies that constitute malpractice. Why should the U.S. “force austerity” on its citizens? Is Treasury supposed to be in a sadomasochistic relationship with the people? Fifty Shades of Green? Leonhardt next tells his readers that the “United States also continues to benefit from low interest rates, a signal of the bond market’s confidence.” The supposed problem with deficit spending is inflation, and inflation fears show up as higher interest rates on sovereign debt – but interest rates were incredibly low so Leonhardt couldn’t even come up with a phantom case for austerity.
Leonhardt then trotted out another austerity trope – the need for pain. Austerity is good because it causes pain. Firing workers represents “shedding fat.” The workers feel the pain, while the finance bosses enjoy the gain. That’s Pete Peterson’s idea of a win-win.
Fiscal programs in response to a recession provide a different kind of win-win. They help the recipients of the government spending or the tax cuts and they help the economy recover by providing demand where it is deeply deficient. Leonhardt gets the economics reversed.
“Yet the United States and Europe face the risk that their problems will feed on each other. Recent economic stagnation may make voters and policy makers unwilling to make hard choices, and the political paralysis might then worsen the economy by creating new financial turmoil. In an article in the current issue of the journal The National Interest, Mr. Friedman named this problem the ‘no-growth trap.’”
Austerity was causing “stagnation” through much of Europe at the time Leonhardt wrote his column. The troika could have chosen the win-win – which would have ended the stagnation. Instead, it made “hard choices” that inflicted austerity and caused the “no-growth trap.”
Leonhardt then relied on the moral and economic expertise of Treasury Secretary Timothy Geithner – because they share a genius for unintentional self-parody.
“‘The central paradox of financial crises,’ Timothy F. Geithner, the Treasury secretary, said before leaving for the Group of 20 meetings in Europe last week, ‘is that what feels just and fair is the opposite of what’s required for a just and fair outcome.’”
I thank Leonhardt for bringing Geithner’s Unethical Paradox (GUP) to my attention, for it explains so much about the ethical and economic collapses that caused the financial crisis and led to a recovery that enriched the banksters rather than the public. Geithner epitomizes the financial pathologies of the Obama administration. GUP reveals why Geithner was such a disgrace. What “feels just and fair” to normal people in response to a Great Recession is to provide jobs and health care to those who lose their jobs. Doing so is “required for a just and fair outcome” – and it reduces the severity and length of the Great Recession. Removing, sanctioning, and replacing with competent officials the banksters that caused the financial crisis is what “feels just and fair” and what is “required for a just and fair outcome.”
Leonhardt then returns to his claim that budget deficits are harmful – even if demand is so inadequate that wages are stagnant.
“Longer term, the trap is created by resistance to the higher taxes and reduced benefits necessary to return countries to financial stability. The resistance is understandable, given how weak income growth has been in the past decade, but it is not sustainable.”
Why does it make sense to inflict austerity (“higher taxes and reduced benefits”) and further reduce demand when demand is already inadequate? Doing so will cause drops in employment and tax revenues and require additional benefits for the unemployed. Why is that sensible? Leonhardt’s proscription is: Bleed the patient and the economy – if they don’t recover you haven’t bled them enough.
Leonhardt: Reinhart & Rogoff are “Definitive” and Debt is the Devil
As a proselytizer for Peterson, is was inevitable that Leonhardt would decree that other Peterson devotees had written the definitive book on the cause of crises. Leonhardt’s July 16, 2011 column was entitled “We’re Spent.”
“The definitive book about financial crises has become ‘This Time Is Different: Eight Centuries of Financial Folly,’ published in 2009 with exquisite timing, by Carmen M. Reinhart, now of the Peterson Institute for International Economics, and Kenneth S. Rogoff, of Harvard.
Surveying hundreds of years of crises around the world, Ms. Reinhart and Mr. Rogoff conclude that debt is the primary cause and that the aftermath is ‘deep and prolonged,’ with ‘profound declines in output and employment.’”
As our readers know, Reinhart and Rogoff proved definitively wrong in their conclusions due to statistical errors and the misuse of selective data.
Leonhardt wrote that the problem with the recovery was that consumers were engaging in the well-known paradox of thrift. In response to reduced consumer demand, producers were closing facilities, reducing production, firing workers, and avoiding hiring. This is, of course, the normal situation in recessions and provides a particularly strong reason why increasing government spending on education, health, jobs programs, and infrastructure is the most effective means of reducing the harm, length, and severity of a recession. Leonhardt (sort of) realizes that he has provided a crushing attack on austerity.
“The easy thing now might be to proclaim that debt is evil and ask everyone — consumers, the federal government, state governments — to get thrifty. The pithiest version of that strategy comes from Andrew W. Mellon, the Treasury secretary when the Depression began: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,’ Mellon said, according to his boss, President Herbert Hoover. ‘It will purge the rottenness out of the system.’
History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover’s day.”
I added the parenthetical “(sort of)” because only four months later Leonhardt – with no explanation for why he had reversed his position – bemoaned that because of democracy we might be unable to “force austerity” in the U.S., France, and Greece. Leonhardt puts the “in” in “incoherence.”
I also added the parenthetical because Leonhardt took the position in his July 16, 2011 article that the U.S. wisely failed to fill most of the insufficient consumer demand.
“[A] [debt-ceiling] deal could avoid the Mellon-like problem of having government cut back at the same time as consumers. The Federal Reserve, the Obama administration and Congress seemed to learn this lesson in 2009, when they aggressively responded to the crisis, only to turn more passive in 2010 and spend much of the year hoping for the best. It didn’t work out.”
Yes, Leonhardt was in favor of the Republicans using the debt ceiling as a method of extortion to force cuts in government spending at a time when consumer and producer demand were grossly inadequate. “It didn’t work out” when Geithner convinced President Obama to greatly reduce fiscal stimulus, but even that failure doesn’t dissuade Leonhardt from urging a repeat of the fiasco. Consider the really whacky phrase Leonhardt used – that everyone involved “learned this lesson” and decided to become “passive in 2010 and spend much of the year hoping for the best.” What “lesson” did they “learn?” Leonhardt’s language appears to mean that there is some historic “lesson” that teaches us that providing inadequate government demand in response to a recession is a sensible policy. The lesson is that we should instead rely on “hoping for the best.” That’s a plan! None of this makes any economic sense or meets even the most minimal test of internal logical consistency. No one, with the possible exceptions of Geithner and Leonhardt, was surprised that the faith-based strategy (sic) of “hoping” “didn’t work out.”
Leonhardt Channels additional Sovereign Debt Hawks
Leonhardt has long tried to panic Americans about sovereign debt. His June 10, 2009 column had the screaming headline “America’s Sea of Red Ink Was Years in the Making.” Recall that this was soon after the Obama administration began, with the world in financial crisis and the Great Recession deepening. Leonhardt began his column by making the bizarre point that “Mr. Obama does not have a realistic plan for eliminating the deficit.” Why would Obama want to “eliminate[e] the deficit” and even if he did why would preparing such a plan be worth doing and discussing in June 2009? The rational economic priority in 2009 was to expand the deficit, rapidly, by increasing government spending, providing federal revenue sharing to the states (which are otherwise forced to adopt procyclical austerity that makes the recession and human misery worse), and stopping collecting the Social Security taxes (the quickest and one of the most effective means to provide fiscal stimulus).
Leonhardt, however, was pushing the work of his fellow purveyors of Peterson’s debt panic.
“Congressional and White House aides agree that no large new programs, like an expansion of health insurance, are likely to pass unless they are paid for.
Alan Auerbach, an economist at the University of California, Berkeley, and an author of a widely cited study on the dangers of the current deficits, describes the situation like so: ‘Bush behaved incredibly irresponsibly for eight years. On the one hand, it might seem unfair for people to blame Obama for not fixing it. On the other hand, he’s not fixing it.’
‘And,’ he added, ‘not fixing it is, in a sense, making it worse.’
When challenged about the deficit, Mr. Obama and his advisers generally start talking about health care. ‘There is no way you can put the nation on a sound fiscal course without wringing inefficiencies out of health care,’ Peter Orszag, the White House budget director, told me.
Outside economists agree. The Medicare budget really is the linchpin of deficit reduction.”
The entire discussion is crazy. Obama should have spent none of his time in mid-2009 worrying about reducing potential deficits that might arise years after his possible second term would have ended. He should have been spending most of his time figuring out how to increase the deficit productively in 2009-2013. Note that the purveyors of Peterson’s debt panic were gunning to shred the safety net from the beginning.
Leonhardt is a useful corrective to those who think that Obama was strong on stimulus at the beginning of his term. Within months of taking office, Obama was switching to the “passive” (non) strategy of “hoping for the best.”
“Mr. Obama — responding to recent signs of skittishness among those lenders — met with 40 members of Congress at the White House on Tuesday and called for the re-enactment of pay-as-you-go rules, requiring Congress to pay for any new programs it passes.”
Let us the count the ways in which that sentence demonstrates Obama and Leonhardt’s failure to understand sovereign currencies. First, lenders (absent an insane Republican decision to force a default on the U.S. debt – which would be short-lived as the U.S. public’s reaction to such economic treason would promptly end the insanity) know that the U.S. can and will always pay its sovereign debts. Second, lenders demonstrate this fact every day with their actions in purchasing U.S. bonds at trivial interest rates. Third, “a sea of red ink” did nothing to raise those interest rates because bond investors understand that the U.S. will never be unable to repay its sovereign debt, regardless of deficits. Deficits could in some circumstances be inflationary and that would raise interest rates, but that was not remotely true in the circumstances of the Great Recession. Fourth, the fact that Obama, as early as June 2009, was “call[ing] for the re-enactment of pay-as-you go rules” to discourage new spending demonstrates that our efforts to urge the administration to provide adequate stimulus were sabotaged from within the administration at a very early point. Fifth, the U.S. can spend without issuing debt. Sixth, taxes do not “pay” for government services, so “pay-as-you-go” is the wrong concept.
Leonhardt claimed that the “national debt … will grow dangerously large much sooner [than 2014]. Why would it be “dangerously large?” Auerbach’s partner in panic is William Gale. Leonhardt was all for austerity at this juncture, citing Cato as the support for his criticism that the Republicans were demanding far too little austerity.
“Republican leaders in the House, meanwhile, announced a plan last week to cut spending by $75 billion a year. But they made specific suggestions adding up to meager $5 billion. The remaining $70 billion was left vague. ‘The G.O.P. is not serious about cutting down spending,’ the conservative Cato Institute concluded.”
Because he believed there would be insufficient austerity, Leonhardt predicted a debt crisis – unless there wasn’t.
“What, then, will happen?
“Things will get worse gradually,” Mr. Auerbach predicts, “unless they get worse quickly.” Either a solution will be put off, or foreign lenders, spooked by the rising debt, will send interest rates higher and create a crisis.
Auerbach’s purported crisis was soon upon us, as interest rates surged to … record lows … oops. Again, nobody with even a minimal understanding of sovereign currencies could have dreamed up such a fantasy. Leonhardt bought in to Auerbach’s fantasy.
“The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won’t be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.
That is the legacy of our trillion-dollar deficits. Erasing them will be one of the great political issues of the coming decade.”
We have to “eras[e]” federal government deficits in Leonhardt’s panicked vision. We’ve done so a number of times in our history and depressions followed on the heels.
The Auerbach piece that Leonhardt claimed was authoritative was a joint piece with William Gale. Auerbach and Gale begin their piece with what they should have realized was a cautionary tale about the folly of making and relying on such long-term guesstimates.
“At the beginning of this decade, the U.S. fiscal picture was bright. After running deficits every year from 1970 to 1997, the federal budget was in surplus in fiscal year 2000 for the third year in a row, and the surplus was at an all-time high – $236 billion, or 2.4 percent of GDP. Future fiscal prospects looked strong as well. The Congressional Budget Office (CBO, 2001) projected rising surpluses over time, totaling $5.6 trillion over the succeeding 10 years. Despite the well-known shortfalls in Medicare and Social Security finances, estimates of the long-term fiscal outlook showed the government as a whole in manageable shape, at least for the following 70 years (Auerbach and Gale 2000).”
So, the same folks who created the fiction that U.S. bond buyers would stop buying U.S. bonds because of default fears claimed in 2000 that all was well as far as the eye could see. The authors did not even try to explain why running record budget surpluses as the U.S. economy was slipping towards recession in 2000 warranted the phrase “the U.S. fiscal picture was bright.” It sounds like the U.S. fiscal picture was bad and getting worse as the fiscal drag of the surplus pulled the economy towards recession. The CBO projection that U.S. surpluses would rise for a decade and become massive was a projection (1) that made no sense given the crushing fiscal drag such surpluses predicted and (2) was a nightmare scenario that, had it occurred, could easily have produced another Great Depression. The authors, however, assumed that such surpluses meant that “future fiscal prospects looked strong as well.” Note the value judgments that the authors assume are obviously appropriate to describe a Nation with a sovereign currency – surpluses are “bright” and “strong” so deficits must be “dark” and make the U.S. “weak.”
The authors then actually claimed that the U.S. could default on its debt – denominated in dollars – because it lacked the ability to repay those debts. How could this happen with a sovereign currency? Well, it couldn’t but Auerbach and Gale live to try to induce debt panics.
“Credit default swap markets now imply a non-negligible probability of default on senior U.S. Treasury debt in the next five years. A top Chinese official has publicly questioned the security of U.S. Treasury obligations.
The federal government is not alone in its fiscal troubles. The individual U.S. states face daunting fiscal prospects. Most European countries will experience significant fiscal deterioration over the next few years. Standard and Poor’s recently warned the United Kingdom that it could lose its AAA credit rating on account of its projected debt-to-GDP ratio. The United Kingdom’s fiscal trajectory, however, is similar to that of several other countries, notably including the United States.”
Let’s take this panic attack in stages. We were supposed to be panicking about U.S. sovereign debt – in 2009 – because of the alleged debt concerns of three entities: the CDS markets, a Chinese official, and S&P. First, we could not have had nearly so large a crisis if any of these entities was remotely competent in evaluating credit risk. The CDS markets’ “impl[ied]” probability of default for toxic CDOs was a small fraction of reality for many years, the Chinese were leading purchasers of Fannie and Freddie bonds (which had only an implicit government guarantee), and S&P routinely gave toxic CDO tranches AAA ratings.
Second, we have this fancy new thing called markets for our trillions of dollars in sovereign debt. In 2009, we were able to sell all the debt we wished at fabulously low interest rates. Interest rates are supposed to cover expected credit and interest rate risk, so the implicit price of credit risk demanded by U.S. bond purchasers was a close approximation of zero. When the rating agencies did cut the U.S. and UK sovereign debt ratings did the bond markets (a) panic or (b) yawn? The answer is “b,” because everyone involved knows there is no credit risk involving U.S. debt (other than periodic Republican threats to voluntarily default on our debt). Therefore, in 2015, trillions of dollars in additional sovereign debt later, the interest rate we have to pay to induce others to buy our debt has soared to record … lows … oops.
Debt hawks are not discouraged by being invariably wrong about their debt panic attacks. Disaster is always just over the horizon.
“Fiscal discipline delayed too long could also harm the economy, either gradually, as higher interest rates reduce economic activity and deficits sap national saving, or suddenly, if investor fears trigger a sharp and adverse market response.”
Again, notice how they chose morally loaded terminology designed to substitute for argument and evidence. “Fiscal discipline” is obviously a good thing since the opposite must be “indiscipline” which implies “childish.” Except that it takes “discipline” to run larger deficits when they are appropriate. Oh, and U.S. corporations, rather than being starved by the myth that the deficits would “sap national savings,” were soon sitting on trillions of dollars of cash (often in offshore tax havens, because consumption was so inadequate that it discouraged new productive private investments and hiring.
How and why would “investor fears trigger a sharp and adverse market response?” Don’t ask, it doesn’t happen and can’t happen and the authors don’t even try to explain their investor panic fantasy. Yes, the Republican’s zealots could force the U.S. to default and that would cause investors to freak – and that would cause the public to turn on the zealots and end that form of insanity.
The February 2009 version of their joint paper includes this attempt to panic readers.
“Even if the recovery occurs as projected and stimulus bill is allowed to expire, the country will face the highest debt/GDP ratio in 50 years and an increasingly unsustainable and urgent fiscal problem.
To some extent, these considerations are already showing up in market assessments of government debt. Although yields on Treasury bonds are quite low, this phenomenon likely reflects the international “flight to safety” that has accompanied the current world-wide recession and financial crisis. Evidence from credit default swaps suggests a less sanguine picture. Figure 8 shows that the price of purchasing insurance against default on 5-year senior U.S. Treasury debt rose from around 10 basis points before September 2008 to above 70 basis points in early 2009. Figure 9 shows the implied default probabilities, under the assumption that if defaults occur, bond holders would recover 40 percent of par value.”
Note the logical contradictions at the heart of this Pete Peterson panic party. The authors conceded that the stimulus program was essential and would speed our economic growth and reduce the deficit sharply within several years. That means that the stimulus program was already taken into account by U.S. sovereign bond investors – as a strong positive. The authors claim the debt ratio will soon be “increasingly unsustainable” and an “urgent fiscal problems.” “Increasingly unsustainable” is an odd phrase to use in finance given the fact that markets are supposed to take into account future prospects. If our finances are already “unsustainable” then why haven’t investors refused to buy our bonds or at least demanded vastly higher interest rates to protect themselves from the authors’ claimed grave risk of default?
Two economists made the point I just made about financial markets pricing anticipated future risk currently. Indeed, they made the point on the first page of their article for emphasis.
“Third, studies incorporating the best available information about expected future deficits tend to find significant effects of expected deficits on current long–term bond yields, controlling for other factors.”
Given Auerbach and Gale’s admissions about the exceptionally low current long-term U.S. bond yields, the import of the sentence I just quoted is that the bond markets expected the U.S. deficits to have no meaningful effect on the risk of inflation or default and that the markets viewed the first risk as minor and the second risk as non-existent. The two economists who wrote (in 2003) the sentence quoted immediately above were Gale and Peter Orzag. (Their article is otherwise an analytical travesty that doubtless made Pete Peterson proud.)
What do Auerbach and Gale think they mean when they use the word “unsustainable” with regard to transfer payments by a nation with a sovereign currency? The authors concede that our debt ratio was higher decades ago without producing any investor crisis and while they don’t discuss what happened when the U.S. had higher debt ratios the answer is that we had superb growth and won World War II.
The most fundamental contradiction is that the authors claim that interest rates on U.S. government bonds were exceptionally low because of a “flight to safety.” “Safety,” of course, means in this context that investors sell riskier assets and purchase financial assets with ultra-low credit and interest rate risk. The interest rates on 20 year U.S. bonds were exceptionally low in 2009, which means that investors viewed U.S. bonds, including very long-term bonds, as having essentially no default risk. How could our finances simultaneously be “unsustainable” and exceptionally low risk? Recall that in the flight to quality investors often took money out of bonds issued by scores of other nations with far lower sovereign debt to GDP ratios than the U.S. ratios? Plainly, debt ratios do not drive market evaluations of the risk of holding U.S. sovereign debt. In a December 2009 article for CNN the same authors claimed that ten years out our finances were already “unsustainable.” They raised the specter of a “run on the dollar” and a surge in interest rates – and rates remained extremely low for the next five years. Their predictive success record about the horrors of U.S. debt is nil.
“The prospect of large or out-of-control deficits can spark investors’ fears and cause a run on the dollar and a sharp rise in interest rates.”
The market for U.S. sovereign debt is massive and financially sophisticated. From the perspective of 2015, the preposterous nature of the authors’ effort to panic people about U.S. is even more laughable.
The authors’ “40% of par value” loss hypothetical constitutes another layer of fantasy. Were the computers supposed to cease to function in May (40% of the way through the year) so that the U.S. government could no longer create money to repay the other 60% of our sovereign debt?
In a July 8, 2009 LA Times op ed Auerbach and Gale amped up their debt panic message. Their title was “Here comes the next financial crisis.”
“The deficits projected over the next 10 years will accelerate our arrival at a debt-to-GDP ratio that for most countries would signal impending fiscal collapse. Indeed, Britain, with a debt-to-GDP ratio not appreciably worse than ours, was just warned by Standard & Poor’s that its creditworthiness might be downgraded. The United States has traditionally enjoyed a favored status in this regard, as the supplier of the dollar, the world’s reserve currency, and as a perceived haven in times of financial stress. But for how long?
In March, Chinese Prime Minister Wen Jiabao publicly questioned the safety of U.S. Treasury debt. Over the winter, prices in credit-default swap markets implied a significant probability of default on U.S. debt in the next five years.
Default on national debt is what happens in failed states and banana republics; such a possibility for the U.S. would have been unthinkable in the past.”
The op ed gives the reader a strong insight into the Pete Peterson panic arsenal of rhetoric. In three paragraphs we moved from reality – the U.S. was able to borrow at exceptionally low interest rates because creditors knew that there was no risk of default and minimal risk of material inflation to (a) the loss of our status as a reserve currency, (b) the end of our status as a haven during flights to quality, (c) the implication that China would cease holding U.S. debt, (d) a “significant probability of default” on U.S. debt by 2014, (e) reduction to “failed state” status, and (f) becoming a “banana republic.” Of these six reasons Pete Peterson and his minions warned us to fear how many came true? None. What happened to Great Britain when S&P warned that it might downgrade its creditworthiness? UK borrowing costs have stayed exceptionally low. Auerbach and Lane simply ignore the inconvenient fact that we (and the UK and Japan) have a sovereign currency and that we borrow in that currency and cannot be forced to default by our deficit or debt ratios.
Leonhardt Puts Peterson’s Propaganda in the NYT as a “Puzzle”
Leonhardt’s November 13, 2010 column announced the New York Times’ “Deficit Project” (largely designed by Peterson’s people) that invited readers to use interactive features to solve the deficit “puzzle.” The “right” answer, of course is to reduce the deficit.
“In the interactive version of the chart online, readers are asked to come up with a set of cuts that would sufficiently reduce the deficit for both 2015 and 2030.”
The question of whether the deficit for 2015 will be too small is literally unimaginable to Leonhardt. The key issue presented to the reader is whether he or she has made choices that reduce the deficit “sufficiently” as that term is interpreted by people channeling their inner Pete Peterson. Leonhardt admits that his starting point for his puzzle is the methodology of Auerbach and Gale and their fictional “unsustainable” debt that is supposed to produce defaults on U.S. sovereign debt and skyrocketing interest rates. It made perfect sense for Leonhardt to adopt the methodology of people who have been invariably wrong about their panic scenarios, e.g., a “run on the dollar.” Adopting the methodology of those who have correctly predicted very low interest rates on U.S. sovereign debt is apparently unthinkable for Leonhardt.
Leonhardt ends his article by giving particular thanks to those who worked “week after week” with him on the project. First and most prominently: “I’m especially grateful to those who patiently answered question after question, week after week: Mr. Auerbach; Maya MacGuineas, Jason Peuquet and colleagues at the Committee for a Responsible Federal Budget….”
CRFB is another Pete Peterson outfit. MacGuineas is its President. She proudly features in her CRFB bio this line: “Once dubbed ‘an anti-deficit warrior’ by The Wall Street Journal….” Pete Peterson, Alan Simpson, and Erskine Bowles are all CRFB board members.
A purported “bipartisan” moderate with the CRFB was former Senator Judd Gregg. Gregg reposted on the CRFB blog a piece disclosing that in addition to being a fierce deficit hawk he was the equivalent of a “birther” about inflation. The deficit and debt hawks have no answer to the fact that the markets are happy to purchase U.S. government debt at exceptionally low interest rates. Gregg gives them that answer – inflation is actually massive. He begins by railing at fiscal stimulus in response to the Great Recession.
“[Congress] is driving up the debt at a rate that guarantees a fiscal crash for the next generation.”
So, why are interest rates so low even on long-term U.S. debt given when stimulus “guarantees a fiscal crash for the next generation?” Gregg doesn’t try to explain. He blames Congress and Obama for “having lit the fuse of this fiscal bomb.” So, why are interest rates so low? Gregg thinks that interest rates on U.S. sovereign debt are so low because inflation is so massive – and nobody knows it!
“In a world where almost all the important central banks are running their printing press on a 24/7 schedule, inflation becomes muted by the relative nature of this worldwide approach.
If everyone is making money (literally) then how can you get serious inflation? There is no benchmark currency or economy to compare against.”
Words fail me. Gregg was “chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011.” He thinks that if the money supply is increased extremely rapidly all over the world there cannot be “serious inflation” because there is “no benchmark currency or economy to compare against.” We’re surrounded by massive inflation but we cannot observe it because we are surrounded by massive inflation. It’s all very pop Zen economics meets conspiracy theory. That’s the leadership of the Pete Peterson outfit that Leonhardt drew on principally to explain money and finance to Americans. Cue the theme song from “Outer Limits.”
Best recent work showing private equity for what it is (by a restrained scholar/author) is Private Equity at Work by Eileen Appelbaum. (And certainly Prof. Blyth at Brown University has destroyed that austerity theory time and again!)
Really, what more can one say about the chief devil, Peterson?
Great article, sir!
Thanks for the book recommendation!
Mr. Leonhardt probably has a cloistered view working from Kyrzbekistan.
The NYT’s major shareholder is Carlos Slim, the owner of what was Mexico’s government-owned telephone company. Like the Russian oligarchs, Slim grew rich as a result of the Mexican government’s sale of government assets, which was deemed necessary because of the country’s national debt, even though Mexico is a sovereign with its own currency. No doubt, Pete Petersen, and probably Slim and other billionaires, is aiming for similar privatizations in the U.S., which can be facilitated by means of debt panics.