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Sunday, September 29, 2013

Paul Krugman, "Rebels Without a Clue": Obama Should Be Setting His House in Order

In any household, there are arguments, some of them bitter. I suppose that is why I recently printed out 100 square pieces of paper to have them ready in case of need. On one side: "To my darling wife, with all my heart." On the other side: "I apologize." You see, I believe in effective, real-time communication when problems arise, as they regularly do.

In his latest New York Times op-ed entitled "Rebels Without a Clue" (http://www.nytimes.com/2013/09/30/opinion/krugman-rebels-without-a-clue.html?_r=0), Paul Krugman  tells us that "a U.S. government default, which will happen unless Congress raises the debt ceiling soon, might cause financial catastrophe." Krugman explains:

"Financial markets have long treated U.S. bonds as the ultimate safe asset; the assumption that America will always honor its debts is the bedrock on which the world financial system rests. In particular, Treasury bills — short-term U.S. bonds — are what investors demand when they want absolutely solid collateral against loans. Treasury bills are so essential for this role that in times of severe stress they sometimes pay slightly negative interest rates — that is, they’re treated as being better than cash.

Now suppose it became clear that U.S. bonds weren’t safe, that America couldn’t be counted on to honor its debts after all. Suddenly, the whole system would be disrupted."

Well, I agree that a US government default would be a disaster, but unlike Krugman, I also believe that US bonds already aren't safe, and one need go no further than the Congressional Budget Office to learn why. As stated by the non-partisan CBO earlier this month with regard to America's financial future (http://www.cbo.gov/publication/44521):

"Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy (see the figure below). Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely."

"Debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely"? It's down the road, but it sounds to me as if US bonds already are not "the ultimate safe asset."

What to do? Listen. Communicate. Compromise. Not just play tough guy with House Republicans while running after Rouhani and then bragging about an "earth shaking" 15-minute phone call, replete with platitudes.

Instead of running after Rouhani, Obama should be setting his House in order.

1 comment:

  1. "while running after Rouhani and then bragging about an "earth shaking" 15-minute phone call, replete with platitudes"
    Well, this is our "quality" President pleasing the crowd so the crowd could please him.
    He'll get his satisfaction. And only this matters.

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