And those four horsemen you see riding this way, they’re just out for an afternoon canter. Keep in mind these soothing assurances come from the same Nobel prize winner who, contra his ex post facto self-congratulatory posturing, didn’t see the 2008 financial crisis coming:
Once upon a time, walking around shouting “The end is nigh” got you labeled a kook, someone not to be taken seriously. These days, however, all the best people go around warning of looming disaster. In fact, you more or less have to subscribe to fantasies of fiscal apocalypse to be considered respectable.
And I do mean fantasies. Washington has spent the past three-plus years in terror of a debt crisis that keeps not happening, and, in fact, can’t happen to a country like the United States, which has its own currency and borrows in that currency. Yet the scaremongers can’t bring themselves to let go….
Look at Japan, a country that, like America, has its own currency and borrows in that currency, and has much higher debt relative to G.D.P. than we do. Since taking office, Prime Minister Shinzo Abe has, in effect, engineered exactly the kind of loss of confidence the debt worriers fear — that is, he has persuaded investors that deflation is over and inflation lies ahead, which reduces the attractiveness of Japanese bonds. And the effects on the Japanese economy have been entirely positive! Interest rates are still low, because people expect the Bank of Japan (the equivalent of our Federal Reserve) to keep them low; the yen has fallen, which is a good thing, because it make Japanese exports more competitive. And Japanese economic growth has actually accelerated.
Why, then, should we fear a debt apocalypse here? Surely, you may think, someone in the debt-apocalypse community has offered a clear explanation. But nobody has.
So the next time you see some serious-looking man in a suit declaring that we’re teetering on the precipice of fiscal doom, don’t be afraid. He and his friends have been wrong about everything so far, and they literally have no idea what they’re talking about.
First, numerous clear explanations have been offered. It is well-known that Paul Krugman does literally no reading of economics outside his Neo-Keynesian paradigm, as evidenced by his disastrous attempt to criticize Austrian economic theory I addressed in RGD. His grasp on it wasn’t quite as bad as the guy who didn’t understand why such a small country’s economy was so important, but it wasn’t much better.
Second, if there isn’t a potential debt apocalypse on the horizon, then how does Mr. Krugman explain the 5-year anomaly in a 65-year period shown to the left? I’m not going to bother producing a new graph, because the picture looks exactly the same from 1948 to 2013.
Total Credit (Z1) rose at a very steady rate from 1948 to 2008. Like clockwork, the 60-year quarterly growth rate averaged around 2.3 percent per quarter. In the 22 quarters since Q1 2008, the average quarterly Z1 growth rate has been 0.6 percent, leading to a current credit demand gap of $26 trillion with Zn, which is where Z1 would be now if it had simply continued to grow at its normal 60-year rate over the last five years.
And that $26 trillion gap is despite the Federal sector increasing its outstanding debt from $5.1 trillion to $11.9 trillion during those 22 quarters. The Federal sector now accounts for 20.7 percent of all outstanding debt, more than double its percentage in 2008. Without the orgy of Federal borrowing and spending, (or in other words, if outstanding Federal debt was still only 10.24 percent of Z1) we would still be in credit deflation rather than the ongoing state of credit disinflation.
So what we are seeing is the gradual socialization of the credit markets. At this rate, if the Federal sector continues to double its share of Z1 every 16 quarters, 100 percent of the outstanding debt in the entire economy will be owed by the Federal government in the year 2023. This may not matter from the Neo-Keynesian perspective, where debt does not enter into the equations, and all spending counts the same and is equally efficient no matter the source or the recipient. But for those who understand the Austrian concept of malinvestment or are cognizant of the history of fully socialized economies, it should be troubling news indeed.
We are already in a state of debt deflation in the private economy. In Q4 2007, the private sector’s share of Z1 was $42.7 trillion. In Q2 2013, that share was $42.6 trillion. (NB: this does not count the large quantity of bad debt assets that have not yet been booked, which I estimate to be around 40 percent based on reported FDIC losses.) That is evidence that there has been no real growth in the economy despite the GDP numbers and the massive government attempts to kickstart it. One cannot push on a string, and as Ben Bernanke belatedly discovered, one cannot print private sector borrowers either.
Krugman is like a man standing in the rain on the banks of a flooding river, ignoring the frantic efforts of thousands of men piling sandbags higher and higher, calmly assuring everyone that no one has to worry about getting their feet wet. I have very little doubt that this is a column Krugman is going to regret having written in the future and very much look forward to reading his attempts to disavow it or otherwise explain it away.