Not that Krugman is right, but that ‘de Niall is wrong here. Comments in below:
By Morgan Korn
April 30 (Daily Ticker) — Niall Ferguson has two words for Paul Krugman: youre wrong.
The Harvard University history professor and author of Civilization: The West and the Rest says Krugmans pro-government spending thesis not only fails to address the core problems facing the U.S. and Europe today but also has dire consequences for individuals living in these economies.
You cant borrow trillions of dollars a year for the rest of time, Ferguson says in an interview with The Daily Ticker at the Milken Institute Global Conference 2013.
Operationally there is no numerical limit to US govt deficit spending. Nominal restrictions are political only. Yes, the currency might go down, there might be inflation, you might lose your job, but US Treasury checks won’t bounce unless congress decides to bounce them.
Once a government gets to a very very high level of debt, the risk is very small increases in borrowing costs which create a vast ocean of red ink. So that risk is not negligible.
So what happens as that ‘debt’ grows larger? Nothing if it isn’t spent. And if it’s spent, the risk is the risk of too much spending in the economy. Overspending would mean unemployment got ‘too low’ and the ‘excess spending’ was simply driving up prices. Comes back to the only risk of ‘too much’ deficit being inflation. So what’s his long term inflation forecast? He probably doesn’t even have one!!!
Very large debts do not simply disappear by magic.”
Correct, they remain as balances in either securities accounts (aka Treasury securities) at the Fed, or in reserve accounts at the Fed, or as actual cash, to the penny. And they constitute the $US net financial assets of the global economy that supports the global $US credit structure. To the penny.
Ferguson argues that Carmen Reinharts and Ken Rogoffs conclusions about the relationship between high debt and low growth are still true. The two Harvard economists had to defend their seminal book This Time is Different: Eight Centuries of Financial Folly after three University of Massachusetts academics correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II, according to Reinhart and Rogoff. (Lawmakers across the world cited their work as justification to institute austerity policies; they argued that economic growth slowed after a country’s public debt equaled 90 percent of its GDP).
The headlines have done a disservice to Ken Rogoff and Carmen Reinhart, Ferguson notes. Its extremely implausible that governments with already high debt can improve their situation by making their debt even larger. High debt scenarios often end with inflation or default. They dont end with a rapid increase in the growth rate. A minor error in the Rogoff and Reinhart paper does not refute the case that governments with excessively large public debt have to bring them under control.”
Presenting data doesn’t ever show causation.
But regardless of the level of cumulative deficit spending for a currency issuing govt, with a proposed tax cut and/or spending increase every economist paid to be right will revise his GDP forecast up.
Moreover, Ferguson compares government accounting of public debt to one of the most famous and hated public companies that ever existed.
If companies behaved like governments, they would essentially be Enron, he says. There is a fundamental problem with government accounting.
There are likely govt accounting problems, but not solvency problems for the issuer of the currency.