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"Misguided Hysteria": Debt Causes Inflation and Other Common Misperceptions|
Posted Jul 19, 2010 09:20am EDT by Aaron Task
With U.S. deficits expected to top $1 trillion per year for the next decade, its no wonder more than 50% of Americas say the deficit is "dangerously out of control," according to a recent Bloomberg poll.
But America's "sovereign debt hysteria" is "misguided," according to a recent report from the Jerome Levy Forecasting Center entitled: Uncle Sam Won't Go Broke.
The firm's director of research, Srinivas Thiruvadanthai, joined me last week to discuss and debunk several common misperceptions about America's soaring deficit, including:
U.S. = Greece: Comparing America to Greece is "like comparing apples to oranges," Thiruvadanthai says. Unlike Greece, the U.S. has control of its currency, a long history of managing its public debt without default, a proven ability to collect taxes, and a deep and liquid market for its publicly traded debt. For related reasons, he thinks there's little or no threat of a U.S. debt default and the latest rise in Treasury prices (which move in the opposite direction of yields) suggests global bond investors aren't too worried about it either.
Debt Will Crush Growth: "There is no connection between high debt and economic growth - at all," Thiruvadanthai says. The report shows how high public debt is typically caused by wars or economic depression, which is accompanied by falling tax receipts and increased government spending on social safety nets like unemployment benefits. "It is economic weakness that causes public debt, rather than the other way around," he says. "In fact, the peak of the public debt typically presages a long boom."
The Fed Will Inflate Away Our Problems: "You can mine the data as much as you want [but] there is no relationship whatsoever between public debt and future inflation" in nations with a long history of public debt, namely the U.S., U.K. and Japan, Thiruvadanthai says. To claim otherwise is a "fundamental misreading of history." Notably, U.S. public debt was far lower in the 1970s when inflation was running rampant vs. in the current environment when deflation seems to be a bigger threat. On a related note, "government can't engineer inflation at will," he adds. "It's not as easy as people think," as the Bank of Japan can attest.
Our Children & Grandchild Will Pay the Tab: "Unless we find some time machine that can produce economic [activity] now and take it out into the future," future debt payments - and the cost of "unfunded liabilities" - will be paid out of future economic activity, Thiruvadanthai says. Because Social Security and Medicare are ‘pay-as-you-go' programs, "there is no way that fiscal rectitude today would solve the problem in the future," he claims. "All in all, it is extremely difficult to conclude that the federal government's deficit spending is mortgaging our children's future to foreigners."
Because of these (and other) common misperceptions about debt, Thiruvadanthai and his colleagues at the Jerome Levy Forecasting Center, believe policymakers are wrong to be thinking about austerity and say more stimulus spending is needed. "'Hooverist' austerity programs in the midst of depression-like conditions are self-defeating," he says. "They just won't work because the economic weakness they cause rebounds back to further weakness in [tax] revenues."
Noting total U.S. debt (all government and private) has fallen for five consecutive quarters, Thiruvadanthai says the goal for policymakers should be to "slow the [deleveraging] process down to something's that is manageable and not destabilizing, unlike the Great Depression."
Clearly these are controversial issues and there's a lot of room for debate here, including over the very definition of "debt."
Public debt held by the public is the correct figure to look at, according to the Levy report. That metric totaled $8.3 trillion as of March 2010, or 57% of GDP, but excludes Treasuries held in public trust funds, most notably the Social Security trust fund, as well as potential Federal liabilities for state and local governments, Fannie Mae and Freddie Mac, AIG, etc. etc...
in summary, worry about recession and falling prices of every thing.
no inflation for foreseeable future.
you will not get inflation even if you want it.