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Posts Tagged ‘Debt’

Circling the Drain: Can the Euro Be Saved, Or Is It Doomed? A Freakonomics Quorum

On Jan. 1, 1999, the euro was launched in electronic form. A few years later, amidst much fanfare, 12 European countries began replacing beloved national currencies with the euro, and the currency rapidly became the tender of choice across Europe. Wim Duisenberg, the then-president of the European Central Bank applauded the new currency: “By using the euro notes and coins we give a clear signal of the confidence and hope we have in tomorrow’s Europe.”

Almost ten years later, things look a little different. The financial crisis that has brought much of the developed world to its knees looks poised to bring down Europe’s single currency as well. The cover of this week‘s Economist reads “Is this really the end?” Inside, the magazine offers the following observation:

The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast.



The Irony of the S&P Downgrade

At Columbia last year I took a class called “Modern Political Economy” from Ray Horton. One of Horton’s favorite things to say was that sooner or later, if the U.S. didn’t solve its debt issues through the political process, the world’s capitalists would do it for us — as in the debt markets would punish us for our profligate ways, and raise the cost of borrowing.
And yet, here we are: a ratings agency has downgraded our credit for the first time ever. But on the first day of trading, rather than going up, rates on our government debt fell to near record lows as money poured out of riskier assets in a flight for safety. When the markets closed last Friday, and the U.S. still had a AAA rating from S&P, the yield on the 10-year Treasury was 2.55%. It ended Monday down to 2.34%. The same thing happened during the stock market sell-off in the fall of 2008, when the rate on the 10-year Treasury went from around 4% to less than 2.5%. U.S. government debt is still the safest, most liquid market in the world. The S&P downgrade doesn’t change that. In fact, the immediate effect has been to make it safer. How strange.



A Stack of Bills Reaching to the Moon: How to Quantify Our National Debt

Now that the U.S. national debt is in the headlines, the media is awash in astronomical numbers such as $14.3 trillion (the current debt). Everyone realizes that this number is incomprehensible. Even back in 1981, when the national debt was only about $1 trillion, the debt was still incomprehensible. Thus, speechwriters for Ronald Reagan created, or at least popularized, a widely used attempt to give it meaning. Speaking to Congress in February 1981, Reagan said:

A few weeks ago I called such a figure, a trillion dollars, incomprehensible, and I’ve been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high.

This comparison is often quoted as a stack of one-dollar bills 67,000 miles high (perhaps because thousand-dollar bills don’t exist). No matter which denomination you use, I give the explanation an A for effort, but an F for performance. For I have little idea of how far 67,000 miles is. I know it’s way too far to walk and even too far to fly (jumbo jets have a maximum range of around 7,000 miles). But is it large as a national debt? I have no idea. Perhaps a large national debt would reach all the way to Mars. The connection to a height has merely replaced one meaningless idea ($1 trillion) with another meaningless idea (a stack 67,000 miles high).



Debt Ceiling Poll: To Raise or Not to Raise

According to a new poll from the Pew Research Center and the Washington Post, more people see raising the debt limit as a bigger risk than not raising it. Though it’s close, and the margin has shrunk over the last two months, 47% say they’re more concerned about the risks that raising the debt limit pose to the U.S. economy than they are over the fallout of failing to do so; 42% see it the other way around.
Sounds like a good time for a Freakonomics Poll:



Will China Need a New Debt Ceiling Too?

I don’t know enough about the Chinese economy — or the U.S. economy, for that matter — to say just how big a deal this is, but I sense it’s potentially pretty big:

China said local governments owe debt equal to more than a fourth of the country’s economic output, the first time Beijing has put a number on such debt, fueling fears banks could again face mountains of bad loans and underlining the limits Beijing faces as it battles inflation.
The National Audit Office said Monday that local-government debts total some 10.7 trillion yuan ($1.65 trillion), or 27% of China’s gross domestic product last year. The report Monday was billed as a comprehensive tally of such debt, much of which was incurred during a two-year stimulus-spending binge ordered by Beijing to fight the effects of the global recession.
Some analysts say the National Audit Office’s figure failed to count certain kinds of local government debt, meaning the actual total could be even higher.
Either way, the figure released Monday affirms analysts’ belief that the true level of China’s government debt is considerably higher than has been acknowledged by the Finance Ministry, which puts just the central government’s debt at 17% of GDP without taking into account local governments’ debt.



Is the Debt Cap Unconstitutional? A "Thought Experiment" from 1998

Recent discussions of whether the Fourteenth Amendment’s Public Debt Clause would allow the president to ignore the debt limit reminded me of a paper on the topic that a former student of mine, Michael Abramowicz, wrote under my supervision almost fifteen years ago. Michael has since become a prolific scholar on other topics, and this year he had the rare distinction of publishing articles in both the Harvard Law Review (here) and the Yale Law Journal (here). Meanwhile, he and I have recently coauthored twice, on randomizing law (also with my colleague Yair Listokin) and on using bonds as commitment devices. I tried to find Michael’s old article with Google and couldn’t, so I wrote to him asking about it. With his permission, I include here his reply:



Credit-Card Agreements as Literature

Credit-card agreements seem to get longer and longer. Why? Planet Money explains some of the factors, which range from the necessity for less legalese to Congressional reforms.



Giving Back the Tax Cuts: A Guest Post

My colleagues Jacob Hacker and Daniel Markovits have created a cool website called www.GiveItBackForJobs.org that not only includes a useful tool to let you calculate the size of your tax cut, but suggests that “Americans who have the means should collectively give back our Bush tax cuts, by making donations to organizations that promote fairness, economic growth, and a vibrant middle class.” Here’s a post from the creators themselves that gives more details.



Another Financial Prophet Unearthed

In the wake of any financial crisis, a few people are always trotted forth (sometimes they do the trotting themselves) as having seen the particulars of the crisis in advance — but who, despite all their hand-waving and teeth-gnashing, were roundly ignored. In the Wall Street Journal, Jason Zweig profiles Melchior Palyi, an economist who seemingly predicted many of today’s big economic problems. But here’s the twist: he did it some 70 years ago.



Recanting a Small Part of Lifecycle Investing

On page 9 of Lifecycle Investing, Barry Nalebuff and I write:
“[B]efore you invest in stocks, first pay off all your student loans and credit card debts.”
On reflection, we were only half right. You should pay off your high-interest-rate credit card loans before investing in stock. But in this post from our Forbes blog, Barry and I show why young investors need not pay off their student loans before investing in stock.



Brother, Can You Spare a Trill?

Economists Mark J. Kamstra and Robert J. Shiller propose a new tool for government financing: “trills” — i.e., shares in U.S. GDP.



"And They Invented Math!"

Michael Lewis, who expertly profiled Iceland’s collapse last year, has now set his sights on Greece. Lewis chronicles a country accustomed to corruption, handouts, and “breathtaking inefficiency.”



Debt as a Drug

Planet Money interviews Nassim Taleb for its Deep Read series. Taleb compares the developed world’s dependence on debt to drug addiction.





The Debt Clock

In the spirit of its Big Mac Index, The Economist rolled out its Global Debt Clock, which features a running global-public-debt tally.



Do You Owe $23 Quadrillion?

An unidentified computer glitch has led Visa to overcharge several of its cardholders for routine purchases at drug stores, gas stations, and restaurants, to the tune of $23,148,855,308,184,500.00 each. These charges, as far as we can tell, exceed the sum total of wealth accumulated in human history.



The Self-Serving Policy Proposal Prize

We need a prize for the most self-serving proposal. A lawyer with large student loans has assembled a large group of friends on Facebook with the proposal “Cancel Student Debt to Stimulate the Economy.” Ignoring the fact that this might reduce rather than increase the fiscal stimulus, it would reduce the burden on people who, if they attended public universities, . . .



The Fiendish Genius of Credit-Card Minimum Payments

New research finds that credit-card holders pay down their debts more slowly when their statements suggest a minimum monthly installment. The Economist reports on the study, by University of Warwick psychologist Dr. Neil Stewart: Mr. Stewart presented 413 people with mock credit-card bills of ?435.76 (about $650) that were identical — except that only half mentioned a minimum payment of . . .



Diamond and Kashyap on the Recent Financial Upheavals

As an economist, I am supposed to have something intelligent to say about the current financial crisis. To be honest, however, I haven’t got the foggiest idea what this all means. So I did what I always do when something related to banking arises: I knocked on the doors of my colleagues Doug Diamond and Anil Kashyap, and asked them . . .



Is There a January Late-Fee Spike?

If I am someone who profits from other people paying their bills late — a big landlord, perhaps, who charges a 5 percent late fee on rents — I would have to think that January is my favorite month. Why? So many people are traveling during late December, or having their schedules otherwise interrupted, or are perhaps afraid to open . . .