Felix Salmon

Can America’s debt get too big to pay?

Felix Salmon
May 21, 2009 15:14 UTC

Reader Matthew Kelley writes with a question:

Our national debt is over $11 trillion, it is not unreasonable to think that in my lifetime I will see a quadrillion dollar national debt. Do you think that there is a level of debt at which the United States would pull a ‘latin america’ and just default on the debt?

First, it’s a bit of a stretch to think that in your lifetime the national debt will hit $1 quadrillion. Let’s say you have 50 years to live, and let’s say that, pessimistically, inflation averages 5% a year over that time. US GDP is now about $14 trillion, and if real GDP growth averages 3%, then we’ll have nominal GDP growth of 8% a year for 50 years, which would take us to about $650 billion trillion. So a quadrillion-dollar national debt in 50 years’ time would require a debt-to-GDP ratio of about 150%. It’s all possible, but if you just tweak the numbers a little — say you have 45 years to live and inflation averages 2.5% and real GDP growth is 2.5% — then GDP is just $125 billion trillion when you die, and there’s no way you could have a quadrillion-dollar national debt.

But more to the point, for all the rhetoric from campaigners about countries struggling under their debt burdens, there really isn’t much of a correlation between the level of a country’s debt and the probability that it’s going to default — especially not when that debt is wholly denominated in domestic currency. Countries with low debt-to-GDP ratios can default — just look at Ecuador right now — while countries with very high debt-to-GDP ratios can stay current on that debt indefinitely — Japan is the most obvious example, but there are many more.

If you want to come up with a scenario where a developed country defaults on its debt, you’re most likely to look at a case like Italy, where the debt is denominated in euros and there’s a non-zero chance that the country is forced out of the eurozone; in general, if you want a sovereign default, the best way to get one is to find a country with hard-currency borrowings which then has a massive devaluation. That can’t happen in the US — there’s no currency mismatch between its tax revenues and its liabilities.

Even a doom-monger like John Hussman says that Treasury bonds are “default-free securities” and that the worst-case scenario is not 5-6% inflation for a year or two, but 5-6% inflation for ten years. (Which he calls “a near-doubling of the U.S. price level over the next decade”.) Neither of these things are likely to increase the chances of default — in fact, quite the contrary. Since the US has only a tiny number of inflation-linked bonds, a strong dose of inflation would therefore substantially decrease the real value of the US national debt.

Essentially, the only way to get to a quadrillion-dollar national debt is via inflation — but inflation manages to reduce debt levels all by itself, meaning there’s no need to default any more. So a US default is almost certainly not going to happen.

Update, and irony alert: Obvs wrote “billion” where I meant “trillion”. About 90 minutes after posting this.


It seems to me most of the previous comments answer with a resounding YES to “can the US default on its debt?”

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The SEC fights regulatory overhaul

Felix Salmon
May 21, 2009 13:59 UTC

It’s great news, I think, that the SEC’s Mary Schapiro lost no time in pushing back against the new regulatory structure which seems to be emerging in Washington: it means that we’re actually getting somewhere here.

I hope and believe that Schapiro’s campaign won’t get very far, for two reasons: Schapiro personally comes from the financial industry — she was head of the toothless Finra — and therefore hasn’t built up a lot of credibility as a regulator; and the SEC institutionally is unsalvageable in any event.

At the same time, the fact that Schapiro is fighting back so quickly and sharply shows that this plan has a good chance of actually happening — complete with the SEC losing a lot of its present powers. What’s more, Schapiro coming out against reform in this manner only serves to place her in the anti-reform camp — which will weaken her arguments going forward. Elizabeth Warren — the inevitable first head of any new consumer-facing regulator — should be very happy indeed at this development.


Shapiro did a great job in cleaning up the futures industry while topping the CFTC. No doubt, she would have pushed back much harder against Greenspan and Robert Rubin when they told Congress to strip CFTC’s oversight of the OTC derivatives market.

When journalists forget they’re innumerate

Felix Salmon
May 21, 2009 13:42 UTC

David Evans, the style guru for the Reuters commentary group, just sent out a note on numbers; its first paragraph should be seared into all journalists’ minds.

Always check any numbers in a story, and then recheck them. Are they internally consistent? If a number rises to a new number then is the second number larger than the first? Check that the units of measurement are not out by a factor of 10, or 100, or 1,000. Try to appreciate the underlying logic of the numbers rather than accepting them at face value. Ask yourself if the numbers are feasible and realistic. Remember that a journalist plus a calculator often equals mistake.

Journalistic innumeracy is a scourge of journalism for two reasons — firstly that journalists are innumerate, but more dangerously because journalists either forget or never knew in the first place that they are innumerate. It’s a form of overconfidence bias, and it’s highly corrosive. If we all try to remember every day that we’re all prone to making mistakes, especially when it comes to numbers, a huge number of boneheaded errors are likely to be avoided.


I don’t think I’ve ever read a journalistic story in a newspaper that made statements quoting statistics that, upon reviewing the original sources, did not turn out to be more or less misleading.

Stylistic habits of mixing up the phrases when describing different proportions is often the culprit. Journalists will often write things like “A% was foo, while B% of the remainder was bar, and the rest were baz” – leaving you to wonder is that B% a percentage of (100 – A), or a percentage of the whole.

Just a couple of small tables of data would help hugely, particularly when percentages, ratios and proportions are being discussed.

Another bugaboo is people that talk about % differences but don’t mention the base rate – ignoring the fact that small bases can give rise to large but inconsequential percentages. Oh, and folks that talk about averages, but don’t mention variance or distribution shape – another black mark.

The difficulties of moving a newspaper online

Felix Salmon
May 21, 2009 12:17 UTC

The bloggiest, and possibly the most-read, part of the WSJ’s “Heard on the Street” page is its short-take “Overheard” section. (People are much more likely to read short things than long things, in general.) Today, it has some juicy gossip about ongoing negotiations between Microsoft and Yahoo — Microsoft still wants Yahoo’s search engine (despite reportedly planning to unveil its own new search engine next week), but “the Yahoos are steamed that Microsoft CEO Steve Ballmer keeps returning to areas they thought the two camps had already agreed on”.

Take all that as you will — but if you’re a business or technology blogger, don’t link to it, because you can’t link to it. It’s just sitting there in the middle of a dynamically-updated page, and as of tomorrow it’ll be gone forever: as far as I can tell, the “Overheard” archives simply don’t exist.

Why not? I can think of three possible reasons, ranging from cock-up to conspiracy:

  1. “Overheard” was designed primarily as a print product, the web presence was an afterthought, in the rush to launch no one got around to building an Overheard archive or constructing permalinks for it, and since then the webby people have moved on to other things.
  2. “Overheard” is short, and the WSJ still has a mindset that importance is proportional to length; therefore, short items are simply not important enough to archive.
  3. “Overheard” is the closest thing to a gossip column that the WSJ has, and the editors don’t want gossip sullying their venerable archives.

I suspect that the real reasons are more cock-up than conspiracy, but that’s really no excuse. Journalists care about where and how their work is presented on the paper; they tend not to care nearly as much about where and how it’s presented online, where they have an order of magnitude more readers. That’s going to have to change, but it’ll be a very slow process.


Too long, didn’t read.

Just joking. Good post as always, Felix.

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Colombia’s strongman

Felix Salmon
May 20, 2009 22:38 UTC

Here’s a measure of how important Nouriel Roubini has become of late, according to his Twitter, he’s just met with president Alvaro Uribe of Colombia and his (entire?) cabinet.

Nouriel’s right that the big debate in the country is about whether to let Uribe run for an unconstitutional third term; he doesn’t mention (you can’t blame him, he only has 140 characters) that even Uribe’s second term was unconstitutional until he had the constitution changed in 2005 to allow him to run for president again.

Uribe’s very popular, and at the margin a good president for Colombia. But third terms — even constitutional ones — rarely end well, and the longer that a strong president like Uribe stays in power, the harder it becomes for civil institutions to emerge — you get closer and closer to a “L’État, c’est Moi” state of affairs. Uribe will probably get his third term. But I hope the OAS — and the State Department — are bold enough to object.


As an American living and working in Medellin, I can say that Uribe has transformed this once horrifically violent country into one that even my 70-year old parents enjoyed just last week. I do however think that Uribe should respect the Colombian constitution (unlike the animals in Venezuela, Honduras and Nicaragua)and reject a run at a third term.

The music paradigm

Felix Salmon
May 20, 2009 21:48 UTC

I went along to an event featuring Roger Nierenberg today, despite the fact that I’m constitutionally allergic to anybody who comes out with managementspeak like this:

The Music Paradigm will benefit organizations dealing with a period of exceptional challenge or change. The most typical issues include: restructuring or reorganizing, change initiatives, cultural transformation, innovation and creativity, globalization, new leadership, merger or consolidation, cross-functional teamwork, new mission or strategy, and high performance.

Nierenberg’s shtick is that he takes 75-100 “leaders” and seats them next to members of a chamber orchestra he’s conducting. He then draws unconvincing parallels between sections of an orchestra and business-world teams, or between an orchestra’s conductor and a company’s executives.

That said, it’s quite an experience, all the same, sitting between the cellos and the first violins (in my case), experiencing first hand what it’s like to be inside the music-making machine that is an orchestra. How that can possibly translate into book form I have no idea, but many thanks all the same to Penguin Portfolio for inviting me along to this event.

I was struck by one thing Nierenberg said: that both musicians and conductors are rare examples of people who get instant and obvious results from what they do. That’s one of the most addictive things about blogging, too: press the button, and it’s up, immediately, for all the world to see. And I think that’s one of the great attractions of Twitter: not only do you get the instant gratification of seeing your tweet in public, but you also get responses incredibly quickly from the people who are following you. The world is getting faster, and more immediate, and, in that sense, more like an orchestra. Which doesn’t mean that Nierenberg’s “Music Paradigm” is a great buy. But if your company invites you to attend one of these things, do go — it’s a pretty unique experience.


The comparison to Ben Zander is understandable but inappropriate in my view. True, they do both make connections between classical music and business/leadership, but to sit inside a professional orchestra and hear those examples come to life around you is a completely different animal than simply having one man with a mic tell you about them. I’ve run into a few people who have been in Roger Nierenberg’s presentations and they had really positive things to say about how he addressed their companies’ issues. (one of them went to their first orchestra concert as a result of their experience) I’m an amateur pianist with a business degree and applaud anyone’s efforts to get rid of the mindset that classical music is only for a select few or is only for entertainment. And if that means helping out in the business sector too, all the better.

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Smart power meters start to arrive

Felix Salmon
May 20, 2009 21:00 UTC

Google PowerMeter announced its first partnerships today, with energy companies from Kentucky to Canada participating in the program. I spoke to Hal Snyder, who works for one of them, San Diego Gas & Electric, which has recently started installing what it calls “smart meters” in 1.4 million homes in southern California. It’s up to 10,000 now, hopes to get more than 200,000 by the end of the year, and have everybody installed by 2011.

Any of SDG&E’s customers can get their electricity-usage information from the utility’s own website, but now they’ll have the option of getting it straight from Google instead, embedding it on their iGoogle home page, that kind of thing. And the more they see how much energy they’re using, the less they’ll use — a 5%-10% reduction up-front, with more down the road when they start replacing appliances and light bulbs and the like.

None of this comes cheap: SDG&E is spending $500 million on this scheme, or about $350 per installed meter, but reckons it’s worth it in terms of hitting conservation goals, improving system reliability (they don’t need to wait for phone calls any more to know that power’s down in a certain area), and even obviating the need for new sources of power if and when variable pricing is introduced and moves consumption away from peak time and into the night time and evening.

The question is what happens for those of us who don’t have such an enlightened energy utility. Will we pay $350 to Google for a gizmo which does something similar? Since it’s Google.org, the philanthropic arm of the company, will they subsidize it somehow? Or should we just start lobbying our legislators to make smart metering happen nationwide? (I’m unclear on the degree to which such things are part of the stimulus plan.) In any event, the quicker this happens, and the more people that get this information, the better off we’ll all be.


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Online ad-sales datapoint of the day

Felix Salmon
May 20, 2009 20:36 UTC

Remember Nick Denton’s decision to go on a firing spree because ad revenues were going to fall by 40%? Well, they didn’t at his own shop, Gawker Media: sales were up a double-digit amount in the first quarter, and are up 27% in the second quarter. Does this mean that all those firings needn’t have happened after all? My guess, which I hinted at in my comment on the big debate over at Boing Boing Gadgets on Wired.com vs Wired magazine, is that a lot of it comes down to the business side of the media companies.

In a recession, a great ad-sales team, backed by a nimble publisher who’s willing to move fast and aggressively when opportunities present themselves, really comes into its own and starts destroying its competitors in a way that just doesn’t happen in much less discriminating up markets. One of the biggest secrets of Gawker’s success is its business side — they don’t get nearly as much attention as the editorial side, but they make all of the money, and they’re extremely good at what they do. Maybe Denton should have believed in them more.


On the content side, Denton was definitely using the recession as an excuse to cut people. He started taking on new writers less than three months after firing the popular Sheila McClear and has “hired” frequently since then (if you can call it that). For evidence, see http://gawker.com/stats-month/ and check out the number of people that went from 0 page-views to tens of thousands.

Quality has suffered. While the weekday posts still hold up, weekends have become unreadable.

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Private sales at auction houses: irrelevant

Felix Salmon
May 20, 2009 19:12 UTC

Mick Weinstein, commenting on Marion Maneker’s art-market chart, asks whether the auction totals include private sales. The short answer is that no, they don’t; the longer article is that it’s important not to get snowed by auction houses desperately trying to point to any bright spot amidst the gloom. Wait until they reveal hard numbers, and in general don’t trust anything they say which isn’t backed up by verifiable facts. Especially when the bright spot being claimed by Sotheby’s is that its private sales “have not declined at all”. If Sotheby’s private sales are flat, and its public sales have imploded, you can see why its share price has cratered.


Felix is right. Private sales at the auction houses are not relevant. The private market–dealers–is much larger than the auction market. But since there is little pricing information, the private market works off a price structure set in the sales. That’s why prices at the sales are much more important than the volume.

To answer Mick’s other question, the auction houses do not apply their fee structure to private sales. But I don’t think there is a standard fee for private sales. Though the marketing costs for the auction house are much smaller.