The British Prime Minister is one of the Stupidest People Alive

[cthulu2016]

29. Probably disorganized, but i'll try

1. For a nation offering zero fear of default (like the UK and US)
I would say their chance of default is a lot higher than zero.

The literal default risk in both cases is effectively zero because both have sovereign currencies. So the question becomes the devaluation risk.

But in general, whatever the real likelihood of a US or UK bond holder not getting paid back is priced at close to zero. Both nations have 10-years paying under 2%.

Most of all, though, I was just trying to efficiently distance the US and UK (in my explanation) from Greece or Italy which do have substantial risk premiums that change day-to-day. (But even then largely because they have no control over the currency their debt is denominated in.)

However close to zero, the risk premium in our treasuries is the lowest such premium in the world.


2. Deficit spending is not synonymous with having no intention of paying off your bonds.
In some cases it is. Holders of Greek bonds didn't fare that well.

Greek debt is denominated in Euros. Greece cannot control the Euro supply. So Greece really can be forced into default. But the problem there isn't deficit spending per se. It is the lack of options.

We have huge deficits. Japan has ginormous deficits. We both have very cheap credit. There is no basis to think that UK austerity has reduced interest rates other than by reducing growth expectations.



3. US lowest bond yields with highest deficits
I don't think we can assume this is sustainable. Look at yields on Italian (5.5%), Spanish (6.35%) and Portugese (13%) bonds.

This is sustainable in the US until there is a robust, sustainable recovery. At that point it becomes unsustainable. Deficit spending isn't a tool for all environments. It is essential in a down economy and irresponsible in an up economy.

The European yields you cite have immense risk built into them, and they should. Those nations do not control the currency their debt is denominated in. Default is always a possibility because they cannot, as a last resort, print money to pay their debts. (That is a substantial reduction of risk because it means that if worst comes to worst you still won't end up with zero.

Meanwhile Japan has a worse debt picture than, say, France but doesn't have high rates because Japan will never default. At worst it will give you devalued Yen.

And the European risk is circular. If a nation's debt picture means they will be thrown out of the Euro then their ability to come up with x number of Euros is even more in doubt, and so on.

If Cameron was the head of France his comments would be bad policy, but perhaps not totally delusional.



Bottom Line: The claim that austerity increases GDP is of the same school as the Reaganomics claim that cutting taxes increases revenue. It is counter intuitive for a reason.

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right after typing this, I read this Paul Krugman post from on online appearance at FDL, and thought it germane to throw in:


For those not clued in, all of the debt crisis countries right now are either countries that gave up their own currencies for the euro, or borrowed heavily in someone else’s currency (Hungary). Countries that issue their own currency and borrow in it, like us, the British, and the Japanese are able to borrow at very low rates even when, like Japan, they have high debt levels.

So can they (and we) ever have a debt crisis? I think so, but it takes much higher levels of debt than even the Japanese have. People have to believe that there’s no way they can service the debt without printing lots of money, even once the economy has recovered.

The closest parallel I’ve been able to come up with (too deep in the weeds, but I can’t help myself) is France after World War I, which had its own currency but a basically impossible level of debt. Even so, the consequences weren’t catastrophic: a sharp drop in the franc, a brief bout of inflation that reduced the real value of the debt, and a return to stability.

The important point for now is that America is nothing, nothing like Greece — that is, unless the austerians push us into a full-on depression out of misplaced fear that we’re going to turn into Greece …

http://fdlbooksalon.com/2012/05/19/fdl-book-salon-welcomes-paul-krugman-end-this-depression-now/#comment-2219961