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Sunday, January 1, 2012

Paul Krugman, "Nobody Understands Debt": Don't Worry, Be Happy

In his latest New York Times op-ed entitled "Nobody Understands Debt" (http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html?ref=opinion), Paul Krugman tells us - again - that the US should spend its way out of the current recession. Paul tells us:

"when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about — and the people who talk the most understand the least."

You see, only Paul in New York, who writes almost exclusively about debt, knows anything at all about the subject.

Explaining that the US need not fear its debt to other countries, Krugman writes:

"It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners."

Or in other words, I owe them, they owe me, and everything is hunky dory. But unfortunately, there's a fly in this ointment.

For example, Egypt, which owed the US $3.6 billion, came knocking on Washington's door this past May seeking forgiveness of its entire debt, and the Obama administration decided to provide $1 billion in relief (see: http://www.washingtonpost.com/national/administration-planning-1-billion-debt-relief-for-egypt/2011/04/28/AF1m4FLG_story.html). Does anyone really believe that Egypt is "good" for the remaining $2.6 billion?

Better yet, for Paul's benefit, let me explain it differently: Suppose you borrow $100 from Switzerland, one of the world's richest countries, and at the same time loan $100 to the Democratic Republic of the Congo, one of the world's poorest countries. Perhaps on your books, you can try to balance the $100 liability against the $100 asset, but the reality is that there is a good chance that there will be a default on your asset. Your books might say that your assets and liabilities are balanced; however, country risk tells you otherwise.

Krugman claims to be the one and only expert on debt, but apparently doesn't understand country risk, which factors into all international banking arrangements and determinations of overall credit risk.

Don't worry, be happy.

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