At least Ben Bernanke isn’t the only person in government who doesn’t really understand our monetary system. Over the weekend Tim Geithner paraded himself all over the weekend talk shows while he proved that he barely deserved to pass econ 101. That’s right, the Secretary of the US Treasury doesn’t get it.
The interviews mostly began with Mr. Geithner distancing himself from the entire cause of this crisis. Although he was effectively the fox in the hen house (he was President of the NY Fed while we experienced the grossest bank expansion/leveraging experiment in the history of the world) Mr. Geithner continues to make it sound as if he was saddled with this problem and played no role in its cause:
“I, I think I disagree slightly in the sense that, you know, remember, this was a recession caused by a set of policies that left us with a $1.3 trillion deficit when the president came into office, an economy that was falling off the cliff. Millions of Americans had already lost their jobs. The recession was a year old at that point.”
Mr. Geithner goes on to explain that there is no chance of a double dip (famous last words?). He displays absolutely zero sense of risk management and prescience. This shouldn’t be surprising to anyone. It is the tendency of government officials to adhere to the scientific method – “let’s wait for the dust to settle before we make our next moves”. Unfortunately, that’s not how markets work and it’s certainly not how economies work. Mr. Geithner is blindingly optimistic:
“MR. GREGORY: So just to be precise, you do not believe in a double-dip recession, that it will get worse before it gets better?
SEC’Y GEITHNER: No, I don’t. I think the most likely thing is, you see an economy that gradually strengthens over the next year or two, you see job growth start to come back again.”
Mr. Geithner then goes on to explain how he totally misunderstands how a fiat currency system in a floating exchange system works. It’s 100% crystal clear that Geithner is living in his textbook gold standard world where the USA borrows money to finance spending – nothing could be farther from the truth. The Treasurer of the USA says we “borrow” to “finance” our spending:
“I think this is a responsible way to do it. You know, my job, David, is to help make sure we can borrow to finance the obligations that Congress gives us.”
Mr. Geithner then continues his rambling diatribe by offering up an explanation for why we can afford to continue borrowing and why interest rates are so low:
“David, we can afford to do it this way. I’m completely confident we can. And if you look, again, at what we’re paying to borrow now, we’ve got very low interest rates as a country, in part because people around the world and Americans have a lot of confidence in our capacity as a country to make sure we manage through these challenges.”
Of course we can afford it. We are the largest and most productive economy in the world. There is enormous demand for our currency. We have an output gap have you could drive a Mack Truck though. We have Harvard graduates applying for jobs at Starbucks. The amount of idle capacity is an outrage. As a nation, we can always always afford to spend in the currency we create so long as there is a productive economy that backs that currency and the USA does not lose its ability to tax that productivity.
Mr. Geithner believes interest rates are low because the risk of insolvency is low. Of course the risk of insolvency is low in the USA – because there is no insolvency risk in the USA. Despite the ranting and raving of many market pundits in recent years a bet on US insolvency has been an absolute disaster. Interest rates are low today because the market is worried that the USA is at risk of years of very low growth and below trend inflation rates. Insolvency is not an issue, yet Mr. Geithner believes we need to cut the deficit so we can reassure the rest of the world:
“But we have to make some choices, too, and we have to make sure we can continue to earn confidence around the world that we’re going to have the will as a country to bring these large inherited deficits down over time to a much more manageable level. We think that’s the responsible thing to do because we need to make sure we can show the world that (we’re) willing as a country now to start to make some progress bringing down our long-term deficits.”
And we wonder why the economy in this country is such a mess after all this time? Mr. Geithner has no clue how the system actually works. If he did, he would have taken responsibility for his part in the crisis and never taken a job that is clearly well beyond his capabilities. He would have never helped Ben Bernanke devise his great bank rescue plan which has been an utter waste of government resources and failed on all levels (except making bankers more wealthy).
Mr. Geithner might have sounded at least partially credible if he’d spent more time talking about cutting wasteful spending as opposed to letting tax cuts expire (which is an effective tax hike – the last thing the debt saddled private sector needs right now). But it’s clear Mr. Geithner doesn’t understand how a sovereign issuer of currency in a floating exchange system actually functions. He’s more worried about non-existent bond vigilantes and China as our banker (which they aren’t). Let’s just hope Geithner’s model isn’t as horribly flawed as Mr. Greenspan’s was. Unfortunately, the evidence leads me to believe it might even be worse….
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.