Can A Debt Crisis Happen To Countries With National Currencies?

Paul Krugman argues that people who worry that the U.S. Federal government or other national governments with national currencies can suffer a debt crisis (not caused by showdowns between different parts of Congress and the President) are like the Underpants gnomes:

The popular story — put out by everyone from Alan Greenspan to Erskine Bowles — runs like this:

1. Loss of investor confidence
2. ??????
3. Greece!

What I keep asking is for someone to explain step 2 in a way that’s consistent with the fact that America, Britain, and Japan — unlike Greece — have their own currencies, and central banks that control short-term interest rates. Are you saying that they will raise these rates, and if so, why? Are you saying that long rates will become delinked from short rates? Why, and why can’t central banks prevent this just by buying long-term debt?

Krugman is partly right in arguing that having a national currency will, assuming that it has a floating exchange rate and that its debt is issued in that national currency, will almost completely end the risk of problems with financing large deficits. Because if private investors refuse to lend to such a government it can always turn to its central bank and ask it to "print" the money it needs and then lend the money to it. And since central banks can "print" unlimited amounts of money, this means that it can buy unlimited quantities of government debt securities.

However, while the risk of a debt crisis for a government with its own currency is indeed much smaller than for a government without it, it isn't zero, "Printing" a lot of money to finance government deficit spending can have the negative sideeffect of higher price inflation. And if the central bank worries that inflation is getting out of hand it might not be willing to bail out its government, at least not completely. Which is to say that in "step 2" the central bank will raise interest rates and allow long term rates even more because it wants to contain price inflation. And to bring down inflation at that point might require that not just nominal but also real interest rates are increased significantly, like in the early 1980s.

Obamacare-The System Almost No People Wants

Despite the efforts by Republicans to stop, and despite the initial technical glitches on the healthcare.gov web site, Obamacare is almost certain to last. As the latest showdown illustrated, Republicans in a too weak position to use its control of the House to make Obama and the Senate agree to repeal it, and the technical glitches is almost certainly something a few thousand professional computer programmers  hired by Obama can solve in a few weeks or months.

Yet strangely, despite being the new law of the land, almost no one seems to really want it. Republicans clearly don't want it, but most people who defend it doesn't really want it either. The popular leftist group blog "The Daily Kos" has repeatedly published posts saying they really want a different system. And Robert Reich, Paul Krugman and many other prominent liberal pundits have similarly expressed a preference for another system, and so have President Obama and Senate Majority leader Harry Reid. That other system is of course the single payer system that for example Canada and most European countries have.

So who really thinks that Obamacare is a good system, their first choice? I haven't found anyone who actually thinks so, though presumably some of the Joe Lieberman-type centrist Democrats who voted for it but was unwilling to include a so-called "public option" actually likes it. Still, it seems that only a small minority views Obamacare as their first choice for health care system, with the bulk of its support coming from Democrats who really wants a single payer system or at least "a public option" but views Obamacare as a lesser evil compared to the previous health care system and/or hopes that its shortcomings will lead people to support a single payer system

Japan Population Change

There is a debate about whether or not the Japanese have given up on sex. Whether or not they have I don't know, but it seems clear that they have given up on having children.

Between 2000 and 2013 population in Japan increased slightly, from 127 million to 127.3 million. But this number masks a rapid aging of its population. Here is the 2000-2013 population change in different age groups:

2013 population (change since 2000)
0-14: 16.39 million ( -11.5%)
15-64: 79 million  ( -8.6%)
65 or older: 31.9 million ( +44.7%)

As soon as next year, the number of people older than 65 will probably be more than twice as many as the number of people younger than 15 and a year after that the number older than 75 will exceed the number younger than 15. And with a continued low fertility rate and a drop of nearly 1% per year in the number of women in child bearing age, the demographic implosion is likely to only accelerate.

UN Praises Saudi Arabia (!) On Women's Rights

If you ever doubted the moral evil and corruption of the UN in general and its "Human Rights Council" in particular, here is something you should read this: the UN praises Saudi Arabia, of all countries, on women's rights! That's right, the country that excludes women from most of society, forces them to wear tentlike clothes and often executes rape victims for extra marital sex is praised for women's rights.

That's sort of like praising the Confederate States of America, or the United States of America before 1865, for civil rights for black people or praising the Soviet Union for respecting private property rights.

I Agree With Krugman-Sort Of

Usually when I mention Paul Krugman on this blog, it is to criticize him, but now I see that he has written something that I sort of agree with: Alan Greenspan is the worst ex-central banker in the world, as he spends most of his time trying to deny that his policies caused the U.S. housing bubble.

Krugman however wrongly focuses on Greenspan's support for financial deregulation, when Greenspan's big error in fact was keeping interest rates too low, a policy that Krugman supported and still supports

Emperor Palpatine Gets A Job

Hilarious clip of how it would be if  Emperor Palpatine/Darth Sidious from the Star Wars movies tried to get a real job on Earth. When the interviewer at the temp agency asked him why he decided to leave politics he got an answer I bet he never heard before: "my apprentice threw me down a 280 mile shaft directly into the main reactor of the Death Star"


Quotes, or variations of quotes from Palpatine/Sidious from the movies Return of the Jedi and Revenge of the Sith are used in various "normal" situations in hilarious ways.

U.S. Budget Dispute Was Solved In June?

What if someone said that the recent dispute over "government shutdown" and the debt ceiling in the U.S. federal government was solved back in June?

That would of course be laughed at, yet sóme media outlets still claims that the deal that passed both the Senate and the House and was signed by President Obama means that the crisis is solved.

Yet all it does is push the problem a few months in to the future when first the "continuing resolution" and the debt ceiling increase expires. Meaning we're currently as close to the existing deadline as we were in June. When the deadline is reached again, the world will again have to suffer the ridiculous spectacle it has suffered through the past few weeks.

Unless of course, one side decides to openly surrender. And that will most likely be the Republicans as their bargaining position will be even weaker given the fact that Obamacare by then will be considered even more of a "settled law" and the mid-term election even closer in time. Meaning that all Republicans will get for their shutdown strategy is a decrease in their popularity.

UK Continues To Increase Employment By Lowering Wages

The UK labor market report continues to be a seemingly mixed bag. On the one hand, employment growth continues to be strong, with the number of employed increasing in June-August by 0.5% compared to the previous quarter and 1% compared to June-August 2012.

However, average earnings continues to fall in real terms. In nominal terms, average weekly pay rose only 0.7%, which considering the 2.7% inflation rate implies a 2% drop in real earnings.

This in turn implies a 2% drop in aggregate real labor income.

Despite the employment increase, these numbers therefore contradict rather than confirm the story of a strong British recovery that certain British pundits asserts has started. 

Employment is growing, but not because more is produced, but because British workers are willing to work for less and less.

This Year's Economics Nobel Winners Contradict Each Other

Like in 1974, when Socialist Gunnar Myrdal and Austrian Friedrich Hayek got the Nobel Economic Price, the Swedish Riksbanks awards it this year  to two people with contradictory views. Both Eugene Fama, leading advocate of the so-called Efficient Market Hypothesis, and Robert Shiller, who has come up with findings contradicting that theory (Plus some to most people unknown econometrician, Lars Peter Hansen, who has developed new econometric methods for finance)

Sort of like giving Al Gore and leading "climate skeptic" Dr. Roy Spencer the same award at the same time.

Yes, Krugman Has Been Wrong About Economics, Too

Niall Fergusson takes Krugman to task for his assertion that he has been right about everything since 2007, with the only two mistakes that he admits being things that predate that year, namely underestimating the effects of IT on productivity during the 1990s, and overestimating the problems caused by Bush's deficit increasing policies.

Fergusson points out that Krugman has been wrong about things after 2007 as well, most notably repeatedly predicting the breakup of the euro area, indeed often saying that the euro will disappear completely Unlike the interpretation of economic tatistics, this is not an error which can be disputed: there is no doubt that the predicted destruction/breakup hasn't happened. Not only do the euro still exists, no country, not even Greece, has exited and some countries, including Slovakia, Estonia and soon also Latvia  (January 1, 2014) has in fact entered it. So, there is no way that Krugman can really being wrong about that.

Krugman's response to this is that he was still right about the economics, that countries that tries to impose austerity without being able or willing to counteract it with ”monetary stimulus” suffers deep slumps, but that he underestimated the political will of Southern European countries to endure economic suffering to stay in the euro.

But no, he hasn't been right about the economics, either. While it is clearly true that Southern Europe in general and Greece in particular has suffered an economic slump after trying to reduce their deficits, that reflects structural and cultural failings of these countries.

Lots of countries have implemented austerity and despite lacking an independent monetary policy or being at the zero bound while not suffering a slump.  That includes the U.S. who implemented the so-called ”fiscal cliff” that Krugman claimed would cause a slump almost entirely (with all the spending cuts of the so-called sequester and most of the tax increases implemented as well). But also the Baltic states and Ireland which implemented austerity without devakuing and saw their economy recover.

Regarding Latvia, Krugman called it in 2008 ”The New Argentina” and will inevitably collapse. But that clearly didn't happen as Latvia has successfully stabilized its public finances while avoiding devaluation and recovering strongly from its slump.

Here is a interview with Latvia's PM explicitly criticizing Krugman on that issue.

What Happens If Debt Ceiling Isn't Increased?

Most people assume that there won't be a crisis related to the debt ceiling and that either Obama or John Boehner will chicken out before it happens. And that is arguably still the most likely scenario.

But a debt ceiling crisis is certainly far from a far fetched scenario and may very well happen. After all, Obama has said that he will as a matter of principle not negotiate or make concessions while Boehner demands concessions. Thus, there is really no way to solve this without at least one of them "losing face".And because they're both very committed to avoiding that, a crisis isn't an unrealistic scenario.

What happens if the crisis breaks out? Many people have pointed out that the US can avoid defaulting on its bonds since a debt ceiling doesn't prevent the refinancing of expiring bonds and since
revenues are something like 12 or 13 times greater than interest payments.

But while the government indeed has more than enough money to pay their Chineses creditors it doesn't have the money to meet their other commitments. since the government is obligated by current law to pay for example Social Security and Medicare to seniors, various other transfer payments and various other
expenditures, a failure to increase the debt ceiling would create a logical conflict between existing laws. After all, debt changes isn't some independent entity, they're the residual effect of gaps between revenue and spending. With laws at the same time requiring the government to spend more than it earns and another law in effect forbidding it from doing so, it becomes necessary to break at least one law.

But which law or laws should be broken then? This in effect gives the executive branch of government, which is to say Obama, the obligation to choose which laws should be broken. He could at that point simply choose to say that he gives precedence to the laws obligating him to spend more and therefore ignore the debt ceiling. Or he could choose to not spend on programmes he likes less than others or even to give priority to spending that goes to Democratic states and congressional districts over spending that goes to Republican ones.

Republicans in Congress could of course try to impeach him for that, but as current laws gives him no choice but to break some of them, it is extremely unlikely that Senate Democrats would vote to convict him.

Stupid Phones

I've always thought it silly to call so-called "smart phones" smart. It implies that they can think, which they clearly can't. And illustrating the fact that they aren't smart in any way is the fact that they've gotten the switch from "Daylight Savings Time" (which BTW is a really stupid idea) to normal time in Israel all wrong, creating problems for all Israelis who rely on them as clocks and alarm clocks.

Chart Showing Russia's Demographic Revival

Russia's demographic revival continues as the birth rate rose another 1% in the first 7 months of 2013, after rising nearly 6% in 2012. Meanwhile, fewer Russians die. Still, the situation has still not improved to 1980s levels, and once, in a few years, the relatively tiny generation of the 1990s replaces the larger one from the 1980s in the prime child bearing category, it will be difficult to avoid a setback.

No U.S. Government Statistics With Shutdown

As noted before, the so-called "shutdown" of the U.S. federal government doesn't affect most of the government. So-called "mandatory spending" in the form of government entitlements like Social Security, Medicare and the Obamacare subsidies that were introduced the same day as the shutdown, continues. Nor are workers viewed as essential, including the military and air traffic controllers, and for example the 12 personal staff workers of Joe Biden that no one really know what they do. So which federal workers are viewed as "non-essential"? Well, the most talked about example in the media are the people running national parks and museums. But the affected workers who financial markets are likely to care most about are government statisticians. Because of the shutdown, the monthly employment report that markets are usually so addicted to won't be published, nor will any other government statistics be published. Instead, markets will have to do with only reports produced by private institutions (and probably also the Fed, as the Fed funds itself) such as the ISM reports and today's ADP survey. UPDATE: Now the entire BEA website, including previously released data, has been shut down. By contrast, the Bureau of Labor Statistics site is still up, but they have a note saying there won't be any updates as long as the shutdown continues.

Is There A Point For English-Speakers To Learn Other Languages

One interesting, but not surprising, fact in the Eurostat report mentioned in a previous post was that the British study foreign languages to a much lower extent. The vast majority didn't even study anything in upper secondary school.

The explanation for this is obvious. English is the most widely known language in the world, and most foreigners they come in to contact with know English, with varying degrees of proficiency. Why bother trying to learn the languages of foreigners, when they know yours, is probably what most British think.

Given the amount of effort that learning a new language requires, they are probably in most cases right. However,  there are still upsides to knowing other people's languages even if they know yours. This clip form the movie Braveheart (which BTW is my favorite movie of all time) illustrates this.

Here Scottish national liberation leader William Wallace meets with Princess Isabella, the daughter-in-law, of Wallace's enemy King Edward I (usually referred to in the movie, including this clip, as "Longshanks"). After she accuses him of atrocities, he defends himself, by saying that the city he seized was used as a staging point for invasions of his country and that the royal cousin they executed had killed innocent Scots and that  "Longshanks did far worse the last time he took a Scottish city".

Isabella's companion, Lord Hamilton, tries to defend his king, by saying in Latin that Wallace is a murdering savage that is lying. The reason he said it in Latin, instead of English was of course that he didn't want Wallace to know he said it and he assumed that Wallace didn't understand Latin. To both Isabella's and Hamilton's great surprise, Wallace understood what was said and replied to them in Latin. As Isabella and Hamilton was silent, in chock, Wallace then said ou en français si vous préférez, which is French for, that they could speak French, if that's what they preferred, revealing that he could speak French as well as Latin. In the English upper class at that time, most knew French and Latin (and Isabella was BTW the French King's daughter, so naturally she knew French), but among common English and Scot people, most knew only English which is why they didn't expect that Wallace had learned Latin or French.

The point is that even if others know your language, knowing theirs is, all other things being equal, also positive since it enables you know what they're talking about if they switch to another language, or what they're writing about in other languages, whether intentional to exclude you (as in this clip) or not. 

12 Staffers Just For Joe Biden

Investor's Business Daily reports that even during the so-called "government shutdown", Vice President Joe Biden will have 12 staff present as they are deemed "essential". And do note that that number does not include Secret Service body guards that protects him. As IBD asks, what do these 12 people do exactly, make sure that the notoriously gaffe-prone Biden doesn't make any more gaffes?