Comment by the Fed Chairman

From a comment on Mike Norman’s blog.
This helps to ensure a wide output gap.

From Bernanke’s testimony from a couple of weeks ago:

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth. To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events.

Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.”

Full prepared remarks

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19 Responses to Comment by the Fed Chairman

  1. wilwon3 says:

    @Roger Erickson

    “Socrates pointed out over 2000 years ago that we should never listen to sophists just because they’re icated.”

    What is ‘icated’?

    Reply

    roger erickson Reply:

    @wilwon3,

    Dear me! In this case it’s the transformation – by divine right – of a sophist to a sophisticated economist. Other manifestations may vary.

    Reply

  2. Keith Newman says:

    At least Bernanke is no longer saying banks lend out reserves. That could be seen as progress.
    However misunderstanding the technicalities has no political content and so is an error he can correct with no consequences. Calling for fiscal cutbacks at some point is very political. It is all about who is running the country and for whom and what messaging is required.

    Reply

    roger erickson Reply:

    @Keith Newman, You’re right. Obama could nominate Krugman as a replacement Fed Chief. Strange as it seems, Fed policy could obviously get worse.

    He could also suggest a science fiction writer become head of the American Physics Society. That would be fitting. Chief requirement would be pure theory, and all interactions with actual operations strictly ruled out.

    Reply

    Adam1 Reply:

    @roger erickson, Personally my current retort to people about Obama is that the only difference between him and Romney is that Obama is bought and paid for by the 1%… Romney is one of the 1% (full disclosure: I voted for Obama).

    Reply

    SteveK9 Reply:

    @Adam1, More generally the Democrats are 80% owned by the 1%, and the Republicans 100%. This is a choice?

    Adam1 Reply:

    @Keith Newman, sadly this is basicly fact.

    Reply

  3. wh10 says:

    we’re doomed

    Reply

    roger erickson Reply:

    @wh10,
    Sticking with current semantics, just sing the following: “doo me doo me doo; doo doo doo doo”.

    If that industry which is more trouble than it’s worth were to collapse, the rest of us could just hum that when it asks for another bailout.

    Reply

  4. walter says:

    You would say; good reason to stay in bonds ……., although …..they one day may voluntarily default

    Reply

  5. RyanVMarkov says:

    It is a criminal statement leading to menslaughter, and the Chairman has to be prosecuted for that.

    Reply

  6. Broll The American says:

    Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly

    Isn’t macro economics based on math? Shouldn’t all these stuffed suits with their Ivy League economic degrees be able to pinpoint the exact figure that is “unsustainable?” The mere fact that they cannot do so, combined with the fact that no “historical experience” or “economic theory” shed any light onto when the debt becomes a tipping point should tell everyone that the entire idea is flawed.

    Reply

    SteveK9 Reply:

    @Broll The American, That and the fact that Japan’s debt is over 200%.

    Reply

    roger erickson Reply:

    @SteveK9, We keep hearing that Japan’s fiat is 2x their historical fiat. What the heck does that even mean?

    Socrates pointed out over 2000 years ago that we should never listen to sophists just because they’re icated.

    Our semantic deficit also isn’t convertible to reality, regardless of the irrational demand.

    Reply

  7. Dear Dimwit Bernanke (and other central bank governors),

    1. A large level of government debt only crowds out private investment if the government debt results in high interest rates. Currently interest rates are at record lows. Doh!

    2. Re interest payments to foreigners, the important consideration is the REAL RATE (i.e. after adjusting for inflation). Currently the real rate is near zero. If you and the rest of the economically illiterate elite had their wits about them, they’d arrange a more or less permanent negative real rate. That way the US of A would actually make a profit at the expense of its creditors.

    3. “High levels of debt also impair the ability of policymakers to respond….” Hogwash. If no one wants to lend to a monetarily sovereign government, what of it? Such a government can always print money to fund stimulus.

    4. “interest rates can soar quickly if investors lose confidence” See “3” just above. I.e. if no one wants to lend to a monetarily sovereign government, it can just print.

    Suggest you get a job you are better suited to – like sweeping the streets.

    Yours etc

    Reply

    SteveK9 Reply:

    @Ralph Musgrave, Point 4 is another version of ‘we may become Greece’ … to hear THAT is depressing.

    Reply

    Adam1 Reply:

    @SteveK9, when I hear, “if ____ lose confidence…” I immediately know I’m speaking to/listening to an economist who really doesn’t know much that is relevant to the conversation/topic.

    Reply

  8. Brian says:

    We cannot continue to sail west, as eventually, although it is not known when, we will fall off the edge of the Earth.

    Reply

    roger erickson Reply:

    @Brian, He’s worried that even his helicopter won’t work out there, and that his computer will refuse to mark up bank accounts past some supra-natural level.
    It’s a policy feature, not a drug.

    Reply

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