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No. of Recommendations: 13
Rodg - I thought it was a good and vigorous discussion. I don't know why you're still sensitive about it.

Your latest post sounds sincere, and deserves an honest response.


You said "Polite, respectful and constructive is my preferred method of discourse"

Yet right off the bat in your "polite" explanation you threw out this pearl:

"And if the rest of the world doesn't like it, Emperor Bush will tell them where to shove it."


You are taking it out of context. In the scenario where the US seizes control of foreign oil assets, I think you'd agree that Bush would be acting as emperor and would be brazenly telling the rest of the world to shove it. I'm not saying he doing that now, although that is certainly open for debate.


Look as far as I'm concerned, I don't get offended by a comment like that and I reasoned that this'll be a a good 'ol let-your-hair-down debate. One-line zingers add to the flavor of the discussion. I don't think I was impolite - but obviously communication is a two-way street, so when in Rome...

Yes, and as the thread went on, I believed I was giving you some of your own arrogant, condescending medicine. I was offended by your tone, especially as a newcomer who didn't know much about this board or the knowledge base of its membership.


1) Default vs devaluation.

My point is a technical one. Argentina defaulted on its debt. Default is an outright inability to meet interest and principal repayment. Devaluation is quite simply inflating your way out of your obligations because your debt is denominated in a fiat currency that you control.

What happened to Argentina was complex for sure and every country's situation is different. Argentina has historically had a chronic inflation problem and people over time have lost faith in their currency, the real. In the 90's, as a solution to the real's lack of credibility, they set up a currency board using a reserve of dollars freely exchangeable for reals (their local currency). This gave them the benefit of having the real backed by dollars at a fixed exchange. (kind of like when the US dollar was backed by gold at a $35 per oz exchange rate). The world monetary crisis of 1997-98 caused their neighbor Brazil to devalue their currency, putting Argentina's exports under pressure. To add to their misery, the US dollar strengthened in 1998-2000 in real terms and Argentina through its peg imported monetary deflation. Everyone began to fear that the real's peg to the dollar wouldn't hold and quite simply, Argentina had a run on the bank as its population ran to exchange reals for dollars. Their central bank's currency board started to see its dollar reserves dwindle until finally short of dollars and its economy flat on its back, Argentina could not redeem its foreign US-dollar denominated debt - in effect, defaulting on it.


I have no problem with your description of the trigger for the crisis but in the end, the underlying problem was that the country had too much debt, or the real never would have lost so much ground to the dollar.

Ironically, the peg propping up the Real vs. the Dollar has contributed to mounting Argentine debt just as the peg propping up the Dollar vs. the Yuan has contributed to mounting debt in the US.

I believe Krugman makes the point that privatizing social security, in both the US and Argentina, is a potential trigger to a crisis because it cuts into much of the cash flow that Social Security generates. That cash flow is supposed to decelerate rapidly beginning in 2009 and turn negative around 2017 on its own, but privatization schemes will speed that up.


The United States still enjoys reserve currency status and thus has no need to issue Treasury debt in anything other than dollars. I just don't think they would ever default - this would needlessly cripple their ability to borrow.

If the creditors of the world decide that the US is hopelessly in debt, that will cripple their desire to lend. If the US can't borrow either way, then it becomes politically more desirable to default rather than tax the public to death. We've often seen the populations of other countries rioting against austerity measures designed to help the countries pay off their external debts. The same general idea applies here. Americans would likely vote out anyone who wanted to tax the national debt away.


While, the alternative is no less desireable, they would simply over time, devalue the US dollar and cause their future debt obligations to shrink in real terms. Their creditors wouldn't like it but there's not much they could do. Needless to say, I don't think the US needs to do this but of course only time will tell.

To understand how likely this is we really need to do the math, and the whole Debt/GDP measure is supposed to describe the liklihood of the need to devalue or default. That measure is crude, though, and in earlier posts I describe how bad the US position really is. The following chart is old, but tells an important story about the illusory wealth of this nation:

http://www.treas.gov/tic/frbulw04.pdf

While we are living it up and appear to be doing well, the underlying wealth of our nation has been steadily draining away. What is clear is that our current course is unsustainable and changing it will be extremely painful. We'll have to watch the Fed, the government and public sentiment closely to see which way we are heading. Over the last couple months, they've been taking the devalue path, the Fed's talk has been toward austerity in the last week and we'll see if they back that up with action. Here's the report series I track to see what the Fed has been doing:

http://federalreserve.gov/releases/h41/


Perhaps its was literary license, but I think Krugman as an economist knows the difference between default and devaluation - so I was particularly surprised that he would mix up these two economic definitions.

He's not mixing them up, nor am I. To repeat my point: Politics may make default more desirable than devaluation. Krugman isn't debating with you, so I doubt he sees a need to make that specific point.


Argentina's circumstances, IMHO are not comparable to the current circumstances of the United States. Rightly or wrongly, our Federal govt is the monopoly issuer of a currency that is accepted by the rest of the world as a reserve currency.

It has been the world's reserve currency, just as the Pound was once the world's currency. The fact that the world is increasingly shifting over to Euros and mixed baskets of currencies may make the problem worse for the Dollar than it was for the Real, as surplus dollars flood the markets.


Argentina could not even get its own citizens to accept the real and had to peg it to something people had more faith in - the US dollar. It had no leverage and thus had to denominate some of its debt in US dollars. Perhaps Argentina had felt that they had conquered their inflation with their dollar peg and repaying these debts in dollars was not going to be a problem.

Or perhaps Argintinian leaders were like our leaders and pass the tough problems on to future leaders, until finally the problems get too big.


2) Current debt levels. I think this is one where we probably should just agree to disagree. I think reasonable people can do this. However, if other people are interested, I would be happy to continue the discussion.

Again my main point here was simple - while I agree with you that the United States has future long-term obligations in programs like Social Security, etc., the current amount of debt (as measured by Federal Debt held by the public) does not seem out of line with its historical percentages when compared to US GDP at this time. And that is the key point. Who knows whether Social Security commitments will bankrupt us or not but that problem if it occurs is a long way off. Here right now in 2004, our current "cash flow" of cash tax receipts IN, cash expenditure outlays OUT vs. debt obligations to the private sector is lower than in other years. I certainly would concede the point if we were in uncharted territory from a debt-to-GDP ratio POV, but my point is that we don't seem to be. So why would a default be imminent now when we are at 36% debt to GDP?


Perhaps all we need is a trigger. The effective boycott by treasury buyers would force a default, extreme interest rates or massive monetization by the Fed. The falling dollar increases the liklihood of that. Our foreign policy might increase it too.


I used the example of 1995 because the ratio was higher (47%) and because I don't recall any discussions in the popular press at that time about US govt defaults as we are hearing about now. Again, perhaps Krugman is taking some license - but as an economist he should point out this fact if he is throwing around words like "US govt default".

What Krugman should point out depends on his intended audience. I think his message was very effective for his intended audience as written.

Based on the chart I just linked, I was mistaken to say we were a net creditor nation back then. We were already $500 billion in the hole. However, the situation is much worse now (around $3.5 Trillion). That matters because it shows the underlying ability of the economy to make up for the government's debt.


I agree that there are always problems and the future is always uncertain, but as Warren Buffett says "Over the last 200 years plus, you wouldn't have done well betting against America". I think that we have generally overcome problems as a country, even if sometimes they are of our making.

This seems to be a common argument of last resort for people who've been overwhelmed by the facts: Gee, the problems may be extreme, but we've overcome problems in the past and we're still here.

Well, as a nation we survived the great depression, but it sure sucked for the people who had to suffer through it. We've been making many of the same policy mistakes that led to it, and a similar outcome is likely this time around. The arguments for that have been expressed on this board many times in the past and you'll encounter them again if you choose to stick around. Keep in mind that this board has a tremendous amount of interesting and valuable information posted to it, and it is hard to absorb much if you are responding to and debating the politics of every point.


All the best,
bvalue


The best to you too,
Rodg
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