–John Mauldin, debt hawk pushing on a string

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The debt hawks are to economics as the creationists are to biology.

John Mauldin makes a living writing about economics. He posts a blog called “The Big Picture” One of his more recent posts (9/28/10), titled, “Pushing on a string,” contained this observation: “What is needed is fiscal austerity (slowly) before debt spirals out of control. . . “

I entered the following comment to his post:

It’s nice to see that John remains a typical debt-hawk. He never says what “out of control” means, because debt hawks never offer specifics. So let’s speculate:

Does it mean the federal government will be unable to service its debt (the normal meaning for “out of control”)? Nope. Couldn’t be that. As a monetarily sovereign nation since 1971, the U.S. federal government has the unlimited ability to service its debt.

So, does it mean we’ll have inflation? Nope. Since that fateful August 1971 date, there has been no relationship between federal deficits and inflation. Since that time, the cause of inflation has been energy prices.

So, does it mean taxes will be higher or our grandchildren will owe the debt? No, there is no modern (post-1971) relationship between tax rates and inflation or deficits. Our grandchildren actually benefit from federal spending. So what does “out of control” mean. No one knows. I suspect it means something like, “It’s big and I don’t like the word ‘debt.’”

Oh, then there is the “problem” of banks not lending, which is another way of saying, adding to private debt. Does it strike anyone as curious that the pundits want the private sector to borrow more, while these same pundits want the federal government to borrow less? Here is the private sector, where bankruptcies are rampant, and the pundits want more borrowing. And here is the government, which can service a debt of any size, and functionally is incapable of bankruptcy, and the debt hawks want to restrict debt.

And then there is the debt hawk call for less federal spending and more taxes (the only way to get the federal debt down), while being vaguely aware that federal spending is stimulative and taxes hurt the economy.

Oh, you don’t like stimuli because they “don’t work.” Then you will enjoy the story of the man whose roof was on fire. His neighbor showed up with a garden hose and actually was able to reduce the flames, but only somewhat. The neighbor wanted to call the fire department, who would bring out the big hoses, but the man told him to stop, because “The fire still is burning, so obviously, water doesn’t put out fires.” And just as “obviously,” adding money doesn’t cure a recession.

The reason debt hawks continually call for conflicting actions is they begin with a false assumption. The assumption: Federal debt has an adverse effect on the economy. The truth: Federal debt is absolutely necessary for economic growth. Without it, we would have no economy at all.

But try telling facts to a debt hawk.

John has not and will not respond, which is a debt hawk custom. They don’t respond because they have no facts with which to respond. But I’ll give them this: Even with no facts they have managed to convince the world. I’m envious.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity.

Published by Rodger Malcolm Mitchell

MBA Northwestern, business turnaround expert, economist

Published

12 thoughts on “–John Mauldin, debt hawk pushing on a string”

  1. I don’t know why you think I would not respond. Just happened to see this on Google alerts.

    I have been quite clear on what is too much debt. I have done whole e-letters on it. It is debt growth above nominal GDP on a consistent basis, which ends up in a Greece like state. In fact, I will have a book out in January called The Endgame which goes into hundreds of pages of detail about the problems with debt and debt crises.

    Now, I do not want private businesses or people borrowing beyond their own means or banks lending if they do not think there is reason to believe they will be repaid. And there is a limit to how much countires can borrow. To assert that the US can borrow without limit is rather absurd. You write:
    “And here is the government, which can service a debt of any size, and functionally is incapable of bankruptcy, and the debt hawks want to restrict debt.”

    Go read Rogoff and Reinhart. 266 crises in 60 countries over the last few hundred years, from countires that can print thier own money to gold standard currencies. Everything was fine until the last moment. There are more than one ways to default on debt, and one way is to print the money and debase the money supply. Inflation ruins pensioners and savers. If that is your ideal future, then by all means, run up that debt!

    John

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    1. John,

      Some would argue that it isn’t the debt itself that causes the problem, but the issuance of money without accompanying productivity growth. Many problems have historically been caused by issuing debt in a currency that you don’t control – Weimar Germany, Zimbabwe and even Greece were in that boat. The US doesn’t have that problem.

      The US has many things going for it that are likely to keep inflation in check. For the US, the big worry is that real goods that we import become scarce, or other economies (China) spend more of their productivity on domestic consumption instead of exporting it to us. To issue currency that puts people to work productively in this country hardly seems inflationary.

      You can suggest that hyperinflation is just around the corner, but there is little direct evidence to support this claim. Perhaps one day you will be correct, but Henny Penny will probably be correct one day too.

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  2. Andrew, funny you should say that, as it is similar to a post I put up a few minutes ago. I question this, however: ” . . . the issuance of money without accompanying productivity growth.”

    Money is a commodity unto itself. Like all commodities, its value is determined by supply and demand, which in turn, is determined by risk and reward. As you will see from the graph in “John Mauldin responds,” productivity is not part of that formula.

    Rodger Malcolm Mitchell

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  3. Last post. Of course productivity matters. I have three best sellers, almost 5,000 pages of copy in tens years worth of e-letters going into all sorts of issues. you can’t get everything into one quick reply. And I am NOT in the hyperinflation camp. I think we are in for deflation. And for the record, The Big Picture reposts my material. You can read the letter (which is a free weekly) at http://www.2000wave.com .

    John

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      1. Yeah, I am clicking on it and nothing is happening. I tried several different browsers with no luck. I wonder if the code is broken somehow.

        Anyway, could you just post the RSS URL here and I’ll paste it into my reader. Thanks.

        Best,
        tom

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  5. Re. the post: http://www.ritholtz.com/blog/2010/09/pushing-on-a-string/

    Uh oh, John is pulling out the “reputation” card.

    O.K., John, I admit it. You are more famous. But somehow, we have drifted off the subject. You said, “What is needed is fiscal austerity (slowly) before debt spirals out of control. . . “ and you never did explain exactly what “out of control” means.

    You also didn’t explain how the U.S. could end up in a “Greece-like state.” I acknowledge your world-wide fame, but shouldn’t we discuss economics, instead?

    Rodger Malcolm Mitchell

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