Wednesday, August 9, 2017

Paul Krugman Warns on the Developing Debt Crisis



Geez, is Paul Krugman about to launch a gold bug newsletter, to be published by Bill Bonner, next?

How else to explain this?

He is warning about a developing US debt crisis. He has a decidedly nasty lefty spin to his warning but he sticks to facts in this warning and he is correct to issue the warning.

Take heed.

He writes for The New York Times:

The odds of a self-inflicted US debt crisis now look pretty good: hard-line Republicans are eager to hold the economy hostage, Democrats are in no mood to make concessions, and Trump is both spiteful and ignorant. So it looks fairly likely that by October or so there will come a day when the U.S. government stops paying some of its bills, including interest on debt.

How bad will that be? The truth is that we don’t know; but it may be helpful to talk about *why* we don’t know.

Until now, US debt has played a special role in the world economy, because it is — or was — the ultimate safe asset, the thing people can use to secure transactions with no questions about it retaining its value. In a way, the dollar is to other moneys as money is to other assets, and US dollar debt is the form in which dollars are held with ultimate safety.

Taking away that role could be very nasty...

Suppose that everyone expected normal payments to resume, with back interest, in a couple of weeks. In that case, even a slight discount on, say, Treasury bills would make them a very good investment — so speculators would basically step in and support the value of U.S. debt despite temporary default. In that case default might not be that big a deal.

The big problem would come if investors see the default as more than a temporary glitch — if they see it as a sign of enduring, critical dysfunction in American governance. In that case they wouldn’t necessarily step in to buy our debt, and their confidence in the whole economic edifice would take a severe hit.

But of course that’s implausible. To see default by a basically solvent government as more than a mere glitch, you’d have to believe that we have an unbridgeable partisan divide, with one party largely dominated by extremists, and with a president who is ignorant, incompetent, and vindictive.

Oh, wait.
  -RW

1 comment:

  1. He got it half right when he said one party is dominated by extremists.

    ReplyDelete