Is It Inevitable That the United States Will Default?
With all the talk of the fiscal cliff and the sequester, I respond to a reader who wants to know if the economic dominoes are likely to fall, causing a government default, and I weigh in on why the NewsHour rarely reports on other stock indexes besides the Dow Jones.
Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here are Friday’s responses:
Todd Lofton — Lincoln, Neb.: If we must never default, why must we have a president or Congress put our country into a position in which default is a possibility? What will stop them from forcing it? I have seen nothing to convince me it will not occur.
Paul Solman: Nothing to convince you? See if this will this do it: The current price of a bet will pay you $10,000 in the next year if the U.S. does default is $39. On the open market. It’s called a “credit default swap,” which I tried to explain on the NewsHour a few years ago, much to John Stewart’s subsequent merriment on The Daily Show.
In other words, investors who put their money where their mouths are think there’s less than a half-percent chance, Todd, that your country will default in the next 12 months. If you think strongly otherwise, you might ask a broker how to take the other side of this bet. Me, I think the odds are a little higher — that the bet ought to cost even less.
We do not need to default to get out of our debt hole. Various benefit and tax changes could fix the problem. To the extent they’re not made, we can inflate by creating more money, and pay back our loans in devalued dollars.
Hey, come to think of it, isn’t that what we’re doing already?
Ron Campise — South San Gabriel, Calif.: Do you personally believe that this theory is valid: that an individual investor can, utilizing the rational 90 percent of trading patterns, mass emotions, tempered with general chaos and hysteria, filter out the remaining 10 percent of the bulls, and make money in the stock market?
I keep reading and hearing from established stock firm experts that short-term investors are idiots, lucky or a combination of both; and if they come ahead a dime, in the end they always lose their shirts.
If so, I must be one of the idiot savants who have been very lucky in the last four years, taking small returns, which when combined, have netted a 29.9 percent return last year, and a 14 percent return so far this year. I expect a return this year of at least 50 percent, regardless the market is up or down.
I’ve learned to thrive on the chaos, and temper my stock trades with a determination to profit, in small steps or bites, compared with the established pro trading firms. Maybe I’m not such an idiot after all. I can now buy all the shirts I want, and shorts too if the need arises. I have all the monthly figures, supplied by my partner in insanity, my broker Charles Schwab, in neat, yearly profit and loss statements.
Paul Solman: Heartiest congratulations, Ron. You are either a very astute investor — a true savant, perhaps, and a cool-headed one at that, or … very lucky. The problem with analyzing successes like yours — and many failures, for that matter, is that in investing, as in all of life — skeptics like me will never to able to know who is astute and who is lucky. I don’t doubt, for example, that Warren Buffett has a sixth sense about investing, but how can I ever be sure?
It’s not that I doubt you, Ron, but have you read Nassim Taleb’s book “Fooled by Randomness,” the predecessor to his bestselling “Black Swan”? My only advice is that when you start your own investing firm and trumpet your track record, just don’t forget to add the disclaimer about past performance being no guarantee of future results.
Chris Budesa — West Orange, N.J.: The cent coin issued by the U.S. Mint has changed several times since it was first struck at the end of the 1700s. Typically, the change was brought about due to the increasing price of the metal used to make the coin. The same can be done now; our cent coin can be made using a copper-coated steel blank. Steel is significantly cheaper that zinc.
Paul Solman: You’re referring, of course, Chris, to this post from Feb. 8 in which I join former George W. Bush chief economist Greg Mankiw and graphic genius C.G.P. Grey in urging the death of the U.S. penny.
But none of us thinks the reason to kill the coin is because copper is so expensive. It’s because this near-valueless and thus specious form of specie is a pain in the pocket — a great time-waster. And time, as Ben Franklin reminded us, is money. For those more worried about out-of-pocket expenses, even steel pennies will cost plenty to mint.
Reid Paxton — Mayfield, Ky.: Why doesn’t the PBS Newshour report the “Wilshire 5000″ stock index? To me, the Dow Jones Industrial Average is not very meaningful as it only represents 30 stocks.
Paul Solman: Parsimony. You could ask the same question about the S&P 500 or the Russell 2000. And why not a global stock index that includes the U.S.? Might not that be even more meaningful?
I think the answer is that the Dow has become a common point of reference. We can gauge how stocks are doing because we’ve heard the Dow number again and again.
It’s like unemployment. The official monthly unemployment rate, which the government calls U-3, is far more misleading than the Dow, since it excludes millions of Americans who say they want a job but haven’t looked for one in the past week. It also excludes anyone who worked at all in the past week, even if only for one hour. That’s why I initiated what I titled U-7 or the “Solman Scale” here on the Business Desk last year.
Maybe U-7 will be reported by others some day. Maybe even by the NewsHour. But right now, the benchmark is U-3, even though at 7.7 percent, the U-3 is less than half what I consider to be the more meaningful measure of the job market.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions
Top photo by Martin Barraud/Getty Images.