Greenspan’s Probability Skills as Good as His Monetary Policies
Most of you by now have already seen this, I’m sure:
(I saw that particular video linked from EPJ, but it’s all over the place.)
Now lots of people are (rightly) flipping out over Greenspan’s move into MMT territory. But what I want to focus on is his absurd claim that there is “zero probability” of default.
For one thing, countries with sovereign fiat currencies do default; Russia did when it blew up LTCM, for example.
Yet even if we focus exclusively on the United States, Greenspan is telling us that when we had about 2 days to go and no debt ceiling deal, that there was a 0% probability of default?! Does he know what “0%” means?
It’s one thing to say that the Fed has the technical ability to create an unlimited amount of dollars. It’s another to predict that that’s what will happen.
By the same token, I could say, “The federal government has more than $2 trillion coming in through tax revenues. So the government just has to cut spending to less than that, and interest payments are fine. There is therefore a 0% probability of default.”
My hypothetical analysis is only slightly less ridiculous than Greenspan’s.
Uh, Greenspan never moved into MMT. Greenspan is just as clueless about how the modern monetary system operates as every other so called economist with an internet connection and a keyboard. He is, however, correct, to claim the ability for the US pay it’s bonds is 100%. Willingness is another question, but the ability is 100% since all bonds are denominated in a currency that only the US government can issue. This is just common sense.
And to compare Russia in the late 90’s to the US today is a completely false comparison. Russia had a pegged currency and liabilities denominated in a foreign currency; the US has neither. These are very important basic facts that must be considered. You’re own link says:
Declining productivity, an artificially high fixed exchange rate between the ruble and foreign currencies to avoid public turmoil, and a chronic fiscal deficit were the background to the meltdown.
To even imply Russia’ default foreshadows potential credit issues in the US is about as logical as bringing Zimbabwe into inflation discussions. But then again, logic left this debate 30 years ago….
Greenspan did move into MMT territory by claiming that countries that can print their own money have 0% probability of default.
James Galbraith, who subscribes to MMT, had this to say:
“So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system.”
In other words, Galbraith claimed that as long as a government can print its own currency, then bankruptcy (default) has 0% probability associated with it. That’s what “not being a risk” means. Greenspan said the same thing, although he used slightly different terminology.
Murphy is absolutely correct when he emphasized what 0% probability of default actually means. 0% probability of default implies a prediction that “unwillingness to print” is not even a possible future.
If, on the other hand, “unwillingness to print” is a valid argument, if it is a possible future, then the probability of default cannot possibly be 0%. It would have to be something greater than 0%. You can argue over what that percent probability should be, but we all have to agree that it must be positive if we are going to attach any positive probability to “unwillingness to print” at all. If it is a possible future, then we MUST attach a positive probability to it, which means the probability of default would have to be greater than 0%, not 0%.
It would a logical absurdity to attribute a positive probability to “unwillingness to print and thus default” but then arrive at a 0% probability of default.
Second, it is not a false comparison to compare the US to Russia in 1998. Both countries (governments) had their own currencies and thus both in principle can print their way out of debt default. The fact that Russia pegged their currency to a foreign currency does not mean that the Russian government could have dropped the peg and inflated their currency to avoid default. In principle they could have. But they didn’t.
In other words, it has been empirically proven that countries that can print their own currency do not necessarily avoid default. That is Murphy’s criticism of Alan Greenspan saying that there is 0% probability of default for a government that can print its own money. It is not 0%. It may be very low, but technically speaking, it has to be greater than 0%.
All this is contrary to the MMT belief that it is wrong to even suggest a sovereign currency creator defaulting on its debt. Your post is nothing but a “No True MMT” fallacy.
Prior to Russia defaulting, you’d say “no MMT government” would default on its debt.
After Russia defaulted, you’d ad hoc explain away the contrary empirical data and say “no true MMT government” would default on its debt.
Prior to the US defaulting, you now say “no true MMT government” would default on its debt.
Should the US government default on its debt, you’d say “no real-true-positive-for-sure-this-time-I-have-to-keep-defending-MMT-despite-continuous-empirical-refutation government” would default on its debt.
Russia borrowed dollars to keep its peg for too long, and was unable to pay back its debt. The same thing happened to Argentina. So even if those countries chose to peg their currency to the dollars, at some point they had no choice but to default on their dollar liabilities.
However, MMTers always say default is a matter of willingness to pay not of ability to pay for a country with a free floating currency. stop building your strawman arguments, or at least build shorter ones to conceal the fact you weren’t able to catch a fly today.
Russia borrowed dollars to keep its peg for too long, and was unable to pay back its debt.
So even if those countries chose to peg their currency to the dollars, at some point they had no choice but to default on their dollar liabilities.
False. Russia could have printed Rubles, and then bought US dollars, then paid back their US debt.
But this is besides the point. It would help if you actually took the time to learn about what happened in Russia 1998. Russia did not default on paying back eurodollar debts. They defaulted on their own Ruble-denominated GKOs (short-term zero-coupon bonds) and OFZs (medium to long term bonds).
They chose to default on their Ruble-denominated bonds, rather than inflate their way out of their debt, in order to keep the Ruble within a desired band of exchange to the USD. They actually ended up defaulting and devaluing the Ruble, from 5.3 – 7.1 RUR/USD to 6.0 – 9.5 RUR/USD.
But in principle, they COULD have devalued the Ruble even further and not defaulted on either GKOs or OFZs.
However, MMTers always say default is a matter of willingness to pay not of ability to pay for a country with a free floating currency.
Then explain why MMTers keep making statements like the one Galbraith made, where they keep saying zero risk, 0% probability, etc.
stop building your strawman arguments, or at least build shorter ones to conceal the fact you weren’t able to catch a fly today.
It’s not a straw man to quote MMT statements.
I agree Russia chose to default on its Ruble denominated bonds too which they didn’t need to do, but they decided to shut down the central bank and let everything fall apart. But what pushed Russia to do this was the dollar denominated debt contracted to sustain the peg. It would have been self-defeating to print rubles to buy dollars.
I didn’t read Galbraith full statement, but from what you quoted he is referring to me to the absence of risk of default because of the ability to pay, if the government chose to do so, i.e. the standard MMT view.
I agree Russia chose to default on its Ruble denominated bonds
First, this is not something to “agree on.” It’s historical fact. There is only “I know” and “I don’t know” here.
You obviously did not know or else you would not have said that Russia was not able to pay back its debt because of some nonsense on currency pegging which you thought means they only borrowed in US dollars.
Second, that Russia defaulted on its Ruble-denominated debt is empirical evidence against the claim that sovereign currency issuers default on their debts with 0% probability (Greenspan), or with no risk at all (Galbraith).
But what pushed Russia to do this was the dollar denominated debt contracted to sustain the peg.
Uh yeah, that’s what I just said. You say this like I didn’t just tell you that.
It would have been self-defeating to print rubles to buy dollars.
Only because their goal was to maintain a peg!
This is separate from your fallacious claim that they were UNABLE to pay back their debts.
I didn’t read Galbraith full statement, but from what you quoted he is referring to me to the absence of risk of default because of the ability to pay, if the government chose to do so, i.e. the standard MMT view.
Yes, Galbraith also doesn’t seem to understand risk or probability. That it is possible for governments to not print their way out of their debts and instead default, which is not absurd since Russia has shown itself to be an empirical case of just that, then it is WRONG to say 0% probability and zero risk.
This is the main point Murphy made, which you are trying to obfuscate.
No, I forgot I was discussing with an ass pretending to be smart instead of just ignoring you. Va branler les mouches trouduc.
I didn’t forget that when the chips are down, you vulgar MMTers do nothing but bluff.
In principle, a government with a sovereign fiat currency can default simply by printing so much money that the value drops sufficiently such that economic agents and even the issuer eventually drop the currency altogether, rendering any outstanding debt either dead, or at least with bondholders depending on being paid in some other currency. Presumably, under such conditions, hard currencies would be hard for that government to come by and any successor currency would have to begin to establish credibility.
But, a situation like this is brought on by strong intention.
> Greenspan is just as clueless about how the modern monetary system operates as every other so called economist with an internet connection and a keyboard.
Uh, don’t you think he’s got a bit more relevancy on his resume than “internet and keyboard”? Your rhetoric is getting in the way of clear thinking, here.
What I found to be interesting was Goolsbee’s reaction to Greenspan’s drivel. What would you guess he was thinking?
Even MMTers admit the fact that the limit to debt monetization is in currency devaluation. So, at an extreme, once a currency loses its stability (i.e. hyperinflation), there can be no more debt monetization (and the two are linked the other way around, too). I think Greenspan is somewhat correct — the risk of debt default, currently, is very, very, very low. Furthermore, I think gov. bond yields will increase sightly if there is further debt monetization (QEIII). I don’t think there will be hyperinflation, but I do think that there will be plenty of debt monetization to come.
Austrian who talks sense on hyperinflation – very rare breed indeed.
Catalan is just a nice guy, so he tends to not say things that guys like me say, which is that Greenspan is totally clueless on the nature of probability. Catalan just said that in a nice way, by saying that Greenspan is “somewhat correct” even though he said that the probability is very, very, very low. Three very’s, let alone a million very’s can’t make it 0% probability.
This reminds me of Geithner’s statement in April 2011:
Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”
Geithner: “No risk of that.”
Barnes: “No risk?”
Geithner: “No risk.”
http://www.zerohedge.com/news/and-just-because-there-risk-us-could-lose-its-aaa-rating-tim-geithner-no-risk
much in agreement.
I actually agree with you here. It is not literally true that a country with a sovereign fiat currency can’t default, or at least suffer the same consequences, semantics aside.
Even in the US, inflation expectations can rise so high in principle, that investors stop buying our bonds and the dollar would be abandoned altogether by economic agents and eventually even by its government. It is the certainly not guaranteed that any successor official US currency would have any immediate credibility in terms of value, so default by any meaningful definition is possible.
But US default would require an extraordinary effort to accomplish, and it would nearly have to be intentional. We’re nowhere near that now or at any point anyone can see presently and it’s probably a safe bet that it won’t occur, especially given the Fed’s reluctance to even fight disinflation. For all intents, one may as well say US default is impossible.
For estimating a 0% probability, Alan Greenspan is persona non grata in the Bayesian conspiracy.
LOL
Robert Higgs expects stagflation, not a collapse of the dollar:
http://www.scotthortonshow.com/2011/08/03/antiwar-radio-robert-higgs-11/
Statists attack various Austrian predictions of the future because they are clueless about basic Austrian concepts. It’s a forrm of changing the subject.
His Lordship Lord Keynes pronounces Greenspan an MMTer:
Curiously, I just saw this video below where Greenspan understands the basics of MMT and why there is no risk of US default (from 0.51), where he says:
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
http://socialdemocracy21stcentury.blogspot.com/2011/08/us-downgrade-decision-is-irrelevant.html
How cool is that?
He and AP Lerner need a cage match to settle this.
Yeah maybe like this:
http://www.youtube.com/watch?v=QWX54-qc_sA&feature=related
“Good fight, good night!”
I don’t understand why MMTers are claiming that what Greenspan said is “the basics of MMT”.
It’s the basics of economics that predates MMT. Rothbard and Mises were talking about this decades ago.
MF is right. The difference is that Austrians are horrified by the prospect of satisfying debt with funny money and the MMTers, being morally degenerate, think it’s really cool. How many times do they come on this blog to triumphantly announce money dilution to satisfy debt as the greatest discovery since sliced bread? THE GOVERNMENT IS UNCONSTRAINED! We libertarians didn’t know that?
If a person is not already appalled by the Cantillon Effects and embezzlement of purchasing power inherent in creating funny money out of nothing, there is really no possibility of “debate” with such person.
Wrong! Our orgies are much much cooler than Porcfest or any other libertarian gathering that Murphy attends, in spite of the green hot girls from unknown planets he claims to have seen.
> The difference is that Austrians are horrified by the prospect of satisfying debt with funny money and the MMTers, being morally degenerate, think it’s really cool.
Well said, Bob.
The fiscalist theory of inflation, which is a free-market oriented, rational expectations, type approach, says pretty much the same thing. The assumption is that default is always avoided by printing money. The current price level depends on the future price level which depends on the budget deficit, now and in the future.
How is inflating the debt away not default? I think it is just a matter of semantics when people say that default can always be avoided by printing money.