Happy New Year

Posted by Ray on January 1, 2010 under Main | Be the First to Comment

To kick off the New Year you should go read this guy’s silliness. It is no wonder why he has been largely discredited and why he completely missed the housing bubble in 2005-06, he was the guy laughing at Peter Schiff when Schiff told him lending standards were nonexistent, guess who was right?

What I found amazing is that Mike Norman actually thinks that issuing treasuries is not borrowing money. Furthermore, he actually states the following, this blew my mind because it is utter nonsense:

Some would argue that the vote simply gave the government the right to “borrow” $290 billion more, so it did not really increase its spending power at all, only the amount it could take from others. This argument would be wrong.

Government spending, by definition, increases the amount of reserves in the banking system and those reserves are the funds used to buy Treasury securities. Therefore, it is correct to say that government spending itself provides the money to buy the debt.

How else can you explain how the national debt went from $900 billion to $12.4 trillion over the past 30 years with interest rates falling to historic lows or even zero? If the issuance of government debt were truly “borrowing” then rates would have climbed to astronomical levels.

If this made you say, what!? You are not alone. I know what he is saying and on the surface he is kind of right, but it is also the words of a true idiot. I will explain this in a very simple way for Mike to understand, if you issued your own debt and could control your interest rates, would you keep interest rates, the amount you pay, high or low? Clearly you would keep the amount you pay low, unless you like paying a lot more for what you borrow. Now, that is a very simplistic way of approaching the total issue and it is much more involved than that, but I fear if he reads this getting into details would probably confuse him.

Apparently Mr. Norman is one of these people who thinks you can issue unlimited debt or “increase the amount of bank reserves to buy treasury securities” and we never have to pay the piper. I find this fascinating that one can think that investors will never, ever, want their money back or that even though we have to pay interest on the amount of money we spend it is still not considered borrowing. I am not sure how that is not debt or borrowing nor am I sure how one can borrow their way to prosperity, but I find this disturbing among many economists in the US, including one Nobel Prize winning economist who writes for the NY Times a lot.

The last time I checked those who tried to borrow their way to prosperity, Dubai, Argentina, home owners, Eastern Europe and so on all ended up not doing so hot or defaulting. I am not suggesting the US will default on its debt, that would be crazy, we will simply inflate our way out as that is the game plan. Well, I guess I am early in giving out my 2010 Contrarian Award to Mr. Norman for going against all conventional wisdom and basic economic teachings when we examine debt and prosperity. Debt, for a lack of a better term, is good. I gotta stop, my head hurts.