Matt Yglesias

Obama: Our Debt Is Safe

Strange days as the President of the United States needs to reassure China that we’re not defaulting on our debt:

“There’s a reason why even in the midst of this economic crisis, you’ve seen actual increases in investment flows here into the United States,” Mr. Obama told reporters. “I think it’s a recognition that the stability not only of our economic system but our political system is extraordinary.”

He added, “Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States.”

I don’t know if this was the intention, but the highlighted portion serves as a reminder, I think, that the Chinese leadership almost certainly has a bigger problem on their hands than the performance of their investment portfolio. It’s an authoritarian system that even before the crisis was suffering from a fair amount of protests and political unrest. Conventional wisdom twelve months ago was that the regime’s stability was based on its success in delivering economic growth. And now it seems they may not be able to deliver much in the way of economic growth. And that’s not just an economic problem, it’s a political one.

The World Can’t Get Enough American Debt

Between the TARP and the stimulus, we’ve added an enormous amount to the national debt recently. So it’s no surprise that I’ve heard from a lot of people who are worried about the situation. How are we going to finance all this debt? Aren’t we risking a dollar crisis? A huge run-up in interest rates?

These are all reasonable questions, but as Peter Goodman writes in The New York Times, the answer is no and the world can’t get enough of our Treasury bonds. Instead, the debt crisis is hitting elsewhere, especially Eastern Europe: “as Americans eschew foreign deals and keep their dollars at home, and as foreign central banks — especially China — buy Treasury bills, the United States is absorbing money that used to be scattered around the globe. And that is making money tighter elsewhere in the world.”

In a sense, we seem to have cycles from a dot-com bubble to a U.S. real estate bubble to a brief commodities bubble and now to a U.S. Treasuries bubble. Which all seems a little perverse. But it also bolsters the case for additional stimulus or a massively expensive bank nationalization scheme. We’re well-below full employment, and under the circumstances the way you know you’re doing too much stimulating is that the borrowing is pushing interest rates up. At the moment, that’s not happening.

Admittedly, I Don’t Really Know What I’m Talking About, But… (Part II)

Reader A.M. wants answers I can’t really provide:

We should recapitalize the banks with printed money. (Nationalizing them first, of course–we wouldn’t want shareholders benefiting.)

Here’s the logic:
Given:

- The banks need to be recapitalized in order to be non-zombies.
- The government will provide the capital one way or another.
- We ALSO are on the edge of a deflationary spiral. Krugman has been warning us about this.
- One sure-fire way to get inflation going is to use seigniorage–print money!–to pay for government expenditures.

Therefore:

- We should print money to recapitalize the banks! (I guess the Fed would do it?)

The result is:

- The recapitalized banks can be re-privatized and function as solvent, independant institutions.
- The taxpayer doesn’t pay for it.
- People freak out a bit about printing money to pay for stuff, so “expected inflation” goes away from the edge of zero-to-negative.

Would this work or would it immediately cause a Weimar-republic-style hyperinflation? I ask you because you:

- like to think about these types of things
- are willing to consider crazy ideas just for the sake of argument
- have the power to get the attention of actual blogging economists.

I don’t think I fully understand all the issues here. But my guess is that we can’t do this. The reason we can’t do this is that one thing we enjoy as a country is the ability to borrow money in our own currency. That means that we’re not subjected to all kinds of crazy currency shocks and the need to maintain massive reserves and yen and euros to stabilize things the way a small and/or untrustworthy country would be. And I think we’d like to keep it that way. My suspicion is that repaying US banks’ creditors with funny-money would put an end to this quickly. That, in turn, would be a huge problem the next time we need to roll over our federal debt payments. The main reason we’re able to contemplate bigger short-term budget deficits is that at the moment we’re paying a low interest rate to borrow. Adopt this proposal, and we’d find financing the deficit much more difficult.

Conservatism = Debt

Cato’s David Boaz alleges that “it must be a great disappointment to Goldwater Republicans to discover this story that got almost no notice this week.” The story in question turns out to be about the burgeoning national debt in the Bush years:

But as the chart makes perfectly clear, it seems unlikely to me that Goldwaterites are genuinely disappointed with this turn of events. The major causes of growing debt-to-GDP ratio are World War II and the election of post-Goldwater conservative Republicans. That’s not necessarily the worst thing in the world — arguably some Democrats are too debt averse — but the record is pretty clear. Conservatives in power leads to skyrocketing debt.