There is no evidence that countries like the United States face debt tipping points
Have you read the opinion section of any newspaper in the last three years? Yes? Then there is a better-than-even chance you have come across some impressive-sounding analyst predict that the United States is "turning into Greece."
Maybe it's been a while, so we'll recap. The short version of this story is that we'll spend ourselves into bankruptcy. The longer version says that too much public debt makes markets nervous. Nervous markets demand higher interest rates. Higher rates mean higher deficits and lower growth, both of which mean more burdensome debt. More burdensome debt makes markets even more nervous. And around and around we go in a vicious circle into insolvency.
As far as scare stories go, this is pretty damn scary. It's also just a story. Rates haven't risen as debt has the last few years; they have fallen to historic lows. Of course, that hasn't stopped the Greek chorus from predicting that the economy is going to Hades. But when? Is it when debt reaches 100 percent of GDP? Or 90 percent, as Carmen Reinhart and Kenneth Rogoff famously argued?
What about 80 percent?
That was the bright white line drawn in a recent paper by David Greenlaw, James Hamilton, Peter Hooper and Frederic Mishkin. Greenlaw & Co. ran regressions on 20 advanced economies from 2000 to 2011 to see if there's a relationship between a country's borrowing costs one year and its gross debt, net debt, and 5-year current account average the previous one. (Glossary Interlude: Gross debt refers to the total amount of debt, including debt the government owes to itself. Net debt is the amount held by the public, minus any government assets. Current account is the balance of trade, which includes both net exports and net income on foreign investments).
They found a link. By their calculations, the coefficients for gross and net debt were "both highly statistically significant", and increasing both debt levels by 1 percentage point of GDP would increase borrowing costs by 4.5 basis points (or 0.045 percentage points). The coefficient for the current account balance was also highly significant, and decreasing the balance by 1 percentage point of GDP would increase borrowing costs by 18 basis points.
This is a big deal. It's not that this regression equation has much predictive power (the authors admit it doesn't) or that the above 4.5 basis points are all that scary; it's the claim that there's a statistically significant relationship between debt and rates. After all, if Greenlaw & Co. are right about debt tipping points, then we are, technically-speaking, screwed. Our gross debt to GDP is already at 102 percent -- enough to send our borrowing costs soaring, as they predict below.
If they are right.
They almost certainly are not.
WHY WE'RE SPECIAL
[Things are about to get very wonky below, so my editor forced me to sum up things here. The two main conclusions are: (1) For countries that can borrow in their own currency, like the U.S., higher debt doesn't clearly lead to higher interest rates. (2) For countries that don't control their currencies, like Greece, it's borrowing too much from foreigners (NOT borrowing too much in general) that clearly leads to much higher borrowing costs. Okay, forward with the wonkiness... ]
Not all debt is created equal. Countries that borrow in a currency they control play under a different set of rules. They can never run out of money to pay back what they owe, since they can always print what they need as a last resort. That's not to say they actually do or should turn to the printing-press to finance themselves. But the option to do so calms markets. After all, inflation is a lot less bad than default for creditors. That's why it's no so easy for countries that don't borrow in a currency they control. They can default. And this is a case where thinking can make things so. Indeed, as Paul De Grauwe points out, countries that don't have their own central bank, like euro members, can fall victim to self-fulfilling panics that push them into bankruptcy. In other words, markets force up interest rates because they fear default -- which then pushes them into default. It's a bank-run on a country.
So we have to answer one big question. How much of Greenlaw & Co.'s results are driven by euro countries that have completely different debt dynamics than non-euro countries?
Well, as Paul Krugman points out, 12 of the 20 countries they look at are either part of the euro, or, in Denmark's case, pegged to it. The remaining ones show no signs of anything resembling debt tipping points. Often the reverse. That's simple enough to see if we break up their sample. The chart below looks at the pre-crisis years from their sample, and shows the non-euro countries in red, the core-euro countries in green, and the (later) troubled PIIGS countries in blue. Back then, at least, there wasn't any difference between -- except for Japan, which had far more debt, and far lower borrowing costs. Nor was there much of any discernible relationship between debt and interest rates.
But then Lehman failed, and the world changed. Debt went up and borrowing costs came down -- except for the PIIGS.
I decided to go back and see what kind of results I'd get if I looked at the non-euro countries and PIIGS separately. I started by trying to recreate the Greenlaw & Co. result for the entire 20-country sample over the 12 years -- which I was able to do, with some very slight differences due to slightly different data sources. (I couldn't find IMF data on long-term interest rates for every country, so I used OECD data to fill in the blanks). Next, I ran a regression with country and time-fixed effects on the non-euro countries -- Australia, Canada, Japan, Norway, Sweden, Switzerland, the U.K., and the U.S. -- from 2000 to 2011. I got coefficients of .00743, .00575, and -0.0695 for gross debt, net debt, and current account, respectively. None of them were statistically significant at the 95 percent level. (The P>t values were 0.13, 0.18, and 0.087).
To translate from stats-speak: our equation for non-euro countries tells us increasing debt by 1 percentage point of GDP only increases borrowing costs by 1.3 basis points. And that result isn't even statistically significant. In other words, there is no evidence of a debt tipping point for countries that borrow in money they can print.
But what about Europe's troubled economies? The Greenlaw & Co. results should hold up there, if nowhere else, right? Well, kind of. I ran another regression with country and time fixed effects on the PIIGS -- Portugal, Italy, Ireland, Greece, and Spain -- from 2000 to 2011, and I got coefficients of 0.0605, 0.0209, and -.8952 for gross debt, net debt, and current account. The coefficients for gross debt and the current account were statistically significant (the latter highly so), but not for net debt, since the PIIGS mostly have the same amount of gross and net debt. (The P>t values were 0.046, 0.342, and 0). I went back and ran the regression again, this time without net debt, and got coefficients of 0.0843 and -0.9157 for gross debt and the current account. Both were highly significant. (The P>t values were 0 for both).
Translated: our equation for the PIIGS tells us increasing debt by 1 percentage point of GDP increases borrowing costs by 8.4 basis points -- but increasing the current account deficit by 1 percentage point of GDP increases borrowing costs by 91 basis points! The PIIGS do have a serious problem, but that problem is borrowing too much from foreigners, not too much government borrowing, in general. Of course, this isn't exactly new information. Paul Krugman, among others, has been pointing out for years that the euro crisis is really a balance of payments crisis that just looks like a debt crisis because of the common currency.
Beware economists bearing regressions -- and journalists too. My sample sizes here are so ridiculously small that the results are hardly dispositive. So don't pay attention to the evidence. Pay attention to the lack of evidence.
There isn't any evidence that the U.S., or other countries that borrow in currencies they control, face some debt tipping point after which borrowing costs spiral out of control. There isn't even much evidence this is true of Europe's troubled economies. Borrowing costs fell for the PIIGS in 2012 (one year after Greenlaw & Co.'s sample ended), not because those countries reduced their debt burdens, but because the ECB promised to do "whatever it takes" to save the euro. A monetary backstop matters more than the amount of debt. Reducing debt isn't as empirically urgent as we hear.
Our Greek chorus are more Chicken Littles than Cassandras.
Sullivan: Now we’re getting somewhere. And I’m not just referring to all of the potential wars that so many of our Game of Thrones characters are trying to either stave off or set aflame. We’ll get to those in a moment. No, I’m talking about the long-simmering question that should be on every fan’s mind, the one that showrunners David Benioff and D.B. Weiss had to answer before George R. R. Martin would hand over his series so they could bring it to television
Mary Hamm was in pain, though it was hard to tell. She bustled around the Starbucks, pouring drinks, restocking pastries, and greeting customers with an unshakable gaze perfected during 25 years of working in hospitality. Her smile said, How can I help you? Her eyes said, I know you’re going to order a caramel Frappuccino, so let’s do this.
Occupying prime space in a Fredericksburg, Virginia, strip mall, beside a Dixie Bones BBQ Post, this Starbucks pulls in about $40,000 a week. Hamm, 49, had been managing Starbucks stores for 12 years. The problem was her feet. After two decades in the food-service business, they had started to wear out. She had two metal plates in the right one, installed over the course of five surgeries. Now her left foot needed surgery too. She doesn’t like to complain, but when I asked her how often she was in pain, she smiled and said quietly, “All the time.”
Every week for the seventh and final season of AMC's hit period-drama Mad Men, Sophie Gilbert, David Sims, and Lenika Cruz will discuss the possible fates facing Don Draper and those in his orbit.
Sims: At the end of a rather spellbindingly strange episode of Mad Men, Don Draper drove off into the American unknown (well, St. Paul), having picked up a hitchhiker, in search of … it’s hard to know what, exactly. It was a powerful image, but wherever Don is going, it might be one of the show’s least interesting story threads as it approaches its conclusion. Don’s listlessness has been pointing toward this hobo journey for months now, but “Lost Horizon” wrung far more fascinating material from Joan and Peggy’s transitions to McCann Erickson. Perhaps we won’t even see Don in next week’s penultimate episode. Would that be so bad?
Journalism is, at its core, a public service. This is why several days ago the reporters at Action 7 News in Albuquerque, New Mexico, decided to investigate just what, exactly, teems within the beards of the polity. They swabbed the whiskers of a handful of local men and took the results to Quest Diagnostics.
The results were the kind that medical labs don't leave on your answering machine:
Several of the beards that were tested contained a lot of normal bacteria, but some were comparable to toilets.
“Those are the types of things you'd find in (fecal matter),” Golobic said, referring to the tests.
Even though some of the bacteria won’t lead to illness, Golobic said it’s still a little concerning.
LOS ANGELES—Over the weekend, TheNew York Times published an amusing article about New Yorkers discovering Los Angeles anew. It seems that for a long time they harbored a lot of facile prejudices about us but have lately realized that L.A. is delightful. For some, this apparently began while they were looking at Instagram. "Last fall," the article begins, "Christina Turner, a fashion stylist in Brooklyn, was dreading another New York winter in her cramped, lightless Greenpoint, Brooklyn, apartment while gazing longingly at the succulent gardens and festive backyard dinner parties posted on social media by her friends in Los Angeles."
So she moved here. I only wish that I could've gotten word to her sooner. I've always known that New Yorkers are inwardly focused. When there's a municipal election there they don't even realize we're not all picking a mayor of America together. But I would've sworn that everyone already knew about our good weather.
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
Ben Carson is one of the nation's most famous neurosurgeons. He's never run for office.
Carly Fiorina was once the CEO of Hewlett-Packard, and she ran for office once—in 2010, in a Republican wave year, when she was trounced by Democratic Senator Barbara Boxer.
Now both of them are running for the highest office in the land, the leadership of the free world. It takes an impressive amount of confidence and a certain amount of detachment from reality for even the most seasoned politicians to undertake presidential campaigns, but that's especially true of long-shot candidates like Carson and Fiorina, whose odds of becoming president are practically nil.
Both of them are trying to turn that very distance from the establishment into a rationale for their candidacies. "I'm not a politician," Carson said at his launch event in Detroit on Monday. "I don't want to be a politician because politicians do what is politically expedient. I want to do what's right." And Fiorina, in her announcement video, said: "Our founders never intended for there to be a professional political class."
The question that most people ask themselves as they walk into their boss's office to negotiate their salaries is likely some variant of "What am I going to say?" But according to hostage negotiator Chris Voss, that might be the least important thing to keep in mind when negotiating.
Voss, now an adjunct professor at Georgetown University's McDonough School of Business, spent 24 years at the FBI. It was as an FBI agent that he started to get interested in hostage negotiations. At the time, a supervisor told him to start by volunteering at a suicide hotline to gain the set of listening abilities that a hostage negotiator needs. By 1992, he was training at the FBI's school for negotiators, and from 2004 to 2007, he was the FBI's lead international hostage negotiator. After retirement, Voss founded The Black Swan Group to bring negotiation know-how to the business world.
On Sunday night, two gunmen opened fire outside a complex in Garland, Texas, that was hosting a contest featuring cartoons of the Prophet Muhammad. Both gunmen were killed and one security officer was injured in the shootout.
What We Know About the Shooting
Sunday's shooting took place outside the Muhammad Art Exhibit and Cartoon Contest, which was being held in Garland, a city just northeast of Dallas. The contest, which offered a $10,000 prize, was hosted by the American Freedom Defense Initiative, a group widely characterized as Islamaphobic.
"As today’s Muhammad Art Exhibit event at the Curtis Culwell Center was coming to an end, two males drove up to the front of the building in a car,"officials wroteon the the city's Facebook page. "Both males were armed and began shooting at a Garland ISD security officer. The GISD security officer's injuries are not life-threatening. Garland Police officers engaged the gunmen, who were both shot and killed."
Every candidate in the 2016 race so far is an experienced politician. That changes Monday with the addition of two new candidates with little electoral experience: neurosurgeon Ben Carson and former executive Carly Fiorina. Both chose Monday to announce their presidential campaigns, and both face an uphill battle against the GOP establishment.
Carson has confirmed his run with reporters, but the big kickoff will be a rally in Detroit, his hometown, Monday afternoon. Fiorina, meanwhile, is eschewing a big launch in favor of an online rollout, and announced her campaign with a tweet early Monday morning.
The field is expected to grow again on Tuesday when Mike Huckabee—the former Arkansas governor who made a strong showing in 2008, placing third in the Republican primary—makes his decision about a run formal.