Idiocy On Display
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2009-03-02 10:41 by Karl Denninger
in Macro Factors Ignore this thread
Idiocy On Display

Here we are from "The Skeptical Optimist", illustrating the abject stupidity populating our Capitol (and elsewhere) with the mantra "Deficits don't matter".

The only problem with the Republicans' and Democrats' concerns about the federal deficit and debt is this: deficits don't matter. Worrying about deficits is barking up the wrong tree at what is possibly the worst time in our nation's history to be making that mistake. The time our politicians and ideologues are wasting on the deficit debate is preempting a national debate on the only real solution to our economic problems: returning to robust economic growth. The unimportant, time-wasting deficit drivel could end up being extremely costly to our kids and grandkids.

Really?

Here's his graph:

Deficits are harmless eh?

Hmmm.

Here's a chart for our resident fool at that URL:

 

Right now the cost of rolling over that debt (which is his solution) on the short end is about 23 basis points, or 0.23%.

But look back just a short while, when "growth was robust".

What was the IRX?

50.45, or 5.05%, twenty times higher.

No, folks, that is not a misprint.

The cost of government financing right now is extremely low, and Treasury has shifted an unprecedented amount of funding to the short end of the curve, compressing duration downward massively.

What happens when the yield curve shifts upward, especially on the short end?

Funding costs explode, that's what.

This is a catch-22 that makes the "deficits don't matter" claim idiotic, and those who run this argument during recessionary conditions (as they always do) dramatically (and in this case catastrophically) incorrect.

Given the average duration outstanding by Treasury, should we see the yield curve shift upward that "benign" 4.2% assumption under "robust" growth would almost certainly more than double, and this assumes that a destructive yield-increase spiral does not initiate due to (very valid) concerns about the United States being able to service the debt.

The idea that we can continually grow GDP at a compound 4.2% rate is exactly the sort of magical thinking that got us in this mess in the first place.  Such a rate can only be sustained (for a while) through fraud-laced credit creation - a bubble that those with capital will not allow to be restarted, as they simply won't fund it.

The math is never wrong.