There's No Fiscal Crisis, Except for That Fiscal Crisis Thingie

Former International Monetary Fund Chief Economist Simon Johnson has an extremely odd little piece up at The New York Times that claims to give a "no" answer to the headline "Does the U.S. Really Have a Fiscal Crisis?" The sum of Johnson's arguments are in the lead paragraph:

The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overly indebted countries typically have a hard time financing themselves when the world becomes riskier — yet turmoil in the Middle East is pushing down the interest rates on United States government debt. We are still seen as a safe haven.

Any standard measure? The most standard measure of crisis-level debt is north of 60 percent of GDP, a threshold we blew through one year ago. You can find this standard measure, by the way, in just about everything the IMF has published on the subject, including this bit from December:

What is a desirable debt level for these countries to ensure fiscal sustainability? This is a difficult question to answer: the target must take into account country-specific considerations concerning sustainable debt in light of fiscal policies, demographics, and unfunded entitlements, as well as long-term interest rates and output growth rates. For example, a return to the precrisis public debt level may not be sufficiently ambitious for countries that had high ratios before the crisis. A widely used approach is to define specific thresholds of 60 percent of GDP for advanced economies and 40 percent of GDP for emerging market economies—reflecting the perceived higher risk for the latter. The 60 percent of GDP target for advanced economies is roughly also the median debt-to-GDP ratio of those economies before the crisis.

What's more, as the Washington Post pointed out in a Sunday depresser, the unprecedented state and local fiscal crisis (which, as the events in Wisconsin underscore, really is upon us right the hell now) makes those bad numbers look worse:

Even if analysts leave aside the debt held by the Social Security Trust Fund, the total indebtedness of federal, state and local governments is running around 85 percent, vs. 108.7 percent in 1946.

And even that doesn't tell the full picture, since chronic underfunding of contractual pension obligations has left a future budget hole in the trillions of dollars. Oh yeah, and entitlement spending gets more expensive by the nano-second.

The funny thing is, the rest of Johnson's column bolsters the theory that, well, we're in a fiscal crisis:

The financial system poses a major risk to our fiscal outlook over the next few years. Unless you think that the Dodd-Frank reform bill really ended "too big to fail" and the associated excessive risk-taking culture, you should worry a great deal about the assumption of boom, bust, bailout and fiscal damage that the Bank of England now refers to routinely as the "doom loop." [...]

[W]e need to control health care spending as a percent of G.D.P. [...] [I]n the projections, by 2030 or 2040, the growth of health care spending ruins us all — whether or not we get the government to pay for it.

Both sides of our political elite have contributed to the sense of fiscal crisis. And as we continue down this path — dangerous big banks, out-of-control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending and irresponsible rhetoric on both sides — we are well on our way to a real crisis.

It's almost as if he thinks the medicine can only go down if at first you say to our delusional political class, "Look! The Goodrich blimp!"

Link via Scott Rosenberg. For a more hard-headed look at the mess we're in now, read (and follow the links from) Brian Doherty's piece yesterday.

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  • Rich||

    The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis.

    With all due respect, what is "medium-term"? Next week, next month, or next year?

  • Matrix||

    Next century

  • Hugh Akston||

    Next election cycle.

  • ||

    Until he changes his mind.

  • db||

    Goodyear?

  • Ragin Cajun||

    Those are the other guys.

  • db||

    You see that blimp up there?

  • Mike M.||

    I find it absolutely remarkable that the former IMF chief economist would completely neglect to mention in a piece like this that the IMF (and major countries like China and France) just formally recommended moving away from the U.S. dollar as the world's preferred reserve currency.

    Johnson certainly must know this, along with the staggering implications it would have for our economy. I have to conclude then that he's being deliberately disingenuous.

  • Johnson||

    I ...... FORGOT!!

  • Irresponsible Hater||

    The Goodrich blimp is full of dicks.

    Now the Goodyear, that's a blimp.

  • ||

    ...turmoil in the Middle East is pushing down the interest rates on United States government debt. We are still seen as a safe haven.

    Well, the US doesn't have protesters blocking the streets and attempting to bring down governments or legislators fleeing...

    Oh, wait.

    Nevermind.

  • ||

    That's a good point. Members of government running off to hide from legislation is not a good sign of stability. If Congress ever pulled something like that, our reputation would take a major hit. U.S. stability through crises is something a lot of our debt-holders and investors in our currency depend on.

  • ||

    Overly indebted countries typically have a hard time financing themselves when the world becomes riskier — yet turmoil in the Middle East is pushing down the interest rates on United States government debt.

    The Quantitative Easing program is nothing more or less than a concerted manipulation of the market for US debt. It consists of buying up US debt in order to keep the interest rates on that debt from rising.

    Any conclusions that one might like to draw from the seeming ability of the US to sell debt at low rates are thus suspect, as the market is rigged. No one knows what the true market clearing rate for Treasuries is, but you can say with a great deal of confidence that it is higher than what we see now.

  • Mike M.||

    Within the last few weeks the Fed in fact passed China and officially became the American public's largest creditor.

  • Jersey Patriot||

    It's not like any of this is hidden, though. If QE were a secret program, I could see how it could be a dastardly manipulation of the Treasury market. But it's perfectly open, the information is universally available, and the central banks and financiers of the world know exactly what's going on. Hell, the amount that gets monetized is posted on the Zero Hedge blog 10 minutes after the debt auctions close.

  • ||

    Don't be so pessimistic. The dollar is only worth 2 cents, so if interest rates rose to 6%, you would only be earning about a tenth of a cent, with which you will be able to purchase 50,000 or so molecules of gasoline and drive about 2 inches... I hope you have a prius...
    Soon we will all be trillionaires!!! Of course, a six pack will cost several billions of dollars.

  • ||

    but by any standard measure it does not face an immediate fiscal crisis.

    "Stop worrying; it's not like we're Greece."

  • Ray||

    My prediction is that in the next two years, possibly sooner, the dollar will lose its status as the reserve currency and the oil trading currency and we shall then proceed down the shat hole. It will happen after QE 3 or 4 and once the market crashes, the FED will try to inject billions into the market, causing and even faster decline. Get the guns and gas my friends, it's going to be fun.

  • robc||

    Why do people think being the reserve currency matters at all? Not that I dont agree with your accessment, but it doesnt matter if we are dropped as the reserve currency or not.

  • Mike M.||

    You couldn't be more wrong. The fact that most currencies and major international transactions are pegged against the U.S. dollar is the biggest reason why countries have had to invest in U.S. treasuries as a hedge for so long. The weaker the dollar becomes, the less attractive this investment is for foreigners.

    That's why major countries like China and Russia have stopped buying treasuries. And the less everyone else invests in us, the more we will have to monetize our own debt, and the greater the hyperinflation risk becomes.

  • ||

    Look on the bright side; once T-bills start yielding 32%, those pension investment return numbers will all work out.

  • Tony||

    We don't have a fiscal "crisis." We quite arguably have an employment crisis. You tell me how we're supposed to solve both at the same time.

    But do libertarians, independently, look at the world and decide for themselves what's really going on? Nope, they accept the Republican narrative whole hog and look down their noses at anyone who dares challenge them, as if Republicans would ever, ever lie about such a thing! It's not like they're using this "crisis" as the excuse to gut a bunch of programs they just don't like on a cultural or political level (leaving all their favorite boondoggles intact, of course).

  • ||

    Please don't feed the troll. Want could you possibly say to change his enfeebled mind? What could he possibly say that you haven't already heard? Why help him spread his bad faith pseudo-argumentation?

  • Jersey Patriot||

    I don't see what's objectionable about Johnson's piece. He says the US is not in an immediate fiscal crisis. It isn't; the US is not about to fail a debt auction. An immediate fiscal crisis means the US will have trouble paying its bills tomorrow. It's nowhere near that.

    He's also right that the medium and long-term outlook for the US is bleak. He mentions healthcare costs as one of the reasons, but the problem is actually broader than that: the US leads the world in paying shitloads of money for little return. Healthcare is one aspect of that, but so are education and the military. Hell, throw the stimulus and quantitative easing in there as well.

  • ||

    The US has benefitted from the fact that it is the largest economy and the principal reserve currency. It has therefore been able to avoid the consequences of continual deficit spending longer than other nations with similar debt/GDP ratios.

    When (not if) there is a change in the perception, events will move far faster than the Fed will be able to counter.

    The US is now falling into the pattern of Japan in the 1990s with endless "stimulus" measures that have no effect on either economic growth or employment.

  • ||

    Must. . .stop. . .the. . .madness.

  • Alan Vanneman||

    I think the dude's point, Matt, if you will quit hyperventilating for a moment, is that markets are, you know, efficient, and the fact that people are willing to lend the U.S. oodles of cash at low rates tells us that they don't think the U.S. is going to start inflating its currency any time soon, which tells us that the U.S. won't start inflating its currency, because markets are, as you know, efficient, which means they get it right. That is to say, markets know more than Matt Welch.

    As for the deficit, Congress isn't going to do a damn thing about it as long as they can borrow cheaply. When the deficit starts inflicting visible, tangible economic pain, Congress will do something about it. Until then, nothing. Yeah, Republicans will fuck with high-speed rail and NPR. I have no problem with that.

  • Rich||

    When the deficit starts inflicting visible, tangible economic pain, Congress will do something be unable to do anything about it.

    FTFY

  • robc||

    they don't think the U.S. is going to start inflating its currency any time soon

    Too late.

  • ||

    the question is: Do you believe that the government is straightforward?
    http://www.zerohedge.com/artic.....ex-futures

    I do not know if treasury auctions are or are not on the up and up. But all you need to do is listen to the average politician and than compare to reality.
    We have 4 choices:
    raise taxes
    lower expenditures
    Combination
    Or we don't have any problem and can continue as we are

    thats objective reality. Yet how many politicians have said any of those things straight forwardly?
    In my view, dangerously, we are living in a society where 1 and 1 is 4.

  • ||

    I think it's time to play my fiddle.

  • ||

    the US is not about to fail a debt auction

    Not until the Fed becomes incapable of propping up the bond market anyway.

  • hmm as Obama economists||

    The IMF is like a room full of retards with slide rules.

  • hmm ||

    And I can't remember to change names...

  • Infoteknik||

    Any conclusions that one might like to draw from the seeming ability of the US to sell debt at low rates are thus suspect, as the market is rigged.

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