Does anyone get more press than Niall Ferguson these days? Mr. Ferguson is out with another fear mongering piece in Newsweek that attempts to turn the whole debt debate into a political debate. But more importantly, he continues to trot out the same misguided misconceptions that he’s been discussing for the last decade.
In the piece, Mr. Ferguson, the respected Harvard professor, compares the USA to Europe. Right off the bat you can see that he’s making a huge error in comparing a currency user to a currency issuer. Had he compared California to Greece then he might have had a point, however, his comparison to the USA shows that his entire argument is going to be misguided. But let’s knock out the misconceptions without belaboring any of the points.
1) First of all, Mr. Ferguson intentionally makes the article very political. In doing so he can attempt to take the attention off of important details while he grabs the attention of over 50% of the audience without even having to prove a point. This is a classic fear mongering maneuver and generally proves that the author has a preconceived bias rather than the intention of generating thoughtful discourse. It’s good for headlines and book sales, but very low for a professor of the stature of Ferguson.
2) He begins by discussing how the government breached the “legal debt ceiling”. Right. This is a self imposed “legal” constraint. It is not an operational constraint. There is no such thing as a sovereign currency issuer running out of the currency that it has monopoly supply of. The debt ceiling is a nonsensical issue to begin with. It has no bearing on anything and has been raised each and every time the USA approaches it. He takes a swipe at “the Deficits Forever club” calling them “intellectually lazy”. Well, the good professor might want to crack open a history book and discover how much of the USA’s existence has been spent in fiscal deficit. I know Mr. Ferguson is from Britain, however, I think he’ll be surprised to find out that all Americans are members of the “deficits forever club”. After all, we’ve been running deficits for nearly the entirety of our 200+ year existence. For a much more complete discussion on the debt ceiling please see here.
3) He says President Obama could have learned more from his trip to Europe when it comes to debt problems. The European monetary system is fundamentally different from the USA’s. Comparing the two is like comparing apples and oranges. I don’t think the USA should be taking economics lessons from the most structurally flawed currency union in the world. If anything, it is the Europeans who need to learn a thing or two about monetary sovereignty from the USA. The Euro is a fundamentally flawed construct. Anyone witnessing this debacle should be able to conclude that something is severely wrong in the EMU. And no, austerity is clearly not working there. Or perhaps Mr. Ferguson would like to forgo his comfortable Harvard teaching position so he can look for work in Greece? Perhaps he can report back to us in 6 months and let us know what he really thinks of austerity after he can’t find a job?
For the more sophisticated investor it’s obvious that the single currency system has an inherent structural flaw in its original design. They either need to disband the union or move towards full unity. The system currently in place is the cause of mass depression and hardship. Single currency systems have always resulted in such hardship and it is why they have never worked without full sovereignty. The Europeans will get there one way or another – either by disbanding or fully unifying.
4) He goes on to compare the USA to Greece. He warns that Greece’s problems were the result of surging deficits and excessive spending. This is all accurate of course, however, Greece is involved in a self constrained currency union with no floating exchange rate. Without monetary sovereignty and floating exchange rates there is no self correcting mechanism at work within Europe. Current account deficit nations end up becoming profligate spenders in attempts to overcome their trade deficits. The results speak for themselves. More importantly, however, there is a real solvency constraint as European nations can quite literally run out of money that they cannot create at will. Therefore, bond markets are rightfully concerned about their ability to pay. Ferguson’s use of bond vigilantes in the USA is therefore 100% off base. But this is nothing new to Ferguson. He’s been making this same inaccurate argument about the USA for almost 10 full years now. In a 2003 working paper he said the following:
"So what will happen? And when? The answers to both these questions depend on how quickly Americans wake up to fiscal reality. Perhaps the hardest thing to figure out is why they haven't done so already. Even financially sophisticated Americans seem not to appreciate the fragility of the country's fiscal position."
He went on to discuss how the bond market would one day awake and yields would surge and catastrophe would strike:
"A widening gap between current revenues and expenditures is usually filled in two ways. The first is by selling more bonds to the public. The second is by printing money. Either response leads to a decline in bond prices and a rise in interest rates "“ the incentive people need to purchase bonds."
Ferguson couldn’t have been more wrong about US bond yields. For over 8 years now yields have continued to decline. And as David Rosenberg showed just yesterday, deficits have very low correlation to yields in the USA. Yields are rightly a function of Fed policy. Ferguson’s entire argument is fundamentally wrong.
5) Ferguson finishes off the piece by saying that the USA should be more like Switzerland. No offense to the Swiss (I love Swiss Miss and always will), but their economy is 1/4th the size of CALIFORNIA’S. More importantly, however, Mr. Ferguson proves that he has no concept of sectoral balances. Switzerland has been running trade surpluses and current account surpluses for the last 10 years. So of course they’re strong. They are one of the few countries who are benefiting from the collapse in the periphery. In many ways, the Swiss are in the same boat as the Germans. And the fact that they are a sovereign issuer of their own currency is one of the primary reasons!
The entire article is a preposterous political rant that no professor on the planet should ever think is fair or accurate. It’s particularly unfair for the young adults who are paying $40,000 a year for an education in fear mongering, political bias and a hefty side serving of misinformation.
The thing about NF is that he got the debt crisis right in Europe. Unfortunately, he doesn’t really understand why he was right, but he was right. So now everyone thinks he’s some sort of genius and he gets to pollute young minds all over the world.
“It's particularly unfair for the young adults who are paying $40,000 a year for an education in fear mongering, political bias and a hefty side serving of misinformation.”
I was thinking that at the start of the article and just waiting for you to say it! And he’s not the only Harvard professor doing that. Greg Mankiw and Larry Summers are both in the same boat.
From the professor – “Perhaps the hardest thing to figure out is why they haven't done so already. Even financially sophisticated Americans seem not to appreciate the fragility of the country's fiscal position.”
Funny that. The media/deficit terrorists want the country to believe its on the fiscal edge, and that any day now America will be broke. So what do people do? Well the majority of people don’t buy a word of it and go on with life as normal. I often hear people say, “Yeah, our government is nearly broke too”, to which I reply, “If that’s really the case, are you not extremely worried about your future?”. Nobody is ever worried. Go figure!
Yeah, hard to feel bad for anyone who is going to Harvard, but still – this is the education they’re providing those kids? I can relate as someone who went to Georgetown and then proceeded to learn 95% of what I know outside of college.
Ferguson isn’t an academic professor any more – he’s a lobbyist plugged into the media using the ‘professor’ title as his ‘appeal to authority’. His selective vision is getting very wearing.
Every time somebody mentions ‘professor at Harvard’ it needs to be countered with ‘right wing media lovey’.
A stark difference between Greece and the USA that Niall doesn’t mention – Greece’s currency is going up! How could that be? All their problems???
Surely that fact alone should alert people to the possibility that Greece and the USA are in fact very different in some way…
Niall is another megalomaniac academic who’s far to steeped in his own thesis to maintain any shred of intellectual integrity. No way in hell he’d admit as much and say, “oh, sorry, all. I was dead wrong in my analysis and take back everything I said.”
What really grates me is that he’s so hopelessly entrenched in hard money economics. How blinded to you have to be?
Wise words from Prof Ferguson.
You yanks would do well to listen before it’s too late for you.
Oh, that’s right, you don’t need to – you’re a currency issuer ‘n stuff….
Jo,
How is that double dip going in the UK? You enjoying the many benefits of austerity? Or are you taking the pain like a man? Are your kids enjoying the pain? They deserve this, right? They deserve to suffer because some of your fellow countrymen decided to jam house prices up, right? Isn’t that how it works. No pain no gain, right?
Prof Ferguson is an export we’d happily send back.
I would agree with most of the arguments presented here and think perhaps Niall Ferguson is not really further helping the argument towards austerity. 1) Making arguments political does not work for me. 2) The debt ceiling is really nonense, but could do damage if spending were constrained by it. 3) Europe and the US are different and its no good comparing them. The UK might be a better comparison. 4) There is no evidence of bond vigilantism having an effect on the US at the moment, but that does not mean the market has not fundamentally changed, or that the dollar will remain as stable as it has done.Its the wrong argument. 5) Switzerland is perhaps in a different situation, but not everything is rosy in the Swiss garden due to currency volatility and exposure to the east. Perhaps there are lessons to be learned but not the ones argued.
The question should be can Austerity work and a lot of work has been done recently on trying to debunk the examples where it did work. Ireland 87, portugal 95, Australia 87, Canada 81, UK 97, Netherland 83, Sweden 94. Here is quite a good article on why these particular examples worked and why it may not be for the reasons you expect. http://gesd.free.fr/jayadev10.pdf What I notice is that many of the countries are European, over the short term GDP struggled but improved over the longer term.Most importantly there was another source of stimulus to the economy, whether through currency value change, interest rates, or taxation changes. So I don’t think it is unreasonable to suggest a combination of stimulus to the real economy, cuts in government spending and containing government debt worked in some of these examples. We also have plenty of examples where stimulus has worked but it might be interesting to look into occasions where stimulus did not stimulate and in fact made things worse. There are many instances where stimulus lead to stagflation or inflation let loose. Again these instances should be somewhat debunked, but we don’t see much of that, again I think there will be a central theme around not implementing the kind of stimulus which increases GDP enough, quickly enough to offset the increase in debt or decline in the currency. Here is an article which sort of skirts around some of what I am thinking. http://faculty.chicagobooth.edu/john.cochrane/research/papers/fiscal2.htm Perhaps the right way to think about it is that there are elements of reason in both arguments and what government spends it money on and taxes is more important than actually increasing or decreasing spending. I just worry that the arguments become too fixed and focussed on both sides.
100% underwrite.
InvestorX
To give this point to Cullen, austerity in the examples above where it has worked has nbeen through general boom times, not during a balance sheet recession. I also doubt austerity will work for the PIIGS.
We have a very rare type of recession atm (often called balance sheet recession, see Richard Koo e.g.), and austerity is deadly here. It’s THE great threat for the whole system. The system can’t handle ongoing deflation, which is going to happen when the private sector HAS TO deleverage (remember that debt retirement destroys “money” shrinking the money supply) and the government sector doesn’t provide enough financial assets through deficits to offset this force. Simple math. The terrible thing about ongoing deflation is its contagion effect resulting in more debt deleveraging / defaults / hoarding / deflation -> vicious circle. No QE can help here, because QE is all about private releveraging, as is every monetary policy. Playing around with fiscal austerity for political reasons is simply irresponsible. Too much on stake here.
Thank You so very very much for this simple explanation.
God knows I love this site, for it keeps me on the straight and narrow and at my age I tend to forget the details and have to be continually reminded.
God and the devil are in the details and people tend to over generalize.
Brick…thanks for the first link.
“The boom not the slump is the right time for austerity at the Treasury” Keynes
And there lies the problem and why we are trillions in debt with no end in sight. Short of a complete collapse of the system we do not have the leadership to implement austerity during the booms. In fact we have always done the opposite and extrapolated the jump in revenues for the foreseeable future and spent and promised accordingly. California is the classic example.
California, as is Greece, are currency USERS. They must manage their revenues and debt to fund their spending. They can go bankrupt.
That implication does not hold for the US Government who is a monopoly ISSUER of its currency. This provides the US Government with the policy capability of managing economic growth while at the mercy of the accounting identity:
Government Net Spending MUST EQUAL Net Savings of Private Sector + Net Savings of Foreigners (inverse of the trade deficit).
Growth or Boom times STILL may require deficit spending to counter the Net Savings of the Non-Government side of the accounting identity. During the boom years of the late 1990's the US government ran a surplus. A surplus that accumulated on the backs of the Private Sector which was piling on debt"¦ You can't escape the accounting identity no mater what currency regime you have.
“Growth or Boom times STILL may require deficit spending to counter the Net Savings of the Non-Government side of the accounting identity. During the boom years of the late 1990's the US government ran a surplus. A surplus that accumulated on the backs of the Private Sector which was piling on debt"¦ You can't escape the accounting identity no mater what currency regime you have.”
But herein lies the problem in my humble opinion. Rather than taking this as a signal that, GASP, the US economy was losing its stronghold as the most productive in the world (mind you it still is, but just losing its stronghold) and thus unable to come up with a sufficient current account surplus to offset the need for some austerity, we instead decided that the growth at any cost was more important. Even if that growth was on the back of profligate policy.
I think of it like this. Say I have a mild heart attack because my arteries are clogged. Sure I take some blood thinners and get some rest (easy policy) to offset the acute impact of the heart attack, but once I’m in decent enough shape, what I really need to do is start exercising (real economy improvements) so that my ticker can get strong again to handle a certain amount of stress and workload (current account surplus). If instead I just look at how effective the blood thinners and rest were for alleviating the heart attack, my subsequent behavior will reflect a distorted view and ultimately lead me down an unsustainable path of more and more blood thinners and less and less activity (precisely the opposite of what I really need).
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