I have previously criticized Niall Ferguson as one of the gurus for those creatures described by Barry Ritholtz as “deficit chicken hawks”. The deficit chicken hawks have been preaching the gospel of economic austerity as an excuse for roadblocking any form of stimulus (fiscal or monetary) to rehabilitate the American economy. Ferguson has now backed away from the position he held two years ago – that the United States has been carrying too much debt
Henry Blodget of The Business Insider justified his trip to Davos, Switzerland last week by conducting an important interview with Niall Ferguson at the annual meeting of the World Economic Forum. For the first time, Ferguson conceded that he had been wrong with his previous criticism about the level of America’s sovereign debt load, although he denied ever having been a proponent of “instant austerity” (which is currently advocated by many American politicians). While discussing the extent of the sovereign debt crisis in Europe, Ferguson re-directed his focus on the United States:
I think we are going to get some defaults one way or the other. The U.S. is a different story. First of all I think the debt to GDP ratio can go quite a lot higher before there’s any upward pressure on interest rates. I think the more I’ve thought about it the more I’ve realized that there are good analogies for super powers having super debts. You’re in a special position as a super power. You get, especially, you know, as the issuer of the international reserve currency, you get a lot of leeway. The U.S. could conceivably grow its way out of the debt. It could do a mixture of growth and inflation. It’s not going to default. It may default on liabilities in Social Security and Medicare, in fact it almost certainly will. But I think holders of Treasuries can feel a lot more comfortable than anyone who’s holding European bonds right now.
BLODGET: That is a shockingly optimistic view of the United States from you. Are you conceding to Paul Krugman that over the near-term we shouldn’t worry so much?
FERGUSON: I think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was. My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it’s no longer credible. But I didn’t think that point was going to be this year or next year. I think the trend of nominal rates in the crisis has been the trend that he forecasted. And you know, I have to concede that. I think the reason that I was off on that was that I hadn’t actually thought hard enough about my own work. In the “Cash Nexus,” which I published in 2001, I actually made the argument that very large debts are sustainable, if your borrowing costs are low. And super powers – Britain was in this position in the 19th century – can carry a heck of a lot of debt before investors get nervous. So there really isn’t that risk premium issue. There isn’t that powerful inflation risk to worry about. My considered and changed view is that the U.S. can carry a higher debt to GDP ratio than I think I had in mind 2 or 3 years ago. And higher indeed that my colleague and good friend, Ken Rogoff implies, or indeed states, in the “This Time Is Different” book. I think what we therefore see is that the U.S. has leeway to carry on running deficits and allowing the debt to pile up for quite a few years before we get into the kind of scenario we’ve seen in Europe, where suddenly the markets lose faith. It’s in that sense a safe haven more than I maybe thought before.
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There are various forces in [the United States’] favor. It’s socially not Japan. It’s demographically not Japan. And I sense also that the Fed is very determined not to be the Bank of Japan. Ben Bernanke’s most recent comments and actions tell you that they are going to do whatever they can to avoid the deflation or zero inflation story.
Niall Ferguson deserves credit for admitting (to the extent that he did so) that he had been wrong. Unfortunately, most commentators and politicians lack the courage to make such a concession.
Meanwhile, Paul Krugman has been dancing on the grave of the late David Broder of The Washington Post, for having been such a fawning sycophant of British Prime Minister David Cameron and Jean-Claude Trichet (former president of the European Central Bank) who advocated the oxymoronic “expansionary austerity” as a “confidence-inspiring” policy:
Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.
Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”
Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.
Nevertheless, you can be sure that many prominent American politicians will ignore the evidence, as well as Niall Ferguson’s course correction, and continue to preach the gospel of immediate economic austerity – at least until the time comes to vote on one of their own pet (pork) projects.
American voters continue to place an increasing premium on authenticity when evaluating political candidates. It would be nice if this trend would motivate voters to reject the “deficit chicken haws” for the hypocrisy they exhibit and the ignorance which motivates their policy decisions.
EU-phoria Fades
The most recent “light at the end of the tunnel” for the European sovereign debt crisis was seen on Friday June 29. At a summit in Brussels, leaders of the European Union member nations agreed upon yet another “plan for a plan” to recapitalize failing banks – particularly in Spain. The Summit Statement, which briefly summarized the terms of the plan, explained that an agreement was reached to establish a supervisory entity which would oversee the European banking system and to allow recapitalization of troubled banks without adding to sovereign debt. By owning shares in the ailing banks, the European Stability Mechanism would no longer have a senior creditor status, in order to prevent investors from being scared away from buying sovereign bonds.
The bond markets were relieved to know that once again, taxpayers would be paying for the losses sustained by bondholders. The reaction was immediate. Spanish and Italian bond yields dropped faster than William Shatner’s pants when he passed through airport security. Spain’s ten-year bond yield dropped to 6.51 percent on June 29 from the previous day’s closing level of 6.87 percent. Italy’s ten-year bond yield sank to 5.79 percent from the previous closing level of 6.24 percent.
Global stock indices went parabolic after the news from Brussels on June 29. Nevertheless, many commentators expressed their skepticism about the latest plan. Economist John Hussman of the Hussman Funds discussed the shortcomings of the proposal in his Weekly Market Comment:
The criticism expressed by Charles Hugh Smith is particularly relevant because it addresses the latest move by the European Central Bank to lower its benchmark interest rate by 25 basis points (0.25%) to a record low of 0.75 percent. Smith’s essay, entitled “Sorry Bucko Europe Is Still in a Death Spiral” consisted of sixteen phases of the death spiral dynamic. Here are the final seven:
Of course, Mr. Smith is forgetting that the Martians could call upon those generous taxpayers from planet Zobion for a bailout . . .