Today’s Bernanke speech is full of whoppers. He compares the USA to the Eurozone nations where rates have surged, he says the government relies on the kindness of strangers to ensure fiscal sustainability and just generally misinterprets the way a nation that issues its own currency functions in the real world.
“A large and increasing level of government debt relative to national income risks serious economic consequences. Over the longer term, rising federal debt crowds out private capital formation and thus reduces 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 show 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 is moving the nation ever closer to that point.
Perhaps the most important thing for people to understand about the federal budget is that maintaining the status quo is not an option. Creditors will not lend to a government whose debt, relative to national income, is rising without limit; so, one way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. These adjustments could take place through a careful and deliberative process that weighs priorities and gives individuals and firms adequate time to adjust to changes in government programs and tax policies. Or the needed fiscal adjustments could come as a rapid and much more painful response to a looming or actual fiscal crisis in an environment of rising interest rates, collapsing confidence and asset values, and a slowing economy. The choice is ours to make.”
There’s so much wrong there I don’t even know where to begin. It’s impossible for the USA to have a financing crisis or rely on the kindness of strangers for its future spending. We are not funded by foreign spending. We are not at risk of becoming like any Euro nation (all of whom are currency users). He clearly lacks a basic understanding of our monetary system (hard to believe I know, but 100% evident from these comments).
It’s no wonder that Dr. Bernanke has misdiagnosed our problems at every step of the way. He can’t even differentiate between a currency user and a currency issuer! I’d go into detail on each point, but quite frankly, I am losing hope. At least he gets one thing right – the choice is ours to make. We can only hope that our leaders will be wise enough to recognize that the most important central banker on the planet does not even come close to understanding the monetary system which he has a vast influence over.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.