Things That Make You Go Hmmm...

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The following is an excerpt of Grant Williams' free weekly newsletter "Things That Make You Go Hmmm..." Click HERE to subscribe.

“You’ve got to jump off cliffs and build your wings on the way down” – Ray Bradbury

“Doctors say that Nordberg has a 50/50 chance of living, though there’s only a 10 percent chance of that.” – ‘Ed’ (George Kennedy), The Naked Gun

“Well, it’s true: “inevitable” is not the same thing as “imminent.” When people see that something is inevitable — and I’m guilty of this mistake myself — they tend to believe those things are also imminent, even when that’s not so. But the inevitable is inevitable, and that means it must happen. We usually can’t predict exactly when — and such things often take far longer to arrive than we imagine they possibly can — but once things start to unravel, they tend to accelerate quickly.” – Doug Casey

cliff from cheersFor whatever reason, there are not very many famous ‘Cliffs’ in the pages of history. It just appears, by pure happenstance, to be one of those names bestowed upon people destined for lives of quiet dignity as opposed to great fanfare. Such is the way of the world I suppose, though do spare a thought for your humble scribe who shares a name with the actor and operatic tenor who ‘famously’ played Scott Carey, the hero of the ‘seminal science fiction film’ “The Incredible Shrinking Man” - trust me, not a claim-to-fame one advertises readily. There was a mild improvement in my fortunes in 1974 when a boy was born who would also share my nomenclative misfortune but eventually grow up to become a marginally successful New England Patriots offensive linebacker. Sadly though, his distinction according to Wikipedia is that he is “...not to be mixed up with Brock Williams, the player who pawned his super bowl ring for $2000”.

Just my luck. Caught between a jock and a star face.

Anyway, amongst famous Cliffs, there are none more worthy of being the focus of an edition of Things That Make You go Hmmm..... than the great man who often occupied the seat at the end of the bar alongside Norm Peterson in Cheers - Cliff Clavin.

Clavin’s wisdom would regularly make those around him go “Hmmm....” as he laid out his views on a variety of topics ranging from genetic engineering...:

You see, the roots of physical aggression in the male of the species is found right here, in the old DNA molecule itself. Right up here at about one o’ clock as I recall.

(Diane: “Fascinating”)

Oh yes Diane, fascinating, hold on to your hat because the very letters, DNA, are an acronym for the words ‘Dames Are Not Aggressive’.

(Diane: “They stand for Deoxyribonucleic Acid.”)

Ah yes, but parse in Latin declination and my point is still moot.

...to the origins of the word “Florida”:

Norm, it’s a little known fact that the word Florida comes from the language of the Okie Canokie Indians and it means, literally, place where the old people come to sweat.

...but as spectacular as the inner-workings of Clavin’s brain are, the pecking order of ‘Cliffs’ will shortly be topped by a new champion as, on December 31, 2012, America finds itself perched precariously atop what has entered the vernacular as the ‘Fiscal Cliff’.

The Fiscal Cliff is a catchy, media-friendly epithet (coined by none other than Ben Bernanke) for a decidedly unfriendly event as US lawmakers face a rather difficult choice that, whichever way they decide to lean, will have massive implications - not just for the US, but the rest of the world. The options before them are to either let current policy take effect on January 1, 2013, or make changes to the proposed tax increases and spending cuts slated to come into force on that day in order to attempt to propel the can just a little farther down the road.

As it stands, on January 1 of next year, the Bushera tax cuts expire as do the payroll tax cut and several tax-relief provisions. Also kicking in is the first installment of the $1.2 trillion in cuts across defense and domestic programs that were reluctantly agreed under the ridiculously drawn out deficit reduction agreement that was finally reached after the clowns running the circus had the:

  1. ineptitude
  2. arrogance
  3. foolhardiness
  4. all of the above

to flirt with disaster and allow the debt ceiling deadline to pass without a resolution being reached. Sadly, it didn’t dawn on the fine, upstanding representatives of ‘they the people’ that drawing a line in the sand along party lines could lead to events beyond their control (or, it would appear, understanding). How clueless were the men charged with the SS America’s safe passage through iceberg-laden waters? Well, in April, a full four months before the debt ceiling expired, Timothy Geithner was interviewed by Fox Business reporter Peter Barnes who began the interview with this simple, straightforward question:

“Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

woody cliff clavin
If ever I have seen a simple, straightforward question betterdesigned to be carefully evaded at all costs it was this one. Geithner could hardly be called a neophyte when it comes to the pitfalls of answering questions definitively in today’s backed-up world. If he needed guidance, he only had to look to his predecessor as Treasury Secretary, Hank Paulson, to see the dangers of making a simple ‘yes or no’ answer:

“I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained.” - Hank Paulson, April 2007 (Reuters)

“We’ve got strong financial institutions . . . Our markets are the envy of the world. They’re resilient, they’re...innovative, they’re flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong.” - Hank Paulson, March 2008 (Real Clear Politics)

“In my judgment, we are closer to the end of the market turmoil than the beginning,” he said. “Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector.” - Hank Paulson, May 2008 (USA Today)

Now, if faced with the choice of answering Barnes’ question with either ‘yes’ or ‘no’, and armed only with my own rudimentary knowledge of being put in such situations, I probably would have opted for one of the two following possibilities:

1) Well, Peter, one can never answer such questions in absolute terms because the world is an uncertain place and no country can control the effects that outside influences have on capital markets, but what I can tell you is that the United States remains the safest home for capital in a world that has been badly shaken and we will do everything within our power to ensure it remains so. We believe that our AAA-rating is secure.

2) How ‘bout them Cowboys??

A bad answer to the question would have been ‘yes’, but by far the worst possible answer Geithner could have given, in the scheme of things, was ‘no’.

Actually, that is unfair. The actual answer he gave was far worse than a simple ‘no’:

“No risk of that.”

“No risk?” Barnes asked.

“No risk,”

Geithner said, again. Geithner’s delivery of the answer is so assured I rather fear he wasn’t playing politics—he genuinely believed that it couldn't possibly happen (see for yourself here).

Bloomberg’s Jonathan Weil was as perplexed as I was at the time this little exchange took place:

(Bloomberg): It’s enough to make you wonder: How could Geithner know this to be true? The short answer is he couldn’t.

All you have to do is read the research report Standard & Poor’s published on April 18 about its sovereign-credit rating for the U.S., and you will see it estimated the risk of a downgrade quite succinctly. “We believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” said S&P, which reduced its outlook on the government’s debt to “negative” from “stable.”

There you have it: Geithner says the chance of a downgrade is zero. S&P says the odds it will cut its rating might be greater than one out of three. So who are you going to believe? Geithner? Or the people at S&P who actually will be deciding what S&P will do about S&P’s own rating of U.S. sovereign debt?

It would be one thing to express the view that a downgrade would be unwarranted, or that the chance of it happening is remote. Either of these positions would be defensible. Geithner went beyond that and staked out an absolutist stance that reeks of raw arrogance: There is no risk a rating cut will occur. He left no room for a trace of a possibility, ever.

Unfortunately, this wasn’t the first time Geithner had displayed such hubris. During an interview with ABC in February, 2010, when asked the same question, his answer was even more emphatic:

“Absolutely not. And that will never happen to this country”

Now, I fully understand the need for reassurance and showing a confident face to the world, but this whole idea has just gone too far now. What don’t you get, Tim? You know how the internet works, right? You know that every prediction you make will be scrutinized forever and only replayed if it was grossly misguided? Either you are being disingenuous, in which case time will judge you very poorly indeed, or you are clueless in which case time will judge you very poorly indeed.

u.s. debt limit vs. public debt 1950 to present

Gah!

Anyway, where were we? Oh yes, the Fiscal Cliff.

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