Matthew Yglesias demonstrates his profound command of economics at Slate. He takes Mitt Romney to task for worrying about the deficit. Quoting the “Secret Video” of Romney, Yglesias notes the following offending idea.
Romney: Yeah, it’s interesting… the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we’re issuing—which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues. He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up. We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.’ It’s just made up money, and this does not augur well for our economic future.
So he sets Romney straight on the basis of his immense economic knowledge. Here’s Yglesias assuring everyone that there’s nothing to worry about.
You hear this kind of thing about foreign borrowing from politicians all the time, but you might think that one of the benefits of having a career finance guy run for office would be that he would know better. But this is a farrago of nonsense.
It’s all “made up money” and that has nothing to do with the budget deficit or Quantitative Easing or the rest. It’s fiat money. I promise you. And it was even back in the good old days of the Gipper. People who had no problem with this five years ago seem to have become very panicked about it recently even though there’s been no inflation. I’m not sure I understand what the problem is.
The foreign debts, meanwhile, isn’t really a fiscal issue either. The dollar is the cornerstone of the global economy. That means foreigners need to hold safe liquid dollar-denominated financial assets to conduct their transactions.
But fiat money cannot be set at any arbitrary level. Otherwise why stop at any given amount? You don’t have to worry about debt at levels you can service. But it is not insensitive as to amount. The quantities relative to the actual output of the economy matter. Otherwise you you will get currency debasement, no matter what Yglesias says. So where did he get his marvelous conceptions? Why from the One of course, who explains it all to David Letterman. President Obama can’t even remember how much debt there is.
Why, does it matter?
Maybe he believes, like Yglesias, that “it is all fiat money”. But he does know one thing. If you listen to the exchange between Letterman and Obama the President explains that most of the money “is owed to ourselves”. Within a closed, time-bound system this is an awful lot like conjuring money out of thin air. To imagine this can work at any level is like imagining a repeal of the law of thermodynamics, to posit the creation of a financial perpetual motion machine.
The only reason why a limited amount of self-debt works is intergenerational lending. We borrow from the future. That is why there are maturity dates on instruments. In other words the debt is not just “fiat money. I promise you” that nobody except Romney worries about. It’s a real burden on the the next generation, real debt that has to be repaid by real people with real goods and services.
Letterman: Who do we owe that money to?
Obama: A lot of it we owe to ourselves.
If you can pay this real debt you don’t have to worry about it, any more than you have to worry about your credit card payments if they are within your means.
But you can’t say “it’s just debt” and then go out and max your card without fear of consequences. This escapes them. What is truly amazing is how Yglesias thinks he is demonstrating his immense acumen and intelligence by exhibiting the most astounding ignorance. He should try lending money to himself and see how that works. Of course it’s different if applied to all of America, because then you make it up on volume. Common sense is taken as proof of Romney’s imbecility. The discussion is indeed proof of imbecility. Just whose is another matter.
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