The World According to Koo – The Facile Keynesian Story
We came across an article by Rex Nutting yesterday the title of which at first made us suspect that a Krugmanesque rant was in the offing: "Investors demanding larger government deficits".
This title seemed to suggest that Nutting holds, a la Krugman, that the current very low and at times even negative interest rates on the most highly rated government debt are an open invitation to the government to spend even more money it doesn't have. To his credit, Nutting doesn't quite fully veer off into this type of nuttiness, so to speak.
Rather, he suggests that ultra-low interest rates on certain government debt show that there is a 'shortage of safe assets', a concept we have discussed in these pages before (more on this in a follow-up post). Here is Nutting's central point:
"And, despite what S&P says, nothing is safer than a T-bill. The government shouldn’t run a big deficit merely because investors demand it, but the strong demand should reassure those who worry that the United States is turning into Greece. There’s a big difference between the U.S. and Greece: We can sell our bonds, and they can’t sell theirs, at least not at a reasonable rate of interest.
Of course, once the global economy is healed thoroughly, demand for safe assets like Treasuries will subside and our interest rates will rise. Washington’s costs for servicing the debt will go up. But we shouldn’t think that this will happen very soon: Investors are willing to lend money to the government for five years at about 0.75%, and for 10 years at less than 2%. After taking expected inflation into account, investors are willing to lock up their money for 10 years at a negative real interest rate. These investors, at least, don’t expect a boom any time soon. And they certainly aren’t frightened by the prospect of default."
We would note to this that it is not possible to know when the US might 'turn into Greece'. Greek interest rates suggested that there would be no trouble whatsoever for many years – until they didn't anymore. Granted, the US is unlikely to be beset by similar problems in the near future. Of course Nutting is unable to keep from asserting further below in his article that 'cutting the deficit too soon would be dangerous' for the economy. 'Excessive debt reduction' he writes, will 'create unemployment and a recession'.
This assertion makes non sense as we have often pointed out. This view presupposes that government is in possession of a secret stash of resources that floats about in the ether somewhere, outside of the ambit of the market economy. However, that is definitely not the case. Every single cent the government spends it must perforce take from those in the private sector that possess or produce wealth. It is simply not possible to increase 'aggregate spending' by means of the government going on a deficit spending spree. Moreover, massive deficit spending as a rule tends to invite the even greater evil of monetary inflation on the part of the central bank.
The so-called 'multiplier' of deficit spending may well be negative, as several studies have suggested (inter alia those by Robert Barro) – in layman's terms: when the government deficit-spends, the effect on the economy is to make it shrink, not to make it grow. This is actually quite easy to grasp on a conceptual level as well. After all, government spending as a rule wastes scarce resources, as government bureaucrats are not guided by the profit motive and have therefore no idea whether what they are doing is economically sensible or not. Moreover, capital is scarce. Whenever government competes for scarce resources with the private sector, producers of wealth will be put at a competitive disadvantage. Mind, this is not even considering the vast scope for corruption and theft that usually attends government spending. Anyone arguing in favor of deficit spending might as well argue that 'socialism works'. Well, it doesn't. Government spending doesn't help the economy: it burdens it.
A short while after having digested Nutting's article, we came across a screed by one Anthony Mirhaydari who writes for MSN Money. Our interest was piqued by the title: "The world's $8 trillion debt hole".
In this case, we expected to read a cautionary tale about the massive unproductive debtberg that presently threatens civilization as we know it. Alas, far from it. The sub-title already gives Mirhaydari's game away:
"There's a huge pit of private and public borrowing we have to work our way out of to really get the developed world's economy moving again. And budget-cutting won't do the job."
(emphasis added)
Say what? How can you possibly 'work your way through a huge pit of private and public borrowing' without cutting budgets? By winning the lottery?
