So why does all this matter? For one thing, it’s journalism—accuracy always matters. And casually asserting that a government is “broke” when it isn’t can’t do much to improve the economic literacy of readers.
For another, as the Bloomberg story makes clear, there is a political motivation behind the “we’re broke” rhetoric, which is to force cutbacks in government spending. To bring this back around to where we started, one reason the state budget outlook is so grim is that federal aid provided under the stimulus bill has now been cut off, even as the economy hasn’t fully recovered. Because the federal government isn’t broke, it could, as a matter of economics, continue to provide that aid to the states. Federal policy-makers, though, are choosing not to do that.
That may be the correct choice; it’s certainly a bipartisan one. But when journalists write, incorrectly, that the federal government is “broke,” they elide that choice, and in the process shield policy-makers from accountability for its consequences. We can do better than that.
I guess “technically” you are right, the US is not “broke” and we will always have the ability to pay our dollar denominated debt off so long as we have paper for the presses, but do you really think this is an acceptable alternative? Inflating our way out of our obligations would be have the same practical effect as defaulting on them. Prices of any good priced in dollars would skyrocket (hey, aren’t we already seeing that?), the real value of assets priced in dollars would plummet, and the credit of the US would evaporate. Pimco’s Bill Gross recently stated that our finances are in worse shape that Greece’s. To this effect, and something that would have been rather relevant to this article considering you quoted the good folks from Pimco, Pimco has dumped of its U.S. government-related debt holdings recently. China too has sharply decreasing its ownership of short-term securities from $210.4 billion in May 2009 to $5.69 billion in March 2011.
Lots of people thought buying Greek debt was an acceptable risk all the way to the point when they suddenly didn’t.
And you are certainly right that there is a “partisan” angle to this debate. The public is clamoring for deficit reduction and liberals known damn well that with a Republican house this won’t be done on the backs of tax payers it will be done primarily on the backs of tax recipients. So we have articles like this that go through great leaps to downplay the risks of continuing to run trillion dollar deficits because the sooner congress acts on the deficit the sooner the gravy trains end for their constituents.
#1 Posted by Mike H, CJR on Mon 13 Jun 2011 at 05:40 PM
The first definition from Google:
broke/brōk/
Adjective: Having completely run out of money
The use of the word "broke" to describe our national fiscal condition is entirely appropriate. The country is surely broke. We don't have anymore money - indeed the only reason that Congress needs to raise the debt limit is because we have (or will in a few days) completely run out of money.
All the liberal semantics games in the world won't change the reality -- We are broke. Cherry picking dictionary definitions won't alter the financial truth.
#2 Posted by padikiller, CJR on Wed 15 Jun 2011 at 09:47 AM
Funny how a broke country is able to afford all them tax cuts, oil subsidizes, and red state pork.
#3 Posted by Thimbles, CJR on Wed 15 Jun 2011 at 07:05 PM
@Mike H,
Without debating all the particulars, you raise a fair point with Greece -- the economic case for a debt freak-out is that markets sometimes do change their minds quickly. (And fwiw while Greece hasn't technically defaulted yet, I wouldn't object to anyone calling it "broke.") But that's an argument about what could happen, not a statement of what has happened.
And thanks for acknowledging the political salience of the terminology, and the way it shapes what are seen to be the political alternatives. The issue is not that there aren't any risks associated with debt -- it's that, as I wrote, the problem with casually employing this language is that it obscures the debate.
@padikiller,
Fine, let's work with that definition -- the federal government has not "completely run out of money," and it's not going to. As Mike H notes, the federal government prints money. And despite the events he flags, the government continues to be able to borrow money at favorable rates too.
As for the debt ceiling, that is a political limitation, not an economic one. Which, again, was the point.
#4 Posted by Greg Marx, CJR on Thu 16 Jun 2011 at 02:24 PM
Greg wrote: As Mike H notes, the federal government prints money. And despite the events he flags, the government continues to be able to borrow money at favorable rates too.
padikiller responds: Well, hell, Greg.. I've got a copier and some paper, so I could print some money too! And there's a payday loan store in town, so I guess I'll never run out of money, by your stilted, silly definition.
Neither will anyone else.
All this gnashing of teeth in some sort of commie protest over the purported "definition" of a commonly used colloquialism is nothing but juvenile whining.
We are out of money. The only reason... Again.. I repeat... The ONLY reason the debt ceiling needs to be raised is because we are out of money.
Having a bag of crack and having the ability to score a twenty rock on credit are NOT the same things. Having the ability to borrow money from others is NOT the same thing as having money yourself. PERIOD.
That's just the reality.
#5 Posted by padikiller, CJR on Thu 16 Jun 2011 at 02:43 PM
Greg, thanks for the response. To your point that the government is still able to borrow at low interest rates .. this is true, until the moment in time when its not, and every day we continue to run trillion dollar plus deficits that moment draws closer. Correct me if I am mistaken, You seem to believe that the rise in rates on Treasury securities will be long and slow, a point here and a point there. To my “moment when its not” point, I believe that since the worlds finances are in such shambles, investors have nowhere else to go, or they don’t see any viable alternatives, Treasury securities look safe, until the market has a Eureka moment spurred by a new under the radar monetary safe haven or by some massive shock. I believe its called a Black Swan, a seemingly innocuous event that begins a domino effect delivering a coup de gras to an already sick patient. When that moment comes, Treasury securities will become radioactive at their low rates and increasing the yield will not only make that debt more expensive to fiancé but it will make all previous debt that matures extraordinarily expensive to refinance, even if we can cajole investors into buying them at all.
This won’t happen gradually, it will happen all at once. Just like the collapse of Lehman Brothers or AIG or the European financial crisis no one will see it coming but in retrospect it will look obvious to all.
#6 Posted by Mike H, CJR on Thu 16 Jun 2011 at 04:01 PM
And just on a side note, since we are talking about debt here, although I see his name cited here with a regular degree of frequency, I hope the next time you mention Dean ‘lets default our way to prosperity’ Baker its to tear an argument of his to pieces.
#7 Posted by Mike H, CJR on Thu 16 Jun 2011 at 04:07 PM
First, the situation with Greece is that they have no monetary options to use in response to their economic conditions, and so they are getting killed because bank rates for the Euro are good for Germany and France, but not for Greece.
http://www.frbsf.org/publications/economics/letter/2011/el2011-18.html
The only option left Greece in the absence of monetary policy adjustment is a depressed economy until a new equilibrium is established. Banks aren't going to lend to a country undergoing depressed demand and being on the Euro means you gotta borrow from private banks.
This is different from America.
Now, on the subject of Dean Baker, he was one of the ones screaming about the Bush tax cuts and how stupid it was to renew them without guaranteeing a raise on the debt limit, but right now you have a-hole republicans taking hostages to achieve their policy goals. "If you don't renew the Bush Tax cuts, the unemployed get it! If you don't cut medicare and medicaid, the faith in the credit of the United States gets it, etc..."
http://my.firedoglake.com/deanbaker/2010/12/20/saving-social-security-stopping-obamas-next-bad-deal/
The line on hostage taking should have been drawn long ago, but if the republicans continue to attack entitlements while the economy is depressed, then you have to draw the line now. Failure to raise the debt isn't something ANYONE wants, but if the republicans want to attach ever increasing conditions to the release of their hostage, we have to call their bluff.
Iceland and Argentina called the bluff of creditors when they ran into trouble and they have recovered. It wasn't easy, but it was better to start fresh from a lower base than to start from a weighed down, debt saturated, medium one. Dean is not advocating a "default our way to prosperity" path, he's saying if the choice is letting the republicans control policy through hostage taking or standing by the pledges made to american entitlements, you should prioritize the pledges. If the republicans really want to push the country off a cliff, it won't be fun, but the drop will be shorter than you think.
But let's remember who is doing the pushing in this case. Democrats NEVER played this much politics over the debt limit while soldiers were being shot at in the battlefield during Bush.
#8 Posted by Thimbles, CJR on Thu 16 Jun 2011 at 08:12 PM
@Mike H,
Yes, the situation I’m envisioning involves a controlled rise in Treasury rates, when they do start to rise. I should probably leave detailed bond-market discussion to the Audit crew, but what I’ve read leads me to believe that’s the likely scenario.
Relatedly, the terrific econ blogger Karl Smith (who’s right-of-center, in a Will Wilkinson-y way) had a great post, riffing off of Felix Salmon, back in April when S&P downgraded its outlook for U.S. debt. The point was that credit risk can only be understood in relation to other credit. To extend that to your Black Swan scenario, a sudden, uncontrolled rise in rates would mean the bond market’s decided not just that U.S. debt is much riskier than it used to be, but that it’s suddenly much riskier than all the other things investors could do with their money. Because, as Thimbles points out, there are important differences between the U.S. and Greece, I don’t think that’s likely.
Now, maybe you disagree because you think investors will find this other under-the-radar safe haven. Or maybe you think the simple fact of escalating U.S. debt will bring about what Smith calls another “state of nature,” in which haggling over bond ratings is kind of beside the point. I wouldn’t criticize an article that compared the evidence for these arguments against the view I outlined above. In fact, I’d be interested to read it.
But that’s not what this Politico piece was. It was an article on state budgets that, in the course of setting the context in its lede, made a claim about the federal budget that, as I wrote, “can’t do much to improve the economic literacy of readers.” And based on some of the other comments in this thread, I’m sticking by that.
#9 Posted by Greg Marx, CJR on Fri 17 Jun 2011 at 06:36 AM
I just had to laugh at this:
Democrats NEVER played this much politics over the debt limit while soldiers were being shot at in the battlefield during Bush.
The Senate narrowly approved raising the limit along partisan lines in 2006, 52-48, with all Democrats voting no.
Greg, Thank you again for the reply. I would agree that there are fundamental differences between the US and Greece, mainly that Greece cannot print money to pay off its debts like we can, but I don’t think that particular difference is a real issue here. The difference between an outright default and printing money to pay off debt is in style not substance because at the end of the day the outcome is exactly the same: rampant devaluation and a complete erosion of confidence of the borrower. I think that the fundamental difference is US Treasury securities are still considered too big to fail. As bad as a Greek default would be, it would be two orders of magnitude less severe than a US default.
As for safe havens and alternatives to Treasury securities, Pimco and the Chinese are out shopping.
#10 Posted by Mike H, CJR on Fri 17 Jun 2011 at 10:27 AM
Once you catch Thimbles in one of his lies, the thread will soon degenerate into one of his trademark name-calling fests...
"Retard".. "Idiot".. "Moron"..
Still, it was a nice catch.
#11 Posted by padikiller, CJR on Fri 17 Jun 2011 at 10:51 AM
"Once you catch Thimbles in one of his lies, the thread will soon degenerate into one of his trademark name-calling fests...
"Retard".. "Idiot".. "Moron".."
Paddy, I save those labels for you. You're special.
And to Mike, funny I don't see any hostages. I don't see any rapidly escalating conditions that the democrats insist must be met before they pass the limit. I don't see any filibusters. I don't see an end to the war in Afghanistan or Iraq. When it was an empty political gesture, sure the democrats "stood strong" and voted furiously NO. But when their votes mattered in the very next year after the republicans lost some seats?
http://senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=110&session=1&vote=00354
Looks a little different, doesn't it.
I didn't say the democrats didn't play any politics. I clearly said they didn't play politics like the republicans are doing now. The republicans are demanding spending cuts in the middle of a depressed economy right after a bad jobs report came out and not long after the "bipartisan effort" to extend tax cuts for the rich. If the democrats really had the potential to cut off the debt limit and threatened to do so, the Bush administration would have demagogued the hell out of the poor soldiers; fighting without bullets in their guns because the democrats cut off their funding. You know it.
But now it's okay to threaten war funding for the sake of getting one, no two, no two point four, no three trillion dollars worth of spending cuts so that you can line up another tax cut.
IOKIYAR.
#12 Posted by Thimbles, CJR on Fri 17 Jun 2011 at 12:05 PM
It's OK to play politics with the debt limit...
As long as you're a Democrat and as long as you do in the way Thimbles likes..
#13 Posted by padikiller, CJR on Fri 17 Jun 2011 at 01:38 PM
Which label should I use? They're all so appropriate.
#14 Posted by Thimbles, CJR on Fri 17 Jun 2011 at 07:57 PM
You guys notice something interesting in the 2007 vote that Thimbles posted as a dodge to cover his nonsensical claim that the Democrats "never" played politics with the debt limit in wartime?
Take a look at the "Not Voting" section...
Clinton, Obama, and Biden all joined McCain in abstaining from the vote raising the debt ceiling in 2007.
Yeah, Thimbles... No Democrats would ever play politics with the debt limit, would they?
This statement is almost as kooky as Thimbles' suggestion that journalists be held to different standards based on their race.
#15 Posted by padikiller, CJR on Sat 18 Jun 2011 at 07:56 PM