John Thomas Financial Chief Economist Mike Norman Talks Debt Ceiling; Says Comparisons to Greece Are Inapplicable

According to Tim Geithner, the United States will hit a wall on August 2 that will prevent the government from making obligatory payments. After that, the government will have to decide which payments it can continue to make and which payments they will be unable to make. In other words, the United States will default, or not be able to make good, on many of its financial obligations.

As the elusive August 2 deadline to raise the debt ceiling approaches, people around the world remain confused as to what exactly is going on that is keeping American politicians and economists worldwide at the edge of their seats.

Mike Norman, Chief Economist of John Thomas Financial in New York City, tells Greek Reporter in an exclusive interview just what all the fuss is about, his take on the issue of a possible U.S. credit default, and why it’s a mistake to compare the United States to Greece.

“The consequences of a credit default would be widespread.  Some people won’t get their social security checks, veteran’s benefits won’t get paid, and maybe unemployment insurance won’t get paid. Government workers could be furloughed. They won’t get their salaries. A whole host of things,” says Norman, who has spent over 30 years in the industry.

Norman goes on to explain the global effect a default could have on the U.S., whose credit has always been second-to-none. “The worst case is we won’t pay the interest or principal on bonds that are owned by investors around the world. A default would also jeopardize the United Stated credit rating, which is currently – and always has been – AAA.”

And yet Norman says that all of these things could be avoided if the government just used common sense. “It’s ridiculous – it’s a totally artificial constraint and it should be removed. Even Moody’s recently called for an elimination of the debt ceiling, but that would require a political vote because it’s a statute.”

When asked to compare the recent situation in Greece to that of the United States, Norman quickly explained that the comparison simply cannot be made. Unlike Greece, the United States issues its own currency, therefore it has options and can take liberties that Greece simply cannot because the U.S. is not under the same limitations.

“It’s a completely inapplicable analogy because the U.S. is a sovereign, currency-issuing nation. You hear a lot of people say ‘Is America going to become the next Greece?’ But just to backdrop a little bit, if this default happens it would be 100% voluntary.  We are not defaulting because we don’t have the money; we are defaulting because politically we have decided to default.

We issue dollars, our debts are denominated in dollars, there’s never ever an inability to meet that obligation because all our debts are denominated in our own currency. So it’s simply a matter of crediting some bank account, which is how the government spends anyway. Greece or Portugal or Spain or Ireland or Italy or any of the countries within the Euro zone don’t have that ability. They don’t print Euros, only the European central bank does. So they are functionally like states in the US. California is broke. It’s broke. They can’t issue California dollars.”

Greek Reporter  asked Norman what should be done to avoid the far-reaching consequences of a default.  He tells us that as with any relevant macroeconomic debate, what should be done and what can be done are two different things – it’s politics.

“The whole problem is political in nature. It’s not a monetary problem because we have the ability to make the payments but Congress has to authorize all these things. The U.S. debt ceiling has been increased about a hundred times throughout our history. Congress is using the debt ceiling negotiation as leverage to achieve what they want, which is dramatic spending reductions.

So probably in the end what you are going to get is some kind of comprise, where you are going to see a certain amount of spending cuts which will also be negative for the economy and you are going to get a debt ceiling increase of some magnitude, which will probably keep us going for the next year and a half – through 2012, through the election – and the next administration will have to deal with it.”

With all of the politics involved, we wonder if anyone at the policy level has it right.

“No, nobody at the policy level. And most people in mainstream economics don’t have it right either.  The only way the government can balance its budget is to take that money back from the private sector. So what’s better? To have the sovereign issuer of the money run a deficit or to have the private sector run a deficit? All of us have no money or are totally in debt so that the government runs a positive balance, for what?”

 

About Mike Norman:

Mike Norman, Chief Economist of John Thomas Financial, is an economist and trader whose career spans over 30 years on Wall Street. He began his career at Merrill Lynch in 1979 then went on to become a member and floor trader on four U.S. futures exchanges (NYFE, NYMEX, COMEX, CME). Mr. Norman is a sought after TV commentator and has been seen regularly on CNBC, Bloomberg and Fox News. In 2003 he signed with Fox News as an exclusive Contributor and continues to appear on a regular basis on the Fox Business programs. Mr. Norman is an expert on fiscal and monetary policy and has created a unique indicator called the Fiscal Liquidity Index that looks at government spending and its impact on the financial markets. The Index is published daily and is carried on the Bloomberg system. Mr. Norman has a BA in economics from the University of Pennsylvania and a Masters from UCLA