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Forget the Alarmism

Ben Stein, I love your movies almost as much as I like going head-to-head with you on Fox News. But the article you penned recently for The New York Times, titled "Note to the New Treasury Secretary: It's Time to Raise Taxes," is nothing but a one-sided and unnecessarily alarmist view of the American economy.

Lucky thing that Hank Paulsen, incoming Treasury secretary, had the good sense not to read your piece -- or if he did, to see the weakness of your arguments. The other day, at his confirmation hearing, he told lawmakers that the tax cuts were good for the economy and should be made permanent. It seems the praise you heaped on Paulsen in your column was well-deserved.

The spectre of the downgrade
As in all your articles, Ben, you display an impressive level of writing proficiency, but on the subject of economics, you show an amazing degree of ignorance. You say that America faces the most dangerous economic future since the Great Depression. That's a nice bit of fearmongering, but it won't work. You follow up by saying that our nation faces the possibility of a debt downgrade by Standard & Poor's 14 years from now if it doesn't get its fiscal house in order.

In 2002, Standard & Poor's cut Japan's credit rating to the lowest of all the G-7 nations, a full four notches below the United States. At the time, it was widely reported that the world's second-largest economy had a credit rating on par with that of the West African nation of Botswana. So what happened to the Japanese government's debt and interest rates? Nothing. Yields on 10-year obligations remained below 1.5%, and the Bank of Japan continued to maintain the overnight lending rate at zero.

The fact is, there is never a payments risk in the case of a country that issues debt denominated in its own currency, provided that currency floats freely. That was the case in Japan, and it's also true for the United States. The U.S. issues debt denominated in dollars, of which the U.S. Government is the monopoly issuer. While it's true that foreigners hold the exchange risk, the idea that there would be an inability to pay is completely erroneous.

If ability to pay is a non-issue, then what about willingness to pay? If you owe a creditor money, and you have the money to pay, but don't want to for whatever reason, you'll still go into default.

Throughout the period that saw all those Japanese debt downgrades by U.S. rating agencies, Japan always maintained both the ability and the willingness to pay. Yet Standard & Poor's and the other agencies still downgraded it. That's totally illogical in my opinion.

Consider, too, that the U.S. Congress has effectively shut down the government because of a budgetary impasse at least five times in the past 25 years. These shutdowns were serious because they had the potential to interrupt interest and principal payments on the debt. They represented a stated unwillingness on the part of the U.S. Congress to pay its bills. Shouldn't S&P have considered a downgrade then? It didn't, and neither did any of the other rating agencies. Their behavior here appears to be inconsistent and, again, illogical.

So maybe S&P might, in the same misguided way, do to the United States what it did to Japan. The reaction in financial markets, however, would likely be far less hysterical than you presume, and far more like the reaction seen in Japan's case.

Liabilities and assets!
In your piece, you also mentioned that investment advisor Phil DeMuth calculated the cumulative cost of Medicare for the rest of this century. I wonder why didn't he do that with the cumulative economic output as well? At least it would have put the debt into context. But the Debt Doomsday Crowd (of which you seem to have become a member) hates to do that. It only likes to scare people by showing the liability side of the balance sheet, not the asset side as well. (Nor the increasing cash inflows!)

In the past 50 years, our nation's economy has expanded 55-fold. That's the main reason why the Debt Doomsday Crowd has never seen its forecasts of debt collapse come true. The $270 billion national debt that America had in 1947 represented 114 percent of its GDP, whereas the $8.4 trillion national debt we have now is only 65 percent of our GDP. In other words, the debt today represents less of a financial burden than the debt of 50 years ago, despite the significant difference in its nominal size.

Without question, however, the most outlandish comments in your article center on your discussion of the current account deficit, where you say we have to "transfer $1 trillion of our assets every year to foreigners." Ben, the dollar is a non-convertible currency. It's exchangeable for nothing. You should know that. Your former boss, Richard Nixon, delivered the decision that finally broke the dollar's link to Bretton Woods and gold back in 1971.

Foreigners accumulate dollars because it is their desire to do so, and it is their desire to do so because they wish to conduct business in the U.S. If you wished to conduct business in Japan, you'd have to have some yen in your hand, or in a bank account once you got over there. Foreigners also like to invest in safe, secure, high-quality U.S. government bonds.

As for what we're sending them every year, don't hold your breath expecting to see freighters stacked with single-family homes and containers of mutual fund shares, as you seem to imply. We only send them some money for interest payments on the small debt we owe, and other things that they want and need, like software, financial services, entertainment, and agricultural products (otherwise known as food, which is pretty important).

The Debt Doomsday crowd seems to want us to believe that we're forcing our worthless dollars down the throats of these gullible foreigners, and that without their benevolence, impoverished America would be traipsing around the world with its tin cup in hand. According to this view, we owe our overindulgent lifestyles to the thrifty, hard-working people of Asia, who'd just as soon see us choke on our own profligacy.

The future isn't so grim
Actually, America's economy is the engine of the world. It's arguably the only economy that can singlehandedly and reliably raise the living standards of the impoverished and opportunity-starved people who represent more than half the planet's population. That's why these countries have spent trillions to protect their position as supplier to the mighty U.S. The hard currency reserves of Japan, China, Taiwan, Korea, and others should be considered less of an asset and more of a reflection of the cumulative cost of subsidizing, protecting, and insulating their export industries, so that they can keep selling their goods to us. They know it would be disastrous to lose their business with the United States.

History has shown that protectionism, mercantilism, or whatever you want to call it carries a heavy long-term cost for the citizens of the nations that employ it. Workers in those countries invariably see their standard of living rise more slowly -- if at all -- than in free and open economies like America's.

Ben, you started out with a good idea -- your book on helping people to invest for retirement. Now, all of a sudden, it seems you have come back from a junket with the Debt Doomsday crowd; rather than help and instruct, your goal is now to frighten and alarm. When I'm on Fox with you, I hear you talk about how great America is. Don't sell her short with a lopsided view of the future.

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Fool contributor Mike Norman is founder and publisher of the Economic Contrarian Update and a Fox News business contributor. He's also a radio-show host at BizRadio Network.


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  • Report this Comment On February 04, 2009, at 2:48 PM, FoolishJew wrote:

    Mike Norman is a complete idiot. Nobody should ever listen to him again. If he didn't see the economic collapse coming, then why should we ever listen to him when he makes comments on how to correct things or what to invest in. He's an incompetent con-man at best. He sucks!

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