Why the US debt crisis is a good thing

July 27, 2011

I must politely disagree with Felix Salmon of Reuters, Ben White at Politico and others who wring their hands and fret about the undoing of the world in the prospective debt default by the US. The damage is done, Felix declared on Reuters.com. I have heard similar views from many friends and colleagues, but I must disagree.

First the debate over the budget, pathetic as it may seem, represents an increase in the intensity of the public discourse over the nature of the American economy. Debate is good. It is the essence of checks and balances, the key feature that separates American democracy from the authoritarian states of Europe and Asia.

For too long Americans have been on auto pilot, relying upon elected representatives and various flavors of hired agents in Washington and on Wall Street to manage our money and our nation. It’s time to start paying attention again.

Second and more important, the debate over federal spending and the tradeoff between higher taxes and greater fiscal discipline begins a larger discussion about the nature of the American political system. After 80 years of borrow, spend and inflate to finance the Cold War, Housing Bubbles and the rest of the world’s growth needs, the US economy has reached an endpoint. The experiment in corporate statism begun by FDR in the 1930s and extended through and after WWII has brought us to the brink of insolvency.

Political gridlock in Washington means not only an end to growth in government spending, but also that we are no longer willing to serve as the overdraft account for the world in terms of demand for imported goods and services. As I noted in my 2010 book Inflated, the US has bailed out the no growth states of Europe three times since WWI. Each time our allies in western Europe have defaulted on their debts. Bring the US troops in Europe home, I say, right now.

Asia, likewise, has grown at the expense of American jobs, the bitter legacy of owning the world’s reserve currency. As the US reins in spending and the monetary excesses that created the illusion of economic growth since the 1980s, an illusion funded with inflation and vast amounts of public debt, our ability to bail out the EU will fade. Remember George Washington’s warning about “European entanglements.”

But the third and most important side effect of the fiscal crisis in Washington is that people around the world will start to diversify both commerce and financial transactions out of dollars and into other currencies. Far from being a threat, I welcome such an evolution. The less of world trade and finance that flows through dollars, the less easy it will be for the Treasury to issue debt or for the Fed to monetize this borrowing on the backs of US consumers and businesses via steady, unrelenting inflation.

Of course Nobel Prize winning economist Paul Krugman rightly notes that a reduction in federal spending will result in pain for many Americans. But what he fails to tell these Americans, especially low income working people he pretends to love, is that the cost of the borrow and spend policies advocated by second generation New Dealers is persistent inflation, a diminution of purchasing power that is just as surely killing the hopes and dreams of all Americans.

I have long argued that a low growth, low inflation environment is better for the working people that the manic, boom and bust cycles caused by big federal deficits and following accommodative Fed policies to make this all seem to work in a nominal sense. Alan Greenspan, after all, was at best a tool; a cog in the machine.

Americans need to understand that we face not a mid-cycle slowdown, to paraphrase the economist Richard Alford, but a post-stimulus adjustment to economic reality. Think post WWII in fact. If this crisis helps to break the cycle of debt and inflation, that is a big plus for America’s long term prospects.

The right choice for Americans is to say no to ever more debt and to instead embrace debt reduction and restructuring of insolvent banks and markets to restore economic solidity. Both in the EU and the US, debt levels by governments and consumers must be reduced to restore national and personal solvency, and thereby start the great growth game all over again.

Do Americans have the courage to make the tough choices, cut spending and also generate more revenue, and thereby set an example for the world? I think the answer is yes, but it may take some time. That is why I am in no hurry to pass the new debt ceiling. A few days or weeks of pain will raise the political temperature in Washington even further and bring all Americans into the proverbial kitchen for a long overdue family discussion about money. And that is a very good thing.



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It would be fitting to hand the Repubs back the same piece of crap economy they handed the Demos – served up by their own doing. I guess they could pull a lot of marginally legal, eleventh hour back room deals like the last problem they supposedly solved. YOU know – the financial system, the problem our economy is still cleaning up – the paragons of society – the Masters of the Universe.

The problem is that both parties are equally at fault – no matter all the huff and bluster they put on. As far as the debt crisis goes, how do the citizens of this country deserve that monumental shortcoming from the political economic system? They don’t. It’s that simple. Until ALL Americans pull their own heads out and do something about it, like expecting a lot more substance out of Congress, especially the US Senate, then Americans deserve their crooked, self-serving politicians.

In the meantime, if it costs more for a bunch of crappy Walmart junk that belongs in the dump before it’s even sold, hey the joke’s on us!

Posted by Woltmann | Report as abusive

Excellent, persuasive article, although Krugman should consider that a reduction in federal spending will not result in pain for many Americans. The cornerstone to understanding government fiscal policy is that government has no money. The second cornerstone is that it does not create anything of value. Government can only take from one person (or corporate legal entity) by taxation and give that money to another. So what was the return on forgiving debt to European countries? Nothing. The administration cost of this wealth redistribution is the cost of government. If the collective populace keeps what it earns, it saves the administration cost of government, and flows the money through the economy free of the artificial distribution created by government. While indeed “some” may feel the pain of not receiving government largess, that is not an economic decision, but a political one. Cutting medicare or the military is a political choice, and determines if there is any “pain”, or not.

Posted by elusivesolution | Report as abusive

[…] Whalen, co-founder of Institutional Risk Analytics, remains a contrarian on the debt ceiling issue, writing a commentary piece for Reuters Wednesday titled, "The U.S. Debt Crisis is a Good […]

Posted by Political gridlock over how to raise U.S. debt ceiling continues « HousingWire | Report as abusive

Any intelligent person in gov’t, anticipating the outcome of Nov ’10 elections, knew the present tumultous Debt scenario was inevitable a year ago.
Why is it such a big deal now?
…it sounds like the same old Obama push for his agenda of wealth re-distribution and ignoring the will of the people and working against what is good for the country.
It’s the old “Obama” and “Rahm Emanuel” platform for “change”- “don’t let a good emergency go to waste”. Waiting for the last minute to move Obama’s agenda forward.

Posted by bakerout | Report as abusive

Whalen article can be summed up in this: “After 80 years of borrow, spend and inflate to finance the Cold War, Housing Bubbles and the rest of the world’s growth needs, the US economy has reached an endpoint”

He justify America fiscal and monetary recklessness, political corruption, corporate greed, even the selling of fraudulent financial products, of the past dozen years in the broad context of helping the world. Like, where would the world be without America?

This is classic imperial thinking which an educated world will not be fooled. This is the same kind of thinking imperial Britain used in the mid-19th century – it farmed and produced huge amount of opium in colonial India paying slave wages. It then forced the importation of this deadly drug into China under military guns to ‘help’ China trade surplus. To create much needed jobs in India. And if China blows up along the way, well, where would China be without the generosity of Great Britain?

I ask where would America be without the world?

America economic problems are created purely to satisfy its own out-of-control demands. Nobody in the world asked America to ‘please import our products, borrow our savings, to feed your consumer addiction’.

America economic problems are due to US corporations placing ever-higher quarterly profit the only thing that matter, even when it means virtual de-industrialization of production and associated skills-train. They routinely layoff millions to the streets to ‘make the numbers this quarter’, conveniently transferring the human cost to the government. But refuse to pay a dime more in tax. They feed on government free lunch.

America economic problems are created to sustain a massive military-industrial empire far far beyond the legitimate needs of self-defense and all defense treaties. Even beyond the considerable ego of a superpower. Nobody forced G W Bush borrow a few trillion dollars to fund wars of occupation he started. He did it because he thought he could get away with it.

No foreigner forced the ‘masters of the universe’ at Wall Street to twist, contort and corrupt financial capitalism to the point to creating national economic disaster so that they can reap untold billions in bonus. They did it not as a favor to the world. Certainly not to help their country.

So Whalen piece, while offering some useful observations, hide misdeeds and even stupidity under the umbrella of ‘America must act as the world engine of growth’. Yes, but an engine of growth does not mean an engine that drinks top-nitro fuel, rev to 20,000 rpm and blows up.

Posted by TomKi | Report as abusive

Excellent column. FINALLY someone in mainstream journalism is looking at the fact of our outlandish and unsustainable spending and debt.

Posted by NewsLady | Report as abusive

Anarchist. I don’t know if he’s consciously or subconsciously an anarchist, but the author is an anarchist just the same.

The massive dislocation America will suffer from a default, and the rest of the world along with it, will make shredded cabbage of America’s social, governmental, financial and economic orders. The country, in its already profoundly weakened condition, simply cannot sustain the kind of ‘adjustment’ he is recommending.

Yet, eventually something even worse in the way of a crisis is coming if America does not somehow get it’s house in order.

Catch-22 here, because we’re hosed if we do what the author suggests and we’re hosed if we don’t.

Posted by NukerDoggie | Report as abusive

Takes a crisis for people to change! Please thank your local Tea Party for their wisdom, passion and honesty!

Posted by DrJJJJ | Report as abusive

Over $10 Trillion in deficits are projected for the next 10 years and here’s the last 10:

2011 $1,500 Billion
2010 $1,300 Billion
2009 $1,400 Billion
2008 $240 Billion
2007 $161 Billion
2006 $248 Billion
2005 $319 Billion
2004 $412 Billion
2003 $374 Billion
2002 $159 Billion

It’s a crisis!

Posted by DrJJJJ | Report as abusive

Excellent column, Mr. Whalen, although I’m uneasy with your line of thought.

Reading between the lines, you seem to be advocating that America relinquish its role of world leadership. Presumably, your response would be that, as was true of Great Britain in late Empire days, the cost of being the world’s policeman has outstripped America’s ability to pay for it. And there’s no thanks either.

On the other hand,Pax Britannia and Pax Americana have been very good historical epochs for both America and the West generally. Do you really think a subdued form of American isolationism would necessarily be a good thing?

Posted by Elektrobahn | Report as abusive

growth is over. period.
we are entering an era, an era, of decline.

Personal incomes, general standard of living,
the simple numbers of people on this planet,
central planning, massive international corporations,
are all going into a long-term decline.

kick and scream, all you want to.
the good times are gone, gone, gone.

Posted by chistletoe | Report as abusive

How can Whalen say that a possible side benefit of this fiasco might be that as America loses its ability to lend inflation will cease. WTF? I suppose that assumes that the ability to lend is not tied to its reserve currency status, a status that is/was only given because it WAS thought America would never default. The shift will begin away – and quickly – away from the USD as reserve and so to will the value of USDs, and you’ll have inflation simply via depreciation. Lots of it. Unless American corporations decide to repatriate all their factories and America becomes a totally insulated/isolated economy. Ask Cuba and North Korea how that’s working for them…

Posted by CDN_Rebel | Report as abusive

@chisletoe: Exactly. And you didn’t even touch on peak oil. In point of fact, the economic perturbations caused by a continuously plummeting EROI are behind a lot of the economic ripples now rocking our boat. Not directly, but through the corporate giants who know its coming and are positioning themselves accordingly. The entire present system is designed to create enough fiat money to permit these plutocrats to siphon off the essential commodities before the hammer drops.

@ NukerDoggie: Knowing what will happen, and knowing that the more drawn out the process, the more calamitous the inevitable break will be, is not being anarchic. If it is, count me as an anarchist. This system is destined for the dustbin, and all of the drama in D.C. has only the potential of delaying the inevitable. Better to take our medicine right now, and stop the hemorrhage of commodities into the pockets of the elites. This system cannot be sustained, it cannot be reformed, it cannot be repaired, and it must not continue. It is time.

Posted by BowMtnSpirit | Report as abusive

“Bring the US troops in Europe home, I say, right now.” And, do what with them? Add them to the already unbearable unemployment levels? That’s the problem with extremists such as you, Mr. Whalen. Your impatience is a path to disaster. I agree that it’s time to repatriate many of our troops from around the world; but, everything in moderation. These screaming mobs hollering “Shut it down! Shut it down!” are painfully unaware of the consequences of their demands. I agree with much of your premise. Except, without moderation, you are asking for social suicide. We’re already in the kitchen, Mr. Whalen, and the stove’s on fire.

Posted by MtCDoc1 | Report as abusive

“It’s time to start paying attention again.” The best quote of the article.

Posted by KyuuAL | Report as abusive

Since the wealthy class accumulated all of the economic gain in the decades since WWII, how about if they suffer a “little pain” for a change, like paying their fair share of taxes. Now, THAT would be a good thing to result from this “post-stimulus adjustment to economic reality.”

Posted by Gordon2352 | Report as abusive

I agree with his comments on inflation being the worst of two evils but my comment is slightly off topic.
When most people run out of money and credit, they begin selling assets. What about the United States selling some of our protectorate islands we acquired in World War 2? Saipan should be worth at least a trillion, Guadalcanal maybe 5 trillion (probably higher), suggested starting price for Guam should be 10 trillion. Granted that selling these to China, India or whoever else would would weaken the United States strategic position. However, cutting our military spending to the bone by scrapping our carriers, cutting troops and troop readiness and spending on technology might make us weaker than pawning some islands that few Americans visit and that can be retaken or bombed into uselessness if needed. Just a thought.

Posted by Slammy | Report as abusive

@Gordon2352: I agree. The argument goes that the wealthy are already assigned terribly high tax rates. Unfortunately, the richer one is, the higher priced the lawyers and accountants are that they can afford to ensure that their assigned tax rate becomes a challenge to see how much can be knocked off the final bill. Like GE, they end up paying a pittance, if anything, compared to their fair share. Add that to the discussion at hand, in addition to the fact – and I use the word “fact” purposefully – that this whole argument is a charade to insulate the highest income brackets from any inconveniences. Perish the thought that the Koch brothers may have to miss a day that the sand at their beach homes is being groomed. Yes, will that they would suffer a “little pain”!

Posted by MtCDoc1 | Report as abusive

[…] Whalen, co-founder of Institutional Risk Analytics, remains a contrarian on the debt ceiling issue, writing a commentary piece for Reuters Wednesday titled, "The U.S. Debt Crisis is a Good […]

Posted by Political gridlock over how to raise debt ceiling continues « HousingWire | Report as abusive

@Gordon 2352. A tax is fair when everyone pays the same percent of thier income, not to sock it to the people that make more. Sure they will pay more, because they made more. We are turning into a country that either gives a free ride or a rebate (redistribution) to 50% of the country but has the top 5% paying over 50% of the taxes. I am amazed at all the people that have no idea how to make money but think it great to just take it all away from anyone who makes more than they think is what they could spend in a year. Bottom line, it far for someone who make $25K or $25M to pay the same percentage. Then everyone has the same incentive to get off their ass.

Posted by Muleshoe | Report as abusive

Whalen thinks the debate “seems” pathetic. Reality Check: the “debate” as it is being played out in the mainstream media IS pathetic. The Two-Headed Party system is totally in the pocket of a Global Corporate-Banking Elite: the CEO’s of the biggest multinational corporations, banks and financial institutions. They have kept the insolvent Federal Reserve-driven financial Ponzi scheme from collapsing by making $ trillions in secret, private loans to the biggest banks, essentially laundering bad debt by washing it by buying Treasury bonds, while letting smaller banks and financial institutions default, only to gobble them up for pennies on the dollar. This isn’t being reported in this pathetic debate.
Whalen says: “The experiment in corporate statism begun by FDR in the 1930s and extended through and after WWII has brought us to the brink of insolvency.” In truth, FDR’s “statism” economy–with its regulatory controls–would extrapolate into a TOTAL national debt of about $500 billion today, instead of our unsustainable $14.5 TRILLION.
I agree with the author about the necessity and absolute morality of recalling and reducing our colonialist-imperialist military machine. The costs of weapons systems, foreign bases, deploying and supplying troops afar, and re-building destroyed foreign infrastructure and economies are rationalized by the mantra of “The War on Terror.” We have spent $ trillions to fight against box-cutters, while losing our Constitutional freedoms under the Patriot Act.
Whalen must be deeply cynical to want “the Fed to monetize this borrowing on the backs of US consumers and businesses via steady, unrelenting inflation.” We need to get the Federal Reserve, a PRIVATELY OWNED bank which serves ONLY the interests of the Global Corporate-Banking Elite, out of our monetarist system. The Fed got what it wanted with the deregulation of the banking and finance industries: rampant bad DEBT sold by them to bigger fools–the smaller banks and ultimately the U.S. taxpayer. They encouraged the derivative insanity which has falsely driven the economy and the money supply, while laundering their own bad debts through Treasury securities. “Unrelenting inflation” will NOT hurt the Fed, but WILL hurt the poor, who feel the effects of inflation the greatest.
Whalen needs to be SPECIFIC about who needs “to say no to ever more debt and to instead embrace debt reduction and restructuring of insolvent banks and markets to restore economic solidity;” IT’S THE ULTRA RICH Global Corporate-Banking Elite! They are enjoying a “gamed system” and WILL NOT ALLOW IT TO END until America is in a shambles!
Do the Global Corporate-Banking Elites “have the courage to make the tough choices” without cutting domestic spending for services to the poor or generating more “revenue” via higher taxes and fees upon the poor and middle class?
I think we know the answer to that!

Posted by lusoris | Report as abusive

[…] U.S. Debt Debate:Why the US Debt Crisis is a Good Thing (Reuters) […]

Posted by Recommended Links for Investors and Traders (7-28-2011) | | Report as abusive

[…] of a failure to raise the debt limit leading to  a U.S. default and perhaps a credit downgrade. Christopher Whalen isn’t worried. Whalen is a very astute banking analyst. He was well ahead of the crowd in identifying the […]

Posted by Bob Carlson » A Positive Spin on the Crisis | Report as abusive

Finally someone encouraging debate and new ideas. Hopefully we can break out of a stagnant mould of do what has been done before but with more spin. I suggest we implement a true monetary control on cyclical movements called the FSFP (Flow Siphon Flat Payment) it’s simple, easy to manage and stops the boom and bust cycle. And more importantly it works outside politics so we won’t get caught in the mess caused by professional elites using our future as a bargaining chip. See more http://demokratia.jesaurai.net/2011/07/3 1/the-us-government-has-become-the-shove l-of-the-wealthy-as-they-undermine-ameri can-democracy/

Posted by DemoKratia | Report as abusive

[…] him, I dispute the claim that failure to raise the debt-ceiling would have been a calamity. Sure, failure to raise the debt-ceiling would have prevented Uncle Sam from doling out as much […]

Posted by Regretting raising the debt-ceiling | The Great Debate | Report as abusive

The Author should recognize the pattern of cut, retrench, attempt to restructure and final collapse that brought about the end of the Soviet Union after its disastrous term in Afghanistan.

The fall of the USSR brought about the break up of its territory, the collapse of it creaking social support system and opened the door to years of chaos and economic power grabbing by insiders in the emerging political order.

The trick for the aspiring oligarchs here will be finding the insiders that somehow manage to keep their heads and influence in what will no doubt be a very “fast paced and exciting environment” for the most treacherous and greedy bastards one could possibly imagine.

They will simply never be able to set foot outside their armored limousines and securely gated compounds without armed escorts.

Posted by paintcan | Report as abusive

[…] holding the line on the debt ceiling (emphasis Matt’s): Unlike him, I dispute the claim that failure to raise the debt-ceiling would have been a calamity. Sure, failure to raise the debt-ceiling would have prevented Uncle Sam from doling out as much […]

Posted by Changing Spending Habits Isn’t Supposed to Be Easy | Report as abusive

[…] dude what's up with this economy :confused: thought I'd share this article. Christopher Whalen | Analysis & Opinion | Reuters.com Why the US debt crisis is a good thing JUL 27, 2011 11:29 EDT I must politely disagree with […]

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