Monday, November 30, 2009

Someone should ask Niall Fergusun this question...

Niall Ferguson is a journalist who has been writing for years on why America is doomed because of profligate spending and deficits. He is your classic, out of paradigm Chicken Little type, similar to the likes of Schiff, Rogers, et al.

These guys simply don't understand the monetary system and that's why they keep getting it wrong when it comes to debt and deficits. (Rogers keeps shorting Treasuries, for example. He's been doing it for more than a year and a half as the greatest Treasury bull market of all time plays out, simply because Rogers doesn't understand that the Fed sets rates and wants them low.)

In a recent intereview, Ferguson was asked why he thought that U.S. deficit spending would eventually lead to a collapse of the economy. Essentially, this is what he said:

He started off by questioning the very assumption that there was going to be enough global demand for our debt when all is said and done. This presupposes, of course, that it is the sale of debt that supplies the funds needed for the government to deficit spend, when in fact the opposite is true. (Deficit spending supplies the funds to buy the Treasuries, which are merely interest bearing savings accounts of the U.S. Government.) This is a concept that I've explained many times here in this blog and elsewhere, so I am not going to get into it now.

Getting back to Ferguson, he said that up until now the U.S. was able to spend as much as it wanted because it was in the "lucky position of being able to borrow in its own currency."

This is a comment you often hear from the Debt Doomsday crowd, but one that is truly amazing when you realize that it comes from otherwise educated folks. That's because when you think about it, it really makes no sense at all.

Right off the bat it should make you wonder how, or better yet, why, a nation would have any reason to "borrow" its own currency, a currency that Ferguson and the other know-nothings freely admit can only be issued exclusively by the U.S. government and in any quantity?

Hello??? What am I missing here?

To begin with, why would a nation need to borrow something that it has the monopoly power to issue in any quantity?

Second point: How can our "lenders" (China, Japan, etc) even get their hands on that currency without the U.S. Government providing it to them first place? (Typically through some exchange, like when they give us their output, i.e. "real wealth" and we give them that currency.)

If you understand these two simple points then you're left wondering what exactly it is we are "borrowing" and how does the Chinese having dollars or not having dollars have anything to do with the U.S. Government's continued and unquestioned ability to spend in its own currency?

The answer of course, is, none.


Matt Franko said...

It's like they are saying that it's fortunate that the Saudi's have all of that oil below their feet as without that they would somehow have to borrow all the crude oil they want to sell!


Mike Norman said...

Yes, exactly! Or that Picasso wouldn't have been able to sell his works of art unless he first "borrowed" from collectors the work which he had already sold!

googleheim said...

if I want to sell an idea to someone and I have not explained it to them due to no purchase agreement, then I have not lost my idea nor have sold them anything if they do not buy it.

there is no mortgaging of future going on - and without sustainable growth based on sustaining a deficit spending to maintain the growth, then by not deficit spending we are not supporting the growth that our great grandchildren will need.

Deficit hawking is the same as non-revenue cost cutting - it is unsustainable to growth - it cannot sustain growth nor act as the progenitor to grandfather the grandchildren economics many are worried about.

We've got to inject more heat into the fire. more fuel or no more fire.

Mike Norman said...


You got it!

googleheim said...

finally a couple fingers around the edges.

still feel like i'm running around inside the cover of the WHO's "Who's Next?" album ?

Tim said...

Your remarks on this issue are overly simplistic and show a lack of understanding of capital. Not money. Capital. We could work our way out of this crisis and have 2% unemployment in 3 years. But it wouldn't be by government spending. Government spending reduces the amount of capital available in society for future investment. The reason there is no private investment right now is because of government policy. Yet, you seem to argue they continue destructive economics. I understand the fact that the government can spend all it wants, yet it isn't a net producer of long term capital. Were it, we would simply let government spend at this rate all of the time. The government must spend because it has destroyed our economy and there is no one else left to spend. There is no free lunch. Yet, that is seemingly what you argue. If the government spends ad nauseum, its cost of capital will rise. If its cost of capital rises, then we potentially enter a vicious circle which ends very, very badly. I could go on and on and on but it seems apparent you are stuck at the prima facie issue of step one.

Mike Norman said...


No, sorry. It doesn't work that way. That's the "Loanable Funds Theory," which is inapplicable under the current paradigm of floating FX, non-convertible currencies.

googleheim said...

for timmy :

1. ... "that government spending reduces capital available" :

i = S : investment is a function of Spending, therefore no Spending by government means no investment.

s = i : savings are a function of investment.

currently savings are up because the government has swelled reserves because everyone left the "old" investments - the former market that "was".

Tim's words almost present the opposite of what he is forcing to "mean" ...

2. ... " government must spend because it has destroyed our economy and there is no one else left to spend" ...

It is a believe among deficit terrorists who love Bush but don't see his stimulus spendings themselves, that the government destroyed the government ?

De-regulation is what cause the destruction which is a function of not "least gov governs best" but is a function of speculative wall streeters, fancy mathematicians, and multinational companies which keep their money overseas anyway.

The government must spend now because it does not have any other choice since these CDO swap heads blew out the playing field and there is no dirt left to commence the ball games.

Matt Franko said...


Tim said...

My God, I'm dealing with a bunch of bozos. Given I called all of this while Mike was on Fox telling us how great the world is, I tend to think I have some idea how the world works. And should work.

I'm not sure what the world of floating fx nonconvertible currencies has to do with anything but I actually trade fx, so why don't you explain it to me in detailed terms so that I understand it as opposed to putting up some ridiculous one-liner. As for the final remark by Googleheim, what a clown. You are clueless

Matt Franko said...


Free floating means that the US Dollar is not "pegged" to another currency such as the Chinese peg their curency to the USD, or in the past the Argentine CB used to peg their currency to the USD or today the Saudi's still peg their currency to the USD at a fixed rate. This "free floating" characteristic is the actual reason why you CAN speculate in the FOREX with the USD. The US has moved to these floating exchange rates between the USD and other world currencies by design. Contrary to how the maintream financial media depicts it, it is not a contest to see which country has the higher value currency. Central banks work together to set the exchange values to within what are determined (by mutual agreement) to be acceptable ranges.

Non-convertable means that the USD cannot be redeemed on demand at the US Treasury for a fixed amount of a commodity or another (foreign) currency.

As far as the current situation goes, Mike continues to make the case that recent govt fiscal policy is THE reason that the US economy and related stock market indices are underperforming. Here is a better rundown than I can give on the current situation and remedy from someone else that understands modern money.

If you are going to trade the FOREX I also recommend this paper.
A firm grasp of the true nature of modern money should be an asset to any FOREX trader.


PS Goog makes more sense to me than virtually all Congressmen, Senators, Treasury Dept Officials, and mainstream financial media types put together!

Tim said...

For God's sake I know what a floating currency is. And I know what a fiat currency is. I trade forex. I don't need an eighth grade tutorial on currency. What I want is Mike to refute my original post with something of substance rather than his voodoo one-liner which makes no sense. ie, I don't think he knows what he is talking about and I am calling him on the mat.

Matt Franko said...


this part of your statement above: 'Government spending reduces the amount of capital available in society for future investment. The reason there is no private investment right now is because of government policy.' is what I dont understand.

I seems you are suggesting that the govt competes with the non-govt sector for a fixed amount of "capital", and the govt "crowds out" the non-govt sector. If so why doesnt the non-govt sector access the 17% of unemployed human capital that sits idle right one is stopping them from doing so.

Tim said...

A clueless lot. The only way government does not compete with private capital is if it prints money. The government is not doing that. And while we could all argue the government could print all of the money in the world, were it to do so, the cost of capital would rise and have unintended consequences. Do any of you really understand economics?

The reason why private investment is in the shitter is because government policy over the last thirty years has consistently crowded out more and more private investment. This has been accomplished by destroying the rules of economic vibrancy. But, good luck living in your alternative view of reality.

If it were simply a matter of the government printing more and more money and debasing the currency whenever a crisis hit, the world would never again have an economic crisis. Oh, I'm sorry. That's the policies which got us in this crisis. The same policies this thread advocates to get us out. The same thing Rome did while attempting the same dynamic by "fiating" their money as Mike believes is some wonderful dynamic.

Everyone on here is economically illiterate. One day you will wake up. When the world bites you in the ass.

Matt Franko said...

What they may have done in Rome 1000+ years ago has nothing to do with the here and now. The USD is non-convertable, get over it. Its been almost 40 years.

The govt sector is the monopoly issuer of USD, they ar not issuing enough, and accordingly, excess capacity is the result. It's not economic theory of some sort, it is simple accounting.

Tim said...


What a clownish response. You use the very foundational reason for this crisis to argue better times ahead. What happened in Rome is indeed relevant. Rome started adding base metals to their currency to unhinge or as you remark, make their currency "non-convertible". The reasons between Rome and the U.S. are exactly the same. That is a profligate elitist class cared less about Rome and more about themselves. That very reason is why the U.S. dollar became unhinged under Nixon. The U.S. could not fund it's international profligacy under a grounded currency. ie, A currency of some intrinsic value.

This crisis has been building for 40 years and that you are senselessly unaware of that shows you will be caught with your pants down.

Now that I know beyond a shadow of a doubt that no one on here knows anything, I am off to let you live in your own little bubble until the next crisis hits.

I guess foolishness is as timeless as the profligacy of elitist crooks.

Dsylexic said...

norman thinks that rogers doesnt understand why there is a treasury bull market. heheh. he obviously doesnt look at the youtube on the internets?. sigh. how do you make a living sir,do you sleep well knowing that all you spout is tripe?.

Mike Norman said...

The only clown on here is you, Tim. You'd make a good court jester in the middle ages. You speak like a character out of a Sponge Bob cartoon.

Mike Norman said...

"Dsylexic" good choice of a nickname.

Dsylexic said...

yeah. Trippy Tripe would suit you ,sir.sar-chasm,anyone?