Greenspan worried

[Cartman]

http://money.cnn.com/2005/09/24/news/inter....reut/index.htm

Federal Reserve Chairman Alan Greenspan told France's Finance Minister Thierry Breton the United States has "lost control" of its budget deficit, the French minister said Saturday.

"'We have lost control,' that was his expression," Breton told reporters after a bilateral meeting with Greenspan.

"The United States has lost control of their budget at a time when racking up deficits has been authorized without any control (from Congress)," Breton said.

I suppose we should not be surprised by this, but it is kind of scary if it is true.

[theloniusfleabag]

Dear Cartman,

I suppose we should not be surprised by this, but it is kind of scary if it is true.

If everyone keeps believing that the Emperor's New Clothes' are valuable, then there is no need to worry. From the book "Future: Tense, by Gwynne Dyer pg. 130...

"History is replete with examples of empires mounting impressive military campaigns on the cusp of their impending economic collapse". -Eric Alterman, Sound and Fury:The Washington Punditocracy and the Collapse of American Politics (1992)

From the same book, pg.36,

"On 16 September 1985, when the Commerce Department announce that the United States had become a debtor nation, the American Empire died" -Gore Vidal, 1987

However, it seems that the USA has only taken one quote from Dyer's book to heart and adopted it...pg110...

Oderint dum metuant. (Let them hate so long as they fear)   -the unofficial motto of Pax Romana

[August1991]

I saw this article linked on babble several days ago. The interpretation given is completely wrong.

First, a French finance minister leaks a comment made apparently during a private conversation with America's central banker. Huh? (I can't believe Greenspan would choose such a conduit to inform anyone of anything so I'm left with the conclusion that Breton did this on his own. I would say that is the real story.)

Second, Greenspan has made numerous public comments about the size of the federal government deficit - all with the intention to remind the US Congess, Administration and public that governments spend too much money.

Federal Reserve Chairman Alan Greenspan on Thursday said the large budget deficit posed a hefty economic risk, even though it has not yet led to higher interest rates or caused other economic headaches.

USA Today May 2004

The point is that both Greenspan and Bush know that the only politically viable way to limit government expenditures is to have a deficit.

----

I knew Canada's left wing was anti-American but I didn't realize to what extent it was so ignorant of basic economics.

[theloniusfleabag]

Dear August1991,

The point is that both Greenspan and Bush know that the only politically viable way to limit government expenditures is to have a deficit.

----

I knew Canada's left wing was anti-American but I didn't realize to what extent it was so ignorant of basic economics.

I think you misunderstand. Greenspan knows it, Bush ignores it. Bush, as did Reagan, are using deficit spending as an 'overdraft', and have left out the accomanying stopgaps, such as raising interest rates for the budget deficit (at the risk of strangling the economy), and slashing imports for the trade deficit (Huge trade deficits should cause a devaluation of the dollar, also include interest rate hikes as a remedy for this). The US has done neither because they continue to float along on huge foreign investment. A quote...

O'Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. "You know, Paul, Reagan proved deficits don't matter," he said, according to excerpts. Cheney continued: "We won the midterms (congressional elections). This is our due." A month later, Cheney told the Treasury secretary he was fired.

from...

http://www.issues2000.org/2004/Dick_Cheney...t_+_Economy.htm

[tml12]

Dear August1991,

The point is that both Greenspan and Bush know that the only politically viable way to limit government expenditures is to have a deficit.

----

I knew Canada's left wing was anti-American but I didn't realize to what extent it was so ignorant of basic economics.

I think you misunderstand. Greenspan knows it, Bush ignores it. Bush, as did Reagan, are using deficit spending as an 'overdraft', and have left out the accomanying stopgaps, such as raising interest rates for the budget deficit (at the risk of strangling the economy), and slashing imports for the trade deficit (Huge trade deficits should cause a devaluation of the dollar, also include interest rate hikes as a remedy for this). The US has done neither because they continue to float along on huge foreign investment. A quote...

O'Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. "You know, Paul, Reagan proved deficits don't matter," he said, according to excerpts. Cheney continued: "We won the midterms (congressional elections). This is our due." A month later, Cheney told the Treasury secretary he was fired.

from...

http://www.issues2000.org/2004/Dick_Cheney...t_+_Economy.htm

<{POST_SNAPBACK}>

Which makes you wonder what would happen if, little by little, countries stopped investing in the U.S.

[Toro]

I knew Canada's left wing was anti-American but I didn't realize to what extent it was so ignorant of basic economics.

<{POST_SNAPBACK}>

You didn't?

I think you misunderstand. Greenspan knows it, Bush ignores it.

<{POST_SNAPBACK}>

Absolutely correct. The whole modus operandi of the Bush team was relection, by any means possible, partly to vindicate the loss of his father. Bush is not an economic conservative by any means. Discretionary, non-defense spending has risen faster under Bush than it ever did under Slick Willie.

Which makes you wonder what would happen if, little by little, countries stopped investing in the U.S.

<{POST_SNAPBACK}>

They did, at least relatively. Most of the capital flows in the United States from 2001 through 2004 were by central banks trying to prop up the US dollar. That has changed this year as private foreign funds have been big buyers of US corporate bonds since yields on corporate bonds in the US are, for the most part, higher than any other major industrialized nation. Higher interest rates are a function of the high trade deficit. The budget deficit in the US is relatively better than France, Germany, Italy or Japan.

[August1991]

I think you misunderstand. Greenspan knows it, Bush ignores it. Bush, as did Reagan, are using deficit spending as an 'overdraft', and have left out the accomanying stopgaps, such as raising interest rates for the budget deficit (at the risk of strangling the economy), and slashing imports for the trade deficit (Huge trade deficits should cause a devaluation of the dollar, also include interest rate hikes as a remedy for this).

I have argued many, many, many times here that the government is not like a family. Government borrowing is not at all like family borrowing. A government's budgetary position is no measure of its economic competence.

In the past 25 years, the power to print money has been taken away from American politicians. They still have unlimited power to spend and no one knows how to control this. At present, one idea is that if there is a deficit, it may make it more difficult to approve spending programmes. This idea motivated in part Bush Jnr's 2001 tax cut.

In his public speeches and apparently in his private conversations with French finance ministers, Greenspan is reminding the politicians and the public of this idea.

The whole modus operandi of the Bush team was relection, by any means possible, partly to vindicate the loss of his father. Bush is not an economic conservative by any means. Discretionary, non-defense spending has risen faster under Bush than it ever did under Slick Willie.

I wouldn't ascribe Freudian impulses to Bush Jnr, but I would say that, like his father, he's a competitive bast**d who likes to win.

I won't defend Bush Jnr's economic policies and Toro, I tend to agree that he is not a fiscal conservative and he is certainly not a free trader. Neverthyeless, I question your point about non-defence spending. Do you have an easy to find cite?

This is the true measure of what Bush Jnr has done:

The harsh truth is, at this 5 year mark in the administration's life, that its domestic achievements are very few. The most important, the tax cut, will likely prove temporary, undermined by the administration's overspending. The education bill, the faith-based initiative, and the rest do not amount to much. Social Security reform will not happen; work on tax reform has not even begun; the immigration proposals are disasters that will never become law.

Civil justice reform should be credited to Congress, not the White House. After that, what is there other than the Patriot Act and of course judicial nominations? But even on judicial nominations, thus far the president has only preserved the old balance on the court.

David Frum (Yes, ex-Bush Jnr speechwriter and son of Barbara Frum.)

Overall, I think the idea of a deficit to control spending may work. I note that everyone is talking about how the US federal government doesn't have any money. Good.

Compare that to what is happening in Canada. Here, a budget surplus just encourages Jack Layton to think up more hare-brained schemes.

If the Canadian government can give a $277,000 job to a party hack and in addition refund his pack of gum, then I say public spending is out of control. And that, I believe, is what Greenspan is purported to have said too.

Governments are not like families because governments spend other people's money and they can get that money whenever they want to. This is a serious problem for modern democracies, and indeed it could be the major problem of the new century.

[Toro]

I won't defend Bush Jnr's economic policies and Toro, I tend to agree that he is not a fiscal conservative and he is certainly not a free trader.  Neverthyeless, I question your point about non-defence spending.  Do you have an easy to find cite?

<{POST_SNAPBACK}>

I've seen it several times in print from various sources. It shouldn't be that hard to figure out. The CBO will have all the budgets.

I think that Bush is a free trader, but political expediency wins out over free trade, which explains the agricultural subsidies, the steel tariffs, softwood lumber, etc. He has been pushing the Doha Round and recently twisted arms to get CAFTA signed.

[Cartman]

I knew Canada's left wing was anti-American but I didn't realize to what extent it was so ignorant of basic economics.

You didn't?

Oh, so we have a few experts in economics here? Let me see. As you are both so knowledgeable, surely you know the basics of economic modeling. Either one of you want to explain what is hierarchical or linear about hierarchichal linear modeling? This is a basic technique used by econometricians. Would you both agree that it should really be called multilevel modeling?

Level 1: Yij=b0j +b1j *Xij + eij

Level 2: b0j = g00 + g01*Wj +u0j

b1j = g10 + g11*Wj +u1j

Using the above equation, can you identify the "fixed" and "random" effects?

Do you know what the error term stands for?

If you don't know the basics about measurement in economics, you might not want to make claim to the economics hall of fame.

[theloniusfleabag]

Dear August1991,

A government's budgetary position is no measure of its economic competence.

Then why would anyone care? Why would Greenspan ever make any statement about it? What about it's direction? Bush needed tax hikes, not tax cuts....I realize you state

I have argued many, many, many times here that the government is not like a family. Government borrowing is not at all like family borrowing.

however, how is it possible to claim "I promise to take in less and less, and promise to spend more and more"? True for you though, that they are in not much of a different position than a bank, stable unless everyone calls in their chits at the same time. But there has to be rules amd limits, or else everyone and their dog could be an international banker.

The US is on the brink. I am not hoping for their demise, even as a 'leftist', because I believe that they were once a great nation and can be again. However, they do not now have a 'long term, winning policy', and unless there are some serious fundamental changes, they are one 'serious' war away from collapse. Even one 'phyrric victory' would kill them.

[Toro]

I knew Canada's left wing was anti-American but I didn't realize to what extent it was so ignorant of basic economics.

You didn't?

Oh, so we have a few experts in economics here? Let me see. As you are both so knowledgeable, surely you know the basics of economic modeling. Either one of you want to explain what is hierarchical or linear about hierarchichal linear modeling? This is a basic technique used by econometricians. Would you both agree that it should really be called multilevel modeling?

Level 1: Yij=b0j +b1j *Xij + eij

Level 2: b0j = g00 + g01*Wj +u0j

b1j = g10 + g11*Wj +u1j

Using the above equation, can you identify the "fixed" and "random" effects?

Do you know what the error term stands for?

If you don't know the basics about measurement in economics, you might not want to make claim to the economics hall of fame.

<{POST_SNAPBACK}>

Ah, econometrics. Haven't done that in 10 years.

We can get into a p****** match if you want Cartman, but we hire people for a lot of money who are on the cutting edge of applied mathematical modelling so we can do other things.

Oh, and to answer one of your questions professor, the error term is the random deviation from the mean in the model for the ith individual in the jth group.

[Toro]

Dear August1991,

A government's budgetary position is no measure of its economic competence.

Then why would anyone care? Why would Greenspan ever make any statement about it? What about it's direction? Bush needed tax hikes, not tax cuts....I realize you state

I have argued many, many, many times here that the government is not like a family. Government borrowing is not at all like family borrowing.

however, how is it possible to claim "I promise to take in less and less, and promise to spend more and more"? True for you though, that they are in not much of a different position than a bank, stable unless everyone calls in their chits at the same time. But there has to be rules amd limits, or else everyone and their dog could be an international banker.

The US is on the brink. I am not hoping for their demise, even as a 'leftist', because I believe that they were once a great nation and can be again. However, they do not now have a 'long term, winning policy', and unless there are some serious fundamental changes, they are one 'serious' war away from collapse. Even one 'phyrric victory' would kill them.

<{POST_SNAPBACK}>

August

Governments aren't like families, but they still cannot borrow ad infinitum.

Thelonius

What evidence do you have that the US is on the brink?

[August1991]

For those that believe that the US is on the brink, this comes from Paul Wells: Check the two graphs at the top.

Governments aren't like families, but they still cannot borrow ad infinitum.

They pretty much can, Toro. You are begging the question about possible bankruptcy. Well, if a government goes bankrupt, then I guess all those bondholders just got taxed - which is what everybody seems to think is better than borrowing. What if the bondholders are foreign? Well, I guess they just got taxed too. And how can the US government impose taxes on foreigners? Well, many here are upset softwood lumber duties.

In fact, I am not worried about the US government going bankrupt so the question is moot. But the idea does help to show that debt and taxes are really no different. Hence, the fiscal position of the government matters in a way that is quite different from standard discussions. And the important question is how much the government spends - not where it gets the cash.

I have argued many, many, many times here that the government is not like a family. Government borrowing is not at all like family borrowing.

however, how is it possible to claim "I promise to take in less and less, and promise to spend more and more"? True for you though, that they are in not much of a different position than a bank, stable unless everyone calls in their chits at the same time. But there has to be rules amd limits, or else everyone and their dog could be an international banker.

Governments are not like bankers, either. The only institution akin to a government is an ex-spouse. In both cases, they have possibly unlimited access to both your credit cards and your bank cards. As long as you are solvent, it doesn't matter which card they use. (This is why the idea of government bankruptcy is somewhat irrelevant.)

The main point Thelonious is not to understand debt, it is to understand government.

Oh, so we have a few experts in economics here?

I, for one, never made such a claim.

Either one of you want to explain what is hierarchical or linear about hierarchichal linear modeling? This is a basic technique used by econometricians. Would you both agree that it should really be called multilevel modeling?

Hey, I get that. Multi-level modelling! Cute.

Now, is this a test? Can I use my calculator?

When it comes to discovering the Truth, we are all flailing in the dark. In this, I see only advantages in trying to quantify ideas that at first glance seem unquantifiable. More important perhaps, I appreciate the precision of mathematics as a language. There are no equations or econometric regressions in Adam Smith but there is a lot of mathematical reasoning.

Cartman, your argument is similar to the Catholic Church criticizing Galileo because his telescope was of very poor quality.

[Toro]

They pretty much can, Toro.  You are begging the question about possible bankruptcy.  Well, if a government goes bankrupt, then I guess all those bondholders just got taxed - which is what everybody seems to think is better than borrowing.  What if the bondholders are foreign?  Well, I guess they just got taxed too.  And how can the US government impose taxes on foreigners?  Well, many here are upset softwood lumber duties.

<{POST_SNAPBACK}>

Actually, they can't August. They cannot borrow if no one will lend them money.

If you view a government default as a "tax", then any default could be considered a "risk premium payment," no matter who the defaulter is - the government, a corporation, a household, etc. The "risk premium payment" is the cost the bondholder bears for committing to the capital markets. However, this is not what most people think of as "bankruptcy". For practical purposes, bankruptcy is an inability to meet ones debt obligations, violates the terms of an agreement, and those who lent are not made whole. And thus, countries have gone bust, Argentina being the most recent example. What you are talking about isn't bankruptcy August. What you are talking about is a transfer of assets through the capital markets, and it isn't privy to just governments.

[August1991]

Actually, they can't August. They cannot borrow if no one will lend them money.

And if nobody will lend governments the money, they'll just tax it. Toro, I don't mean to be flippant but if you are going to consider fantasy scenarios, I guess I can too.

If you view a government default as a "tax", then any default could be considered a "risk premium payment," no matter who the defaulter is - the government, a corporation, a household, etc.

Households and corporations cannot tax that way - that was my point.

However, let me consider your idea, Toro. Government bonds have the lowest interest rates and indeed, are sometimes considered to be the "risk-free rate". Why? Because everyone knows that governments can tax to get the money to pay the bonds back.

Imagine, for a second, how low your mortgage rate would be if you could sign an enforceable contract with your bank giving it the power to tax you (as governments do) if you don't pay back the loan. Hell, the bank would have the power to tax your mother, father, sister or anyone to get back the money. That would be a risk-free rate.

For practical purposes, bankruptcy is an inability to meet ones debt obligations, violates the terms of an agreement, and those who lent are not made whole. And thus, countries have gone bust, Argentina being the most recent example. What you are talking about isn't bankruptcy August. What you are talking about is a transfer of assets through the capital markets, and it isn't privy to just governments.

And for practical purposes, what you have described is a tax. Governments have the right to take from us at anytime they want. No other institution has this power, and it changes considerably the nature of deficits and debt.

Since we are in a fantasy world of government bankruptcy, if a government borrows from you, and doesn't pay you back, or instead it taxes you, and then pays you back, what's the difference? You lose the money.

(And BTW, Argentina didn't go bankrupt. It abandoned a currency regime.)

----

Toro, I don't mean that governments should borrow. Rather, I think government is a misunderstood beast (I suspect it was better understood in the 18th century than it is now) and also I think government spending should be the issue.

I prefer the 1950s and 1960s view of government debt - then it was called the national debt, and it was a measure of confidence in our governments.

[theloniusfleabag]

Dear August1991,

And if nobody will lend governments the money, they'll just tax it. Toro, I don't mean to be flippant but if you are going to consider fantasy scenarios, I guess I can too.

You are correct, to a degree, but it lessens consumer buying power, and affects the GDP negatively. That is why the second graph is misleading. One cannot ride the numbers (or sales commisions) of a 'loss leader' by increasing volume. (not a perfect analogy, I admit) As I said,

Bush needed tax hikes, not tax cuts....

. Bush could tax it in, but he chooses not to. The longer he goes this way, the higher the tax rate to recoup the expenditures will be. It is, in my opinion, already too late to consider that as the only solution.

Oh, so we have a few experts in economics here?

I, for one, never made such a claim

I believe that this was a response to your claim that

but I didn't realize to what extent it was so ignorant of basic economics

August

Governments aren't like families, but they still cannot borrow ad infinitum

Toro is right, it should eventually render a currency worthless. It is very similar to simply printing more 'scrip', if you can't back it up, you might as well try to use "Monopoly Money" at the store.

[theloniusfleabag]

Dear Toro,

Thelonius

What evidence do you have that the US is on the brink?

Just conjecture, really, if whopping (and growing) budget and trade deficits can't be seen as 'evidence'.

From...http://www.feasta.org/documents/papers/oil1.htm

but countries switching to euro reserves from dollar reserves would bring down the value of the US currency. Imports would start to cost Americans a lot more and as increasing numbers of those holding dollars began to spend them, the US would have to start paying its debts by supplying in goods and services to foreign countries, thus reducing American living standards. As countries and businesses converted their dollar assets into euro assets, the US property and stock market bubbles would, without doubt, burst. The Federal Reserve would no longer be able to print more money to reflate the bubble, as it is currently openly considering doing, because, without lots of eager foreigners prepared to mop them up, a serious inflation would result which, in turn, would make foreigners even more reluctant to hold the US currency and thus heighten the crisis.

From...http://archives.cnn.com/2000/WORLD/meast/10/30/iraq.un.euro.reut/

U.N. to let Iraq sell oil for euros, not dollars

 

  

October 30, 2000

Web posted at: 8:45 PM EST (0145 GMT)

UNITED NATIONS (Reuters) -- A U.N. panel on Monday approved Iraq's plan to receive oil-export payments in Europe's single currency after Baghdad decided to move the start date back a week.

from...http://www.ips-dc.org/iraq/quagmire/

C. Economic Costs

The Bill So Far: Congress has already approved four spending bills for Iraq with funds totaling $204.4 billion and is in the process of approving a “bridge fund” for $45.3 billion to cover operations until another supplemental spending package can be passed, most likely slated for Spring 2006. Broken down per person in the United States, the cost so far is $727, making the Iraq War the most expensive military effort in the last 60 years.

Long-term Impact on U.S. Economy: In August 2005, the Congressional Budget Office estimated that the cost of continuing the wars in Iraq and Afghanistan at current levels would nearly double the projected federal budget deficit over the next ten years. According to current estimates, during that time the cost of the Iraq War could exceed $700 billion.

The 'action-reaction' sequence costs are enormous and unrecoverable, and are akin to 'drilling another hole in a leaky boat to let the water out'.

I'll have to finish this later, but I shall be alluding to how they have geared their economy to only live off the 'gravy' of international markets, keeping the head offices in the US while outsourcing everything else they can, and relying solely on 'consuming'. Also, and probably the biggest threat, and danger, is China and it's rapidly expanding growth, and it's enormous 'resource buying power'. much more to follow...

[August1991]

Dear Thelonious,

First, if governments tax, they reduce household spending (consumer buying power). True, but since governments spend their tax income, we have just substituted household spending with government spending. It's a wash. Unless, government spending is "better" for society than household spending.

Second, government is borrowing now, but it'll have to pay it back eventually - at higher tax rates to recoup compound interest. True, but the government borrows at the best rates available. Should you borrow privately to pay a tax bill or let the government borrow for you instead? At issue truly, is the point above. Will the government's choice make us better off?

Third, expert and economics. Expert economics is one thing, basic economics another. The North American Left (Michael Moore, Naomi Klein, Noam Chomsky, Stephen Lewis, people who post on rabble.ca) really must understand better basic economics.

Fourth, worthless Monopoly money? Jimmy Carter wisely gave the control of money to someone outside the control of politicians. The Left has never understood that there is one person in the world who can ignore (or raise a finger to) Bush Jnr: Alan Greenspan.

Now then, Greenspan is about to retire. I would not be surprised if Greenspan names his own replacement - and presents it to Bush Jnr as a fait accompli. Let's see.

[Toro]

And if nobody will lend governments the money, they'll just tax it.  Toro, I don't mean to be flippant but if you are going to consider fantasy scenarios, I guess I can too.

Its not a theoreticaly fantasy August. It happens. It happened with Argentina a few years ago. (Bondholders recently settled with Argentina for less than 30 cents on the dollar.) It happened with Russia. It happened during the Asian Crisis. It happened during the Tequila Crisis of Mexico in the mid-90s, and again in Mexico in the 1980s. I had a perch watching the Asian Crisis directly and it was absolutely fascinating. Private lenders stopped lending to those countries. Just stopped and many countries couldn't roll over their debts. The countries did not have the cash to operate and it lead to rioting in Indonesia, and ultimately lead to changes of government in Indonesia, Malaysia, Korea and Thailand. These countries were bailed out by the international community. There comes a point when the private market says that's enough. To say that its merely a fantasy is to ignore what has happened in global capital markets over the past 20 years.

Households and corporations cannot tax that way - that was my point.

Yes, but the government doesn't have de facto unlimited power to tax because if the government taxes too high, then the economy will slow or contract. Plus, in some countries, it doesn't matter how high the taxes are, people won't pay them. Again, this happened most recently in Argentina. The government was borrowing too much during a recession, and was caught in a Catch-22 because it had to close the deficit but couldn't because spending cuts or tax hikes would have driven the economy further into recession. The only option was default, which is what happened. The idea that government can tax to their heart's content isn't true.

However, let me consider your idea, Toro.  Government bonds have the lowest interest rates and indeed, are sometimes considered to be the "risk-free rate".  Why?  Because everyone knows that governments can tax to get the money  to pay the bonds back.

Certainly, the rules are different for governments than anyone else. But governments do not work in an vacuum and "the risk-free rate" is set in global capital markets if that country borrows too much. It doesn't matter if a foreign government can tax all it wants if I own a dollar-denominated bond and the funding gap for that government is too wide and the debt cannot be repaid. So, for example, in the countries I mentioned above, the "risk-free rate" soared from 4-5%, to 15-20% in a matter of days. What's risk-free about that? Even in Europe, some countries had to spike up repos and overnight rates to literally in the 1,000+% during the 90s because capital markets just dried up.

Imagine, for a second, how low your mortgage rate would be if you could sign an enforceable contract with your bank giving it the power to tax you (as governments do) if you don't pay back the loan.  Hell, the bank would have the power to tax your mother, father, sister or anyone to get back the money.  That would be a risk-free rate.

But not if all that tax causes my friends and family to stop working. You're assuming that the economic behavior would be the same at any tax rate. At some point, it wouldn't, and that's where you assumptions break down. What would happen if my friends and family stopped working because I taxed them too much and suddenly I couldn't pay my debts because I bought a monster home based on my thinking I'd have unlimited resources? The mortgage holders would start getting nervous that I wouldn't have the cash flow to pay him back. The value of my mortgage would fall and the "risk-free rate" would rise. That's what happens in global capital markets.

And for practical purposes, what you have described is a tax.  Governments have the right to take from us at anytime they want.  No other institution has this power, and it changes considerably the nature of deficits and debt.

Since we are in a fantasy world of government bankruptcy, if a government borrows from you, and doesn't pay you back, or instead it taxes you, and then pays you back, what's the difference?  You lose the money.

If we go by your definition then, any transfer of assets is a "tax". The risk premium I mentioned earlier is a "tax". Both have the exact same effect but work through different mechanisms. For example, US Air has been bankrupt twice in the past 4 years. Each time it went through the bankruptcy process, it extracted concessions from bondholders. In other words, bondholders had to give up part of their capital to the borrowers of US Air. The effect of using a tax to transfer assets from one group, the debt holders, to another, the debtors, is the same as negotiating a settlement in bankruptcy court that relieves debtors of their obligations. Its a transfer of wealth.

(And BTW, Argentina didn't go bankrupt.  It abandoned a currency regime.)

Argentina defaulted on its debt and paid bondholders less than 30 cents on the dollar. Convertibility was one of the causes of bankruptcy, but what happened was not merely a devaluation since Argentina stopped paying its debts. Now there may not be any equivalent of Chapter 11 in the global capital markets, but that's considered to be a bankruptcy.

Here's one of many articles on Argentina's default.

[August1991]

If we go by your definition then, any transfer of assets is a "tax".

<{POST_SNAPBACK}>

Exactly, Toro. Now you get it. (I'll add the word "involuntary".)

----

And if nobody will lend governments the money, they'll just tax it.  Toro, I don't mean to be flippant but if you are going to consider fantasy scenarios, I guess I can too.

Its not a theoreticaly fantasy August. It happens. It happened with Argentina a few years ago. (Bondholders recently settled with Argentina for less than 30 cents on the dollar.)

So, the Argentinian government "taxed" bondholders. Or, holders of Argentinian bonds "involuntarily" transferred claims on real assets to the Argentinian government. They were taxed.

It happened with Russia. It happened during the Asian Crisis. It happened during the Tequila Crisis of Mexico in the mid-90s, and again in Mexico in the 1980s. I had a perch watching the Asian Crisis directly and it was absolutely fascinating. Private lenders stopped lending to those countries.

Toro, no doubt you saw it. And what you were watching in part was the international opinion of a national government's ability to tax.

Can the Mexican government tax? Can the Russian government tax? Can the US government tax? How well organized is Canada?

Now then, I still say that Argentina abandoned a currency regime.

[Toro]

August

In capital markets, when a bondholder renegades on his debt, no matter who it is, its a default. You can call it whatever you want, "bankruptcy", "tax", "risk premium payment", "asset transfer", or whatever, the effect is the same. But that makes a country no different than a corporation, or an individual because they do the same thing. Thus, saying that a country cannot go bankrupt because they can transfer assets through a taxation system is like saying corporations and individuals cannot go bankrupt because they too can transfer assets through the capital markets, financial system and the courts. Thus, the term "bankruptcy" has no meaning.

A nation defaulting can be more serious than a corporate bankruptcy because it can impovrish a nation, even tear it apart.

Argentina did abandon their currency regime. They also defaulted. The two were part of the macroeconomic problems of the country at the time. But the government stopped payment on its debt and the capital markets consider that bankrupt.

[Guest eureka]

Argentina's response to its crisis was akin to a Consumer Proposal. That is covered by the Bankruptcy Act but is not bankruptcy.

When someone introduces a post by claiming the "Left" is anti-American and also ignorant of economics, then one just knows that the discussion, since responders take it seriously, will be a lot of pretentious claptrap.

The reality is that allall virtually all brains, except the bought and distorted ones, are on the "left" On the "Right," we have the sick(Von Mises, e.g.) and the lame (the paid stooges in think tanks.

The army of the "Right" consists mostly of pedestrian MBAs who would scarcely have graduated high school in the days I knew. Bush, for example.

If any wants to understand the US and what is likely to happen to it, they should leave the economists out of it and read some Toynbee. There will appear a much clearer vision than any economic to and froing. The US is in the classic position of all failed Empire states. It could survive under modern conditions with the help of other countries but it is forfeiting any claim to gain assistance.

A little common sense allied to some understanding of the psychology of the world of people is worth a thousand economic opinions.

[Toro]

thelonius

If by "on the brink" you mean, "recession", that is quite possible, and I would expect one at some point in the future, perhaps soon. If, on the other hand, you mean "collapse", then that's not going to happen. The US economy is simply too dynamic and too strong to do so, at least in the forseeable future.

Having said that, there are tremendous imbalances that do worry me. The budget deficit isn't too much of a worry, but the trade deficit, combined with the fiscal imbalance is a worry. Certainly, the war in Iraq is a drain on US resources. Vietnam was as well, and was a big factor to the inflation and economic dislocation of the 1970s.

This argument that trading oil in euros would have a dramatic effect on the value of the dollar is an odd one. The total value of oil traded relative to the global economy is a mere fraction, and much of the trade in oil is settled between countries where the dollar is used merely as a reference while the actual transactions occur in other currencies. This argument originally popped up when the euro was dramatically appreciating against the dollar, including from Saudi Arabia, which caused the financial markets take notice. But now that the currencies have levelled off, you don't hear it anymore, well except maybe from the conspiracy-laden Fringe Left (not you thelonius). Plus, there are concerns about the long-term viability of the euro.

Imports are only about 10% of the US economy, far less than Canada. So its difficult to conclude that the US economy is geared to living off international gravy.

[theloniusfleabag]

Dear Toro,

This argument that trading oil in euros would have a dramatic effect on the value of the dollar is an odd one. The total value of oil traded relative to the global economy is a mere fraction

I meant it not as a practical influence, but as a 'faith' one. The 'greenback' is the reserve currency of the world, (especially in black markets) but only because (lately) of faith in it's value.

Plus, there are concerns about the long-term viability of the euro.

Indeed, but should the EU iron out it's wrinkles, that won't be an issue. Mind you, the Pound Sterling lost it's place on the throne, without grevious harm to the UK, but the USA is in a bit of a different position.

[Toro]

I meant it not as a practical influence, but as a 'faith' one. The 'greenback' is the reserve currency of the world, (especially in black markets) but only because (lately) of faith in it's value.

Of course, any currency is based on faith, including gold. But you make a good point. I think the US government has done more to undermine the greenback over the past 5 years than at any time since the 1970s.

And ironically, given the title of this thread, Greenspan is as much responsible for this as anyone.

Indeed, but should the EU iron out it's wrinkles, that won't be an issue. Mind you, the Pound Sterling lost it's place on the throne, without grevious harm to the UK, but the USA is in a bit of a different position.

Its healthy to have an alternative reserve currency. But unless Europe adopts more pro-growth policies, its unlikely the euro will displace the dollar. That is, assuming the Americans don't undermine their currency and force investors away from dollars, which may happen one day.

The UK lost its place both because it laid exhausted after WWII, and because another country had become the pre-eminent global economy.