Larry Summers Says Public Debt “Failure Begets Failure” But Prescribes More U.S. Debt Anyways Friday, May 28, 2010 by John Bougearel of The Commodity Trading Advisor

While  Tim “Kemosabe” Geithner has been in the headlines this past week stating that the sovereign debt crisis in Europe is contained and won’t spillover into the US, his sidekick Larry “Tonto” Summers stated this week that spiralling public debt is dangerous. “Ultimately failure begets failure in fiscal policy as the logic of compound interest does its worst.

“However, Mr Summers said it would be “pennywise and pound foolish” to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy “faces a liquidity trap” and the Fed is constrained by zero interest rates.”

Tim Congdon, from the International Monetary Research, argues that “fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be incfreased easily by quantitative easing.”

Congdon and others are watching the M3 money supply in the US contracting at an accelerating rate. They cite that the contraction in M3 has already reached the Depression era levels, and given its acceleration is virtually certain to contract further.

The worry is that the contraction in M3 and other measures of money supply will lead to deflation, given that the inflation rate is already quite low and interest rates are already at zero, the margin for error in avoiding a classic Irving Fisher style “debt-deflation” spiral is incredibly small. Because rates are already at zero, we have no debt-deflation “firebreak” that Greenspan argued is so necessary to maintain back in 2003.

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About the author

John is a professional financial market analyst and trader, Commodity Trading Advisor, and a member of the Market Technician’s Association. John began his financial career in 1994 working with trading groups in the SP500 and 30 Year Treasuries at the Chicago Mercantile Exchange and Chicago Board of Trade. In 1999-2000, John joined Beardsley Capital Management, an equity hedge fund.  In 2000, John launched his financial newsletter, Structural Logic.  The newsletter is a risk management tool for the clients John consults with, providing them with research and insights into market behavior they can use in their own investing and trading. Structural Logic’s mission is to meet both the informational and educational needs of hedge funds and money managers, professional investors and traders. John is also the author of Riding the Storm Out, a book on the 2008-09 financial crisis and what investors and traders can do now.  

In September 2001, John published “Don’t Fight the Fed, You Just Might Win” in Futures Magazine when Fed Policies were clearly not working as intended. In May 2001, John published “No Cure for Mad Dow Disease” in Futures Magazine. Excerpts of my financial newsletter have also been quoted in Barron’s weekly magazine in 2006 and 2007.  

One wealth management client has introduces John to his investors as his “secret weapon.” Another client calls John ‘the mad scientist.’ During the worst stock market crash in our lifetime, a hedge fund client emailed on Nov 11 2008 to say: “Hey John - I just wanted to say your work has been awesome the last 6-8 weeks. Outstanding job, Bill” 

Financial Blog at Successful Trading Tips
In July 2007, as an adjunct to the Structural Logic financial newsletter, John began a financial blog called Successful Trading Tips. This blog is all about the economic policies that shape our financial markets destiny. I am also a frequent guest contributor to ZeroHedge.com, another well-known financial blogsite.  

Riding the Storm Out
Published in February 2009, Riding the Storm Out is a timely title on the financial crisis and what investors can do now to hedge the risks that lie ahead.   

Educational DVD’s: Behavioral Finance Modeling and Trade Outside the Box
Published A 75 minute educational DVD Behavioral Finance Modeling in Atlanta, June 2009 and a three hour educational DVD called Trade Outside the Box for traders and investors published at the Chicago Mercantile Exchange July 2009.     

Education
John received his B.A at St. Olaf College in Northfield MN – 1985. The bulk of John’s financial and economic background now comes from over fifteen years of self study and mentoring amongst professional peers and clients. John is well acquainted with the most relevant cutting edge financial and economic research coming out of Wharton's School of Business and the University of Chicago.