David Stockman's reluctant and embarrassing admission

I ran into David Stockman at Fox yesterday. Several months ago I bumped into him as well and we got into a conversation about the debt. Stockman was Reagan's budget director until he got fired, probably because he protested too much against the huge deficits that Reagan ran (which created an economic boom). After he left the White House he disappeared for quite a long time, but has since resurfaced as the new "debt Cassandra," warning everyone who will listen that the debt is going to bankrupt the country unless we get it under control, yada, yada, yada.

The last time I met Stockman I asked him what would happen if we didn't get the debt under control? He said interest rates would spike and it would be impossible for us to service our debt. I said that interest rates wouldn't spike, necessarily, so long as the Fed kept them low and even if rates did go up, the U.S. would have no inability to pay the debt service becuase it was simply a matter of the government crediting bank accounts in U.S. dollars, which it does all the time.

He took issue with my assertion that the Fed set the rates.

I asked him about Japan, which has a debt almost three times that of the U.S. yet yields on 10-year Japanese gov't bonds were only 1.0%. (Back in March 10-year U.S. Treasury yields were about 3.6%.) He said that Japan was "different" because it was "internally financed" as opposed to our problem of having external finance. When I countered that the U.S. was also "internally financed" because it's all in dollars, he got annoyed and basically walked out in a huff, shaking his head the whole time as if I was some ignorant fool.

Well, yesterday, Stockman was on Cavuto and he started in with his usual debt rant--unsustainable debt, bankruptcy, etc. But then he said this: "We should abolish the Fed."

Neil Cavuto looked at him and said, "Abolish the Fed? Why?"

He said, "Because the Fed is keeping interest rates artificially low and that is bad."

I couldn't believe my ears. Just a few months earlier this guy was arguing adamantly that the Fed did not control rates and that rates would spike and we wouldn't be able to pay the debt service. Meanwhile, over that short period of time, deficit spending has continued and the U.S. even had its credit rating dowgraded and interest rates had fallen even further. It was obvious that none of the things he had been predicting were coming true.

When he came back to the green room from his segment I said to him, "David, I thought you said in our last discussion tht the Fed didn't control rates and now you just said that it is keeping rates down?"

His face froze for a second and I could see he was trying to collect his thoughts and think of a comeback. Then he just said, "Yeah, but eventually rates are going to spike up. They have to. They can't stay low forever. The Fed will have to raise them to attract capital." (Notice, he says, again, the FED WILL HAVE TO RAISE THEM...)

Unbelievable. These are our policymakers. Clueless, arrogant, people who are so full of themselves and so deep into their club of false beliefs that it is mindboggling. If they weren't so destructive these guys would be truly laughable.

Congressman Paul Ryan should apologize to the American people!

This was posted on Warren Mosler's site. Warren says that Paul Ryan should apologize to the American people for his misleading comments on the debt.

Dear Congressman Ryan, Your response to the President Obama’s State of the Union address included something we’ve all heard a lot of ever since. You warned along the lines that that the US could become the next Greece, and be faced with some kind of a sudden financial crisis, where the world would no longer lend to us, interest rates would skyrocket, and the US, unable to spend, would be down on its knees before the IMF begging for the needed funding. And no one with any kind of national public forum took issue with you, including the President and the Democrats in Congress, who for all appearances quietly agreed and acted accordingly. Well, today, based on the near universal response to the S&P downgrade, everyone now knows, or should know, there is no such thing as the US becoming the next Greece. The overwhelming response to the S&P downgrade by everyone from Buffet to Greenspan, and most every financial and academic economist in the world was along the lines of: The US is the issuer of the dollar. It can print dollars. So it can always make timely payments without limit. THERE IS NO SOLVENCY ISSUE FOR THE US. There is no such thing as the US running out of dollars to spend. There is no such thing as the US being dependent on taxing or borrowing to get dollars to spend. Greece is very different. Greece, Ireland, Italy, and all the euro member nations, corporations, and households can’t print euro, any more than the US states, corporations, and households can print dollars. And so they are all indeed dependent on revenues from somewhere to be able to spend. So, Congressman Ryan, please apologize NOW for being so wrong and so misleading. There is no solvency risk for the US. The Fed is price setter for the interest rates for the US government and the banking system, not the market, just like the European Central Bank sets the interest rates for its banking system and its own debt. Congressman Ryan, your reasons for deficit reduction have vaporized. You see, the risk of overspending is inflation, not solvency. So if you want to argue for deficit reduction, apologize NOW, regroup, and come back with your next round of fear mongering about how the deficit can be inflationary, or something like that, and see how that flies.

Stop listening to all the propaganda about the debt. It's WRONG!

In 2008 the deficit was $450 bln and the national debt was $9 trillion. The dollar index hit a low of 70.68.

This year the deficit is forecast to hit $1.6 trillion and the national debt is $14.5 trillion. The dollar index is at 74.57. THE DOLLAR WENT UP!!!!!!!!!!!

The growth of the debt/deficit had ZERO impact on the dollar. It went UP!
Interest rates on 10 year Treasuries went from 4.0% then, to 2.1% now!

Stop listening to the propaganda about the debt. The facts above PROVE that all the hysteria is WRONG. The growth in the debt is NOT inflationary, it’s NOT debasing the dollar, it’s NOT causing interest rates to skyrocket. All of that IS bulls—t!!!!!