Video: Ferguson, Rattner, Murray, etc. on What's Happened to the American Dream?

Video: Jeffrey Sachs Full LSE Talk on The Price of Civilization

Reinhart and Rogoff on Why Heavily Indebted Economies Can't Grow

Coinciding with Moody's placing the U.S. debt rating on negative review, Carmen Reinhart and Ken Rogofff remind us that country's will high debt levels often struggle to grow (attention Paul Krugman, they're talking to you!):

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown. Countries such as the U.S., Japan and the U.K. aren’t like Greece, nor does the market treat them as such. 

Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings -- why not take advantage of the cheap money? 

Although we agree that governments must exercise caution in gradually reducing crisis-response spending, we think it would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an “all clear” signal for a further explosion of debt. 

Several studies of financial crises show that interest rates seldom indicate problems long in advance. In fact, we should probably be particularly concerned today because a growing share of advanced country debt is held by official creditors whose current willingness to forego short-term returns doesn’t guarantee there will be a captive audience for debt in perpetuity. 

Those who would point to low servicing costs should remember that market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly. Even though politicians everywhere like to argue that their country will expand its way out of debt, our historical research suggests that growth alone is rarely enough to achieve that with the debt levels we are experiencing today. 

The full Reinhart and Rogoff article can be found here.

Common Ground in Krugman vs. Ferguson

Paul Krugman & Niall Ferguson

Hard as it may seem to believe in today's world, there was a time when not all bankers were reviled.

Equally shocking, perhaps, is that prior to the 1980s the U.S. financial system really didn't experience a major financial crisis for the previous half century. This also was an era of significant economic progress for America as a whole.

For several months now Professors Paul Krugman and Niall Ferguson have been squaring off on camera and in print over whether the U.S. needs a second government stimulus to kickstart the economy. You can check out videos of their their respective arguments on CNN here and here.

While there is a large gap on where they stand in the fiscal debate, there is a topic where they appear to share common ground, and that is the need to fix banking.

Thoughts on Krugman's "Myths of Austerity"

An interesting and lively discussion is taking place over at zerohedge.com in response to Professor Paul Krugman's most recent article titled "Myths of Austerity".

I highly recommend perusing the comments that follow Leo Kolivakis's response to both Krugman and Niall Ferguson's alternative view expressed in a video interview on CNN (Krugman also is interviewed on the same program).

Some of the opinions I agree with:

1. Massive government stimulus spending is inefficient in terms of the economic bang for the buck.
2. I would prefer if Krugman spent more time discussing the 'quality' of government stimulus spending vs. always focussing on the 'quantity'.
3. Government investment and support in new technology development (e.g., sustainable energy) and public works (e.g., street lamps) can add economic value.
4. Japan is not necessarily in as bad of shape as the U.S. because, unlike the U.S., it is a surplus country (it produces more than it consumes) and its astronomical debt level (over 2x larger than the U.S.'s Debt/GDP ratio) is owed almost entirely to itself.
5. Most bond investors aren't interested in playing the role of 'vigilante' -- they simply want to earn an appropriate rate of return on their capital and see their principal returned.
6. While in the near-term it may be true that "the big, bad bond vigilantes are simply no match for the Federal Reserve and they know it. Bernanke can squash them like a bug". However, over a longer-term horizon there is not a central bank on earth -- not even the mighty Federal Reserve -- that can win if confidence in that country's scrip is lost.
7. Always framing the economic conversation around 'growth' or 'inflation' distracts from the very worthwhile economic goals of 'stability' and 'sustainability'.
8. "When we are unable to borrow money to buy new crap we will put more effort into maintenance of what we have" -Paul E. Math
9. It is likely that the U.S., unfortunately, will not make the necessary political decisions and take action until another crisis hits due to the short-term outlook and a lack of public pressure and political will.

And if you haven't already read it The Zero Hedge Conflicts/"Full Disclosure" Policy is pretty entertaining.

Alan Greenspan Explains Why Investors are Running to Gold

As Congress considers approximately $200 billion in new stimulus, Alan Greenspan sounds the alarm that America spending beyond its means cannot continue indefinitely, and that there are severe consequences if this continues much longer.

Meanwhile gold is currently trading at an all-time high of $1,262/oz.

Tea Party success, M3 shrinking, whiffs of deflation equal a chink in Gold's armor?

In the time that has passed since Tea Party candidate Rand Paul & Co.'s wakeup call victories I have been keeping an eye and ear open for perceptible changes in the political discourse.

Fresh out of the U.S.-China Strategic and Economic Dialogue earlier this week, Secretary of State Hillary Clinton today spoke about managing the U.S. debt problem as key to the country's ability to project power and influence abroad. Now, it would be surprising if former candidate Clinton did not opine on just about any topic under the sun. But it is somewhat unusual for a Secretary of State to weigh in on a U.S. debt problem.

The European debt crisis cast a large shadow over the annual Chimerica talks. While no official announcement was ever made China's growing unease over the European sovereign debt crisis and the possible implications contagion poses for China's massive investment in U.S. treasuries was a hot topic.

One potential outcome of the Tea Party's results is the effect it could have on further government largesse. Mid-term elections are just around the corner. Vulnerable incumbents must be thinking twice about casting even more votes that can be criticized for putting the federal government on the path to bankruptcy.

But is it too late for incumbents to change their ways? This evening may have provided a hint as Congress was unable to pass a $200 billion tax and unemployment benefits extension. Benefits for hundreds of thousands of Americans will now expire on June 2. This is especially surprising given that very pro-unemployed Democrats control both houses of Congress.

Should these political trends combined with inflation rising at the slowest pace since the 1960s and the U.S. money supply declining at the fastest pace since the 1930s be giving gold investors, like myself, reason for concern? Is the current case for gold, contrary to what "all-in" billionaire gold investor Thomas Kaplan woud have us believe, not bulletproof?