We Speak on BNN About the S&P Negative Watch for US Debt

I had hesitated to post this video, since I wasn’t too happy about it. Just before the segment was about to start, I got a cross feed on the audio, which meant I was listening to another show! I had to open the door to my itty bitty booth and yell to the production guys to fix it (I was already tethered so I couldn’t really go anywhere). This happened twice. The remote video was also on a big delay, so I couldn’t watch it to see my hosts.

I think that got me sufficiently adrenalined up that I got a bit stroopy and also invoking ideas (like gold standard versus fiat currency constraints) without explaining them enough.

Oh well. One reader thought it was OK and chided me for not linking to it. Hope you like it.

Screen shot 2011-04-22 at 11.54.10 PM

You can watch the segment here.

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  1. David Lewis

    OMG — thanks — this was brilliant! Should be required viewing for every American politician, Obama included — no, Obama first!

    IOW, the Repubs are determined to drive us into the very ditch that we have avoided and would continue to avoid if we’d only go on stimulating the economy with *more* spending rather than depress it with less spending.

    Funny thing… the smartest among the Repubs know it — but they are happy to drive us into the ditch just so Obama is not reelected. They are the true terrorists on the scene today!

  2. Tom Hickey

    Bravo. Thanks for sharing. I didn’t see any glitches.

    Send it to Congress for mandatory viewing.

  3. Sheila

    While I agree that the S&P downgrade threat (aka an attempt to prove that the S&P remains relevant) is functionally a nonevent, the problem I have with this interview is the claim that inflation is not currently an issue due to slack in the labor market and reduced economic output. Anyone in this country (who doesn’t work for the fed) who has to purchase goods, eat, or drive will support the fact that inflation is here and gaining ground with every passing day. As inflation is by definition covert default, your entire argument is just semantics.

    1. Yves Smith Post author

      Remember the spring and summer of 2008, when we had gas go briefly up to over $4.00 a barrel and lots of agricultural products inflation too? It proved to be a bubble. The deflationary undertow was stronger. This is a rerun. The Saudis CUT oil production because they said there is a lot of slack. 3/4 of the reported increase in inflation is food and gas. That admittedly does hit people with tight budgets very hard.

      Even the inflation stats with food and agricultural products included don’t show much inflation. Last 12 month unadjusted it was 2.7%.

      1. Anonymous Jones

        But Yves, you just don’t understand. The actual facts are not relevant (the stats are probably just juked anyway and hence what you’re claiming isn’t really “factual”). These people just *know* there is inflation. Of course, well, I have to admit they haven’t done their own studies, and yes, they have no proof that the stats are juked, and yes, well, their theory about the whole matter has been thoroughly discredited again and again, but seriously, they’re right and you’re wrong, and I’m sure you know that already; so stop trying to destroy the economy.

    1. Skippy


      Your present Government is the H.R. interface, of your multinational masters. If need be, this feature can be removed, and direct interface via state, federal and private security operatives implemented…see rest of the world in conflict.

      Skippy…bring popcorn, they will microwave it for you and you.

  4. rjs

    yves, you didnt seem a bit stroopy to me; you explained a lot of what needs to be explained over and over again, and it’s important it be re-iterated…it takes most people several views, written and audio, for the ideas to sink in…

  5. Philip Pilkington

    I thought you did pretty well. Remember, when you’re talking about this sort of thing you can’t just spew out facts and examples — this is strongly theoretical.

    When you make certain points people will necessarily get confused. It would be like traveling back to the 13th century and trying to discuss navigation with an expert — you have to assume that he has the same worldview as you (i.e. that he thinks the world is round and rotates around the sun) but in fact he has a completely different (and incorrect) conception of the world (i.e. that it’s flat and is the center of the universe).

    What do you do in this situation? Do you argue within his ‘paradigm’. You could. You could, as you’ve done in the above try to squeeze your overarching point through his own paradigm (the way you used Rogoff’s nonsense argument). But this will always necessarily lead you down a path of qualifications and interjections — as it did with you here.

    As I said, I think you did well. I don’t think you’ll be able to do much better until we have our very own Copernican revolution.

    1. DownSouth

      That’s what I was thinking. You’ve got two hurdles to overcome, which were the same that the Copernicans confronted:

      1) One of the reasons the Ptolemaic paradigm was so difficult to overcome is because of the everyday experience of everyday people. For thousands of years people could see the sun rise in the east and set in the west. Likewise, what everyday people experience is their household budget, which operates more like that of California or Greece than the United States. You’re asking people to accept something that is not consistent with their everyday observations and experiences.

      2) The Ptolemaic paradigm underpinned the social, moral, religious and political order of the day, which had become ubiquitously corrupt. Therefore the status quo was going to defend the Ptolemaic paradigm vigorously. The same is true with the current fiscal and monetary paradigm.

      All I can say is “Thank God!” the Chicago School doesn’t have as much political power as the Medieval Catholic Church did, or you’d end up like Giordano Bruno.

      1. DownSouth

        Actually that should have read:

        All I can say is “Thank God!” the Chicago School doesn’t have as much political power as the Counter Reformation Catholic Church did, or you’d end up like Giordano Bruno.

        The Counter Reformation Catholic Church was perhaps even more closed minded than the Medieval Catholic Church.

    2. Procopius

      This is strictly nit-picking, and really I get what you’re trying to say, but I wish more people would get over the idea that pre-Columbus geographers or even ordinary people thought the Earth was flat. Geographers, and anybody whose livelihood depended on navigating, were fully awary the Earth was a (approximately) a sphere. That goes back to third century BC Greece. Their problem was they weren’t in agreement over how big that sphere was. Most geographers had an opinion that it was pretty much the size we accept. The thing that made Columbus different was he was following the opinion of a crank who held that Japan was MUCH closer to Europe than was the case. That was why he thought he could get to India that way. Nobody disputed that it was possible to get there by sailing West, but the sensible sailors were sure he couldn’t carry enough food for the distance he would have to travel.

  6. LeeAnne

    Honest analyses in a criminally managed government is a noble endeavor, particularly remarkable in the context of Obama’s ‘don’t throw me in the briar patch’ theatrics with S&P.

    The most discouraging thing about this is watching S&P’s criminal culpability in the economic war against the American people go barely noticed by serious people who feel compelled to argue as if a level playing field with rules of the road still exist -at all.

  7. Marc Giannoni

    Wonderful segment Ives. You marshaled the facts, laid out the issues, and demolished conventional thinking. I was particularly delighted by the incredulity on display by one particular member of the panel!

    1. Susan Truxes

      The timeframe of our escalating debt is about the same as the Vietnam War. We were there squandering lives and money for about 10 years. Country roads in the US started looking dusty and potholed; mainstreet started to go out of business. Even with all the draftees off to war, there were not enough jobs; real estate began to inflate somewhat irrationally. I haven’t seen the total estimated toll for Vietnam, but I’m sure it was massive. The estimates for our middle east adventure have been kept hidden. Two years ago Stiglitz said he estimated the war there had already cost 3T. Another thing that pushed our debt was third world defaults in the late 90s and early 00s. Approximately 4.5 T in hopeless defaults was being held on the banks’ books as “assets.” And somewhere at the end of the 90s the banks, realizing their spigot was off, began to analyze how they could tap into grass-roots sources of money, money from individuals – how exactly could they exploit this resource. To rebalance their books. We all know how that turned out. Here’s the question: Why do the bankers and politicians hide and deny these debts? And if we are dedicated to the business model of one crisis after another then lets put our money behind it. Lets fully fund each and every asinine crisis.

  8. F. Beard

    Great interview!

    I loved this part: “The Fed can control the entire yield curve.”

    Central banks confuse the issue and for that reason alone should be abolished but a sovereign nation has absolutely no need to borrow at all. It should simply spend and tax its own debt and interest-free fiat. Nothing else. No borrowing. No lending. No recognition of any money but its own fiat. Just spend and tax.

      1. F. Beard

        Don’t you know that would eliminate a whole class of rentiers? DownSouth

        That’s their problem, not ours.

        We obviously need ethical money creation and debt-free government money is 1/2 of the solution. The other half is genuine private money supplies with free market exchange rates between them and the government’s fiat.

    1. F. Beard

      However that fiat should only be legal tender, in fact as well as law, for government debts, taxes and fees, not private ones. That means the capital gains tax must be completely abolished along with any other legal impediments to genuine private currencies. The income tax can remain however.

      Allow genuine alternative private currencies, ye Progressives, and we can all prosper, both government and private sector.

  9. Nate

    of course given some painkiller injection injured football player can play but that will cause permanent damage, cripple rest of life.

    inflation cause by economic expansion due to temporary shortages are different from excess money supply during the stagnation.

    people who lose their homes or give up on their mortgage are the bag holders from housing bubble, artificial creation rather than the economic phenomena.

    we can go with the deflation but deflate at the right place at the individual debt level. most ordinary folks are strapped to their mortgage and student loans they cannot wean from.

    keep increasing money supply to mask out the underlying real problem will be catastrophic result.

    1. F. Beard

      keep increasing money supply to mask out the underlying real problem will be catastrophic result. Nate

      Not necessarily. A huge and equal bailout check of new debt and interest free United States Notes sent to every American citizen would:

      1) eliminate the unjust debt.
      2) compensate savers for years of artificially suppressed interest rates.
      3) reverse much of the unjust wealth distribution.
      4) stimulate the economy
      5) set a precedent for no more US Government borrowing.
      6) set the stage for genuine monetary reform including separate government and private money supplies after the debt was cleared.

      1. F. Beard

        Oh, I left out that to eliminate a serious inflation risk that reserve and capital requirements on the banks should be raised to compensate for the new high powered money.

  10. Anonymous II

    I read not long ago that China has $3 trillion in
    foreign exchange reserves. I think it was reported that
    a Japanese official, after the S&P announcement, said that
    the US was dealing with “fiscal issues” or something of the
    sort and that US Treasury bills were still a good

    I’d like to know what you think are the drivers of
    the lowering US Dollar index, and also how stable you’d
    expect it to be in the next five years or so.

    There are some alarmists that predict a US dollar
    collapse,less capacity to service the US debt owned by
    foreigners and higher US interest rates to make
    US bonds more attractive, somewhere down the line.

    This is all very complicated and I’d be glad to
    hear more from Naked Capitalism contributors and others.

    1. Mark P.

      The short answer to your concerns is that it all depends on the U.S. dollar’s reserve currency status. This we aren’t going to lose overnight: no ready replacements currently exist. That said, the rest of the world is getting pissed off at the Fed creating money to feed the balance sheets of American TBTF financial institutions, which those institutions then use to speculate and create bubbles in global commodities’ and assets’ prices

      For answers at length, read Michael Hudson, an economist who’s an excellent resource on such matters.

      Hudson has been an economist at institutions like Chase Manhattan and currently advises the Chinese government and others, but his outlook is comprehensive, explanatory and far from mainstream.


      1. Mark P.

        Addendum on Hudson: I’ve just noted on Hudson’s wiki that his next book will be THE FICTITIOUS ECONOMY, and he intends it “to explain to general readers how a corrosive bubble economy is replacing industrial capitalism via debt-financed, asset price inflation with the main purpose of increasing balance-sheet net worth, benefiting a select few while spreading risk among the general population.”

        There you go.

  11. F. Beard

    I think that got me sufficiently adrenalined up that I got a bit stroopy and also invoking ideas (like gold standard versus fiat currency constraints) without explaining them enough. Yves Smith

    Yes, I noticed you were a bit different from your normal self but I’m glad you posted the link anyway. Sane discussion about the national debt is refreshing.

  12. Mark P.

    Yves, this was one of your better media appearances, in fact. I like how you got directly in the newclowns’ faces.

    As for the “stroopy” adjective, I presume you intended the British “stroppy” meaning aggressive. Because according to the Urban Dictionary, the American usage “Stroopy” means “a wrinkled, non excited or engorged male’s member.”


  13. MacSin

    Fantastic! And you can take that from someone who spent the first 10 years of my career in television while earning a graduate degree in media studies before moving to finance a decade ago. Remember television news is entertainment in the guise of journalism and its sole motivation is to increase viewership (market share) leading to increased advertising revenue. You were not only entertaining, but were also highly informative which is so rare in this type of news format. You entertained by repeatedly dumbfounding the show’s co-presenter who was trying to bait you with what she or her producer thought were intelligent and provocative salvos like: “not accounting?”
    The glitches you refer to are not noticeable to the average viewer (probably because they are so common that if the viewer even realizes on any level what they are they take them as part and parcel of the usual viewing experience). Although disconcerting for you, I think they might have been a plus because it lent an extra amount gravitas to what you were saying (small pauses do that) in your normal emphatic, logical, well thought out and reasoned manner in which you used understandable and documented facts rather than the usual fare of theatrical, jargon laden, absurd nonsense which passes for financial commentary as employed by so many, much less qualified, so called-experts. I say excellent, well done and keep up the good work fighting the good fight, I salute you!

  14. MacSin

    Forgive me I forgot to also say in my previous comment:

    In regards to being overly aggressive, not a bit of it, that was tame compared to the posturing of most other guests.

    And perhaps you might have done a little more explaining, but would time allow (or would the producers who fear losing smaller attention span viewers) and isn’t this show aimed at an audience already familiar with these concepts or if not are motivated to find out for themselves?

  15. Dean Sayers

    I found the bit about current account deficit helpful, but I think it was one of the things you could have explained better. The flow of capital is a lot more indicative re:relative confidence in US markets, which is what you seemed to be referring to.

    In any case, I found the video highly informative.

  16. eric anderson

    1. Of course, I agree completely that the financial system was not fixed, and that must/ought to be done. This can’t be said often enough.

    2. Repaying debt with inflated money is effectively no different from a default and renegotiation of terms with a haircut for the creditor. It doesn’t matter why S&P downgraded, really. One reason is as good as the other. You make a semantic and legal point, but full repayment with devalued dollars is no gain for the lender. Once this sinks in, the market will demand a higher inflation risk premium.

    3. It is true that Japan has borrowed to the hilt. They’ve created wonderful infrastructure with debt trying to get out of their long recession, without stellar results. That they haven’t been hit with increased borrowing costs is no guarantee that we won’t if we try the same thing. And where does it end? Japan is where now? Total debt to GDP of 420%? 440%? When does debt reach the absolute limit of growth? Why should we try to test that limit?

    4. You presented an argument for increased government deficits based on economics — claiming that spending reductions would counter-intuitively worsen debt/GDP.

    Those who pursue this reasoning will find opposition from many in this country on philosophical grounds. They don’t want more public debt, period. Why? Because they want a much smaller government, period. No ifs, ands, or buts. It’s no coincidence that Atlas Shrugged sold a half million copies in 2009. Just this week we saw Boeing cast in the role of Reardon Steel, being told where and how they may manufacture their airplanes — denying the right of South Carolinians the right to compete in the job market.

    There are powerful philosophies in conflict here. Increasing deficits, expanding government, in the name of paradoxically improving debt/GDP ratio is a technical argument that has little resonance for those who absolutely, religiously believe government is much too large, much too powerful, and spends much too much. But I guess that should be obvious by now.

    1. F. Beard

      Because they want a much smaller government, period. eric anderson

      They should ask the question: “Why did the government get so large in the first place?” ans: Basically both the warfare and welfare states can be traced back to the government enforced usury and counterfeiting cartel headed by the Fed. The Fed financed US entry into WWI leading to the warfare state and wrecked the economy in the 1920’s leading to the welfare state.

      No ifs, ands, or buts. eric anderson

      The government can shrink over time if the cause of its large size is eliminated – the government enforced usury and counterfeiting cartel.

  17. Nicolas

    Yves Explain the plunging U.S. Dollar and its potential collapse. Explain QE2 and possible QE3 and the FED buying U.S. Bonds because of such overwhelming demand. Or is it THE FED can sweep everything under the rug and we are in La La Land?

    1. F. Beard

      … and the FED buying U.S. Bonds because of such overwhelming demand. Nicolas

      A sovereign government should NEVER borrow money in the first place. It should simply create, spend and tax its own fiat money. However, that money should only be legal tender for government debts, taxes and fees, not private ones.

      The central bank simply confuses what is a sovereign right of government – the right to issue debt-free money. The right to tax is the right to issue money for those taxes to be paid with; it’s that simple.

  18. slothrop

    Yves I really think you’re rearranging deck chairs on the Titanic, no? Do you really think we will ever see a 5% 10-year EVER? Your talk of inflation is far too parochial. LIFO vs FIFO?? AYFKM?

    Remember, inflation is as much a psychological event as it is a quantifiable one. Loss of confidence=lower demand for currency=inflation. Just to name one of many aspects of this insidious disease endemic to fractional reserve banking.

    Furthermore, the US can’t default? Tell that to a creditor who receives repayment in dollars worth 50% less. That is default of half the debt.

    And everyone holding dollars is a creditor of the US gov’t.


    1. F. Beard

      Furthermore, the US can’t default? Tell that to a creditor who receives repayment in dollars worth 50% less. That is default of half the debt. slothrop

      Since 97% of the money supply is “credit” and since the US Government can set reserve and capital requirements to reduce the credit creation rate then new money could be created without increasing the size of the money supply, nay?

      In fact it already has been since the banks aren’t lending into the private sector anyway.

      1. slothrop

        I used to read NC religiously and was seduced by such arguments, and surely BB is hoping everyone else is, too.
        Then I went shopping.
        I would strongly suggest you give Martin Armstrong a read. Very compelling on the many ways inflation can manifest.
        The gov’t stats are a complete joke.

        1. F. Beard

          There is a solution to the “stealth inflation tax” – genuine private money alternatives. Those would require the repeal of legal tender laws for private debts and the repeal of the capital gains tax. With genuine private monies then only the governemnt and those who received its money (government workers and contractors, the military, SS recipients, etc.) would suffer if the governemnt overspent with regard to a given taxation level. If fact, certain taxes would be easier to pay if government overspent since its fiat would be cheaper on the open market.

  19. slothrop

    Yves I agree that these deficits would be tolerable given the POTENTIAL of the US economy, which is certainly great. As Richard Koo points out, when the private sector fails, the Feds have to step up. But the fact is there has been a STUNNING lack of leadership in Washington. Would you lend the US gov’t your life savings for 30 years at 3.5%?
    It is obvious to me that the shadow banking system is about to give under the enormous weight of debt derivatives, and the Fed has only one choice.
    What else would we expect after the FIRE sector ballooned to such an unsustainable % of GDP? Would you invest in a company in which 8 of 10 workers were accountants? But as Paul Krugman tells us, “A Country Is Not a Company.”
    Not very comforting.

    1. F. Beard

      Would you lend the US gov’t your life savings for 30 years at 3.5%? slothrop

      You don’t get it. The government does not need your savings nor should it be allowed to borrow. The US government should only create, spend and tax its own fiat. And with genuine private currency alternatives the stealth inflation tax would disappear so the government would have to spend wisely or suffer loss of purchasing power in its fiat.

        1. F. Beard

          To what private monies are you referring? Local currencies? slothrop

          Without a government enforced monopoly money supply for private debts then I’d bet that corporations would be forced (by high real interest rates) to finance themselves with new common stock issue thus sharing wealth rather than looting it. But other possibilities are store coupons, futures contracts, PMs and possibly even completely private fractional reserve lending (though I have doubts it could survive).

          The States and local governments could issue tax tokens too, I imagine, and spend and tax them like money.

  20. slothrop

    Alot to work out there. Five thousand years of history tells us that, flawed as it is, a PM-backed currency is the only source of discipline until we come up with something better. Local towns in PA and NY are having some success with “bread hours.” Whatever is to come, we must strive to ensure it grows organically from the grass roots, and NOT imposed from above. Cheers.

    1. F. Beard

      PMs are acceptable as completely private monies but they MUST NOT be recognized by the government as money. That would be fascist recognition of someone’s favorite shiny metal and by extension for usury since PMs, being non-performing assets, require usury to generate a return.

      Whatever is to come, we must strive to ensure it grows organically from the grass roots, and NOT imposed from above. slothrop

      Agreed. However, the PM fascists are up to that very thing, government recognition of PMs as money.

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