Friday, November 05, 2010

American is Not Greece: Why Glenn Beck and Most Economists/Politicians Are Wrong

"America is Greece" is the refrain you continue to hear from many politicians (particularly Republican). When searched on Google it comes up over 11,000 times. You also hear from the likes of Glenn Beck that if China stops buying our Treasury Bonds that in literally a few weeks the entire nation will collapse (kind of defeats the point of China's military....and ours I guess).

Is this hyperbole based on reality? Well, the answer is no, but there is some common sense that drives such rhetoric.

Before I go forward, let me just say that the more I learn about economics the less I feel I know. Having said that, I do know a few things.

First - the main point of Beck, Republicans and whomever is that America is spending too much - in this respect I think I can agree. I can also agree that, like Greece, we are likely to see riots in the streets if certain pension and health care benefits are cut. However, what Beck and others don't seem to understand is that the United States Government is nothing like Greece and WE DON'T NEED Chinese money to survive. In fact, interest rates don't HAVE to rise if the Chinese decide to get rid of their treasury bills.

The reality is that Greece is more akin to California than America. California cannot print its way out of budget problems because California can't issue its own currency. Greece doesn't issue its own currency anymore (they are on the EURO) and thus they can't print (read: devalue) their way out of there problems. The United States Government DOES NOT HAVE THIS PROBLEM. The U.S. can print as much money as it wants to pay off its debts. This means that it cannot outright default (they can, they just don't have too). If China stops buying our bonds, someone else will at either a higher interest rate or the Federal Reserve will buy them (please understand that this is not an endorsement of such policy, just the reality).

This doesn't mean that the actions of the Federal Reserve to deal with the very same issues that Greece has won't eventually harm us, I can assure it will. My point is that the America IS different because we have a different monetary regime.

Our current Federal Reserve leaders are leading us down the path of destruction, though they are of course being led by our politicians (don't be fooled by the last two elections - it really doesn't matter if its a Republican or a Democrat - neither can bring any kind of fiscal sanity about, nor do they want just a few).

The Federal Reserve has embarked upon another round of Quantitative Easing - or printing money to buy assets. I do want to make it clear that while it appears the intention is to create inflation, I'm not positive it will. While it is true that the Fed literally pays for the Treasury Bonds with money that is created out of thin air, it is also true that this money doesn't actually stay in the system. If the Fed buys a Treasury bond and spends $1 billion the Treasury Bonds come onto the balance sheet of the Fed and stay there, the money goes to the people who sold the bond. The net change is that the Fed has $1 billion in bonds (of which interest is flowing to the Fed and is actually taken out of the system) and the entity who had the bond now has cash. There isn't any additional net assets in the system, the entity who had the bond now has cash (which could be used to buy more treasuries or other assets).

This is different than if the Federal Reserve called up the Mint and asked for $1 billion to be printed and then simply GAVE it to someone without receiving something in return. That would be pure money printing as the amount of cash actually in the system increased - that is potentially inflationary, but it isn't happening.

If you really want to research and understand our monetary system I suggest Austrian theory, reading Mike Shedlock and heading over to the Pragmatic Capitalist (he has some mind blowing stuff). I admit that my little explanation above likely places me in the category of Tim Allen's character on Home Improvement after trying to explain what his neighbor Wilson told him - but at least I'm willing to admit it.

Your Tim Allen Economist,

Scott Dauenhauer, CFP, MSFP, AIF