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.