July 17, 2011
That’s what the Washington Post told readers today in a front page article. It quotes Senator Conrad as saying:
“We cannot as a country fail to deal with the debt threat. …. Every serious economic analysis tells us we’ve reached the danger zone. And just kicking the can down the road? That can’t be. We’re better than that. We’ve got to be better than that.”
This is not true. Many economists, for example Nobel Laureate Paul Krugman, have argued that the country is nowhere near its debt limit. They point to the fact that both the United States and other countries have sustained much higher rates of debt to GDP than the United States does now or is projected to in the near future. For much of the 19th century the UK had a debt to GDP ratio of more than 100 percent. Japan currently has a debt to GDP ratio of more than 200 percent yet can still borrow long-term in financial markets at interest rates of less than 1.5 percent.
They also point to the fact that the markets do not seem concerned about the debt situation of the United States. If the financial markets were concerned about the ability of the U.S. government to pay off its debt then they would not be lending the country money for ten years at interest rates close to 3.0 percent.
It seems that Mr. Conrad relies exclusively on economists who could not see the $8 trillion housing bubble, the collapse of which devastated the economy. This was obviously true before the collapse of the bubble. The fact that it is still true even after the collapse of the bubble should have been highlighted by the Post. This demonstrates a serious failure of judgment by a person in an important position of power.
It is also worth noting that the Post article bizarrely confuses financial markets with credit rating agencies, telling readers that
“the markets are demanding it [large-scale debt reduction]. The credit rating agency Standard & Poor’s says Washington must agree to reduce the debt by $4 trillion over 10 years to avert a downgrade.”
Of course the credit rating agencies often have little to do with the market. They rated hundreds of billions of dollars of subprime mortgage-backed securities as investment grade. The value of these bonds subsequently collapsed, leading to the financial collapse in the fall of 2008. They were paid tens of millions of dollars for these investment-grade ratings. Financial markets have also often ignored the credit rating agencies. For example, Japan can still borrow at extremely low interest rates despite the fact that both Standard and Poor and Moody’s downgraded its debt.
The Post should know the difference between the judgment of financial markets and credit rating agencies.
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