I, Heretic
By Robert A. Hahn Posted in Miscellanea — Comments (266) / Email this page » / Leave a comment »
Here I am going to spout heresy. I am going to argue that the fiscal policies being followed by President George W. Bush represent a breakthrough in conservative — yes, conservative — thinking. They represent good policy; and even better strategy.
I will suggest that President Bush understands money better than any President we have ever had. He understands it better than most economists. He understands it better than our illustrious pundits. President Bush understands money the way a financier understands money. He sees it as a force or a power that one squirts at the world to make the world change. He sees it as a weapon.
This is not how accountants view money, and it is not how most economists view money. And it is certainly not how any ordinary citizen could view money. But in the mind of a President of the United States, such thinking has the potential to lead to some rather revolutionary results.
More below...
Prior to his recent speech concerning the rebuilding of New Orleans, President Bush was already being lambasted by critics from right to left for what appears to be some rather profligate spending behavior. There is pork in River City. There is the $500 billion prescription drug benefit. There is the War on Terror, involving huge expenditures in Afghanistan and Iraq. There are what Democrats call tax cuts, and what the rest of us must still call tax rate cuts even if revenues have risen. And now comes what sounds like two hundred billion more in federal spending to build a shining city in a bowl.
This raises questions. Such as, for example, where is all this money supposed to come from? What about the deficit? What about the national debt? Why are we saddling our children with still more debt they will have to pay off? Whatever happened to small government? We're spending like Democrats! Why? Whatever happened to fiscal discipline? How can anyone call this conservatism?
To which the short answers are:
- China. Well, China and Japan.
- We are taking on debt. Ergo, a cash deficit. So?
- It's about where it ought to be.
- We aren't.
- The public doesn't want it. We have to teach them to want it.
- How long, Oh Lord, will our side be on defense?
- Who says we don't have it? Do they know what they're talking about?
- Watch.
Here's where we get the money: our citizens earn it in their businesses or by performing their jobs. They spend it on things they need. A lot of those things are imported. The cash ends up in the hands of foreigners. The U.S. government borrows it back. Note carefully that our consumers now have the stuff, and our government has the cash. Is this a good deal, or what? What the foreigners have is a debt instrument. Good for them.
Here is why we take on debt: He who has the cash makes the rules. If we have the cash, we get to say how it's spent. Remember, money is power. It is a force you squirt at the world to make it change. We drive the change, when and where we want. What the foreigners get is a debt instrument. They are passive investors. Those are the best kind. This is especially important with respect to China. China is accumulating massive amounts of our debt. Good. Better that than they should have the cash, which they would probably spend on things that we would think are scary. Every dollar we can get them to loan us another dollar they don't have for building battleships. Bush understands this. Too many people don't.
Here's the deal with the national debt: Debt is about acquiring cash now, from somebody else. An institution should do that any time it thinks it can earn a return on the cash that is higher than the interest it must pay on the debt. In actual practice, people start to get uneasy if an institution's debt starts to exceed a certain percentage of its total capital. For companies in the U.S., 50% debt is pretty high. In Japan that's low; Japanese companies rely much more on debt financing than on equity when financing their businesses. There is no right answer to how much debt is the "correct amount." It's one of those things that "depends." For a government, the question is sort of weird, because there is no such thing as owning "equity" in a government. At least, not in the financial sense. For a government, a better measure might be its ability to service its debt, i.e. how much of its actual cash revenue (taxes and fees) is needed to pay the interest on its debt? So long as that looks reasonable, no one should get too worried. Instead they should think about, as Bush obviously does, how we might invest the cash we get from new debt so as to produce a higher return than the interest rate on the debt. If we do that, we don't care how large the debt gets. We'll always be able to service it.
Our children are not going to have to pay it back. Institutions are not individuals. For our purposes, institutions are immortal. If some of their debt comes due, they simply roll it over. They can do this perpetually. IBM probably has debt on its books that's been there since the 1920's. It's been rolled over several times. No one cares.
So long as IBM sees opportunities for investing cash that return more than the interest rate, they will never pay the debt back... they'll just keep rolling it over. And then the Sun burns out. This can be a difficult concept for non-finance-types to understand. But it is crucial to understanding what's going on here. So long as the U.S. economy keeps growing... so long as we have opportunities to invest cash in ways that earn a higher rate than we have to pay in interest... we should keep rolling over our debt, and adding more as we can, forever. All these people who moan about the chillrun do not understand this game. The chillrun aren't going to pay it back. They don't have to. They're going to roll it over, and add more of their own. As will their children. Until the Sun burns out.
Here's why we don't have small government: People don't want it. They say they do, but when you threaten to give it to them, they vote for the Other Guys. It took Republican politicians decades to figure this out, and most Republican voters still haven't figured it out. The fastest way to become the minority political party in the United States is to become the party of government frugality and fiscal discipline. Let the Democrats do that. We've been there, done that, and have Bob Dole to prove it.
Besides, the Democrats are lying. The minute they got in, they'd start spending like, well, like George Bush and the Republican Congress are spending. But there's a difference: they'd be spending it on their stuff. More social engineering. More government-dependency programs. More crosses soaked in more urine on more government grants.
For decades, Republicans played defense with money. Tied to this idea about "small government" in a country where people didn't want that, the best idea they could think of was to build speed bumps on the Road to Socialism. This while the Democrats got to call the shots because Republicans wouldn't call any when they got in. They'd be "responsible." They wouldn't spend as much. All they did was conserve borrowing capacity for the next time the Democrats got their hands on the spigot. What the rest of us got was a ratchet that clicked left when the Democrats were in, and just sat there when the Republicans were in.
Now comes George Bush to play offense with money. Folks, this is a new idea. Think about what we can do here. We get to call some shots. George Bush can see this, why can't anyone else? Is our highest priority right this minute "small government?" Is it "reduced spending?" Is it "balance the budget?" I don't think so. I think our first priority is to survive. There are some really crazy people out there who think we should all be Moslem, or dead. There are a lot of them, and they are nuts. They have a lot of money. They are very, very dangerous and thinking anything else is likely to be suicidal. So that's priority one. We can quibble over the details, but spending money to survive is not a bad idea.
So what's next after survival? Can we now balance the budget? I say no. I say the next priority is to reverse the decline of our civilization. Surviving won't have that much utility if we all end up as savages clubbing one another. We all just got a very clear demonstration of what that looks like. We've seen it before, too. In fact we've seen it almost everywhere that Democrats have had their way in imposing their values on citizens through government dependency programs. There is a message in this. It is that the "ratcheting" has to stop. Like it or not, we either spend money to have our values reflected in this society, or the Democrats will keep pushing us toward Lord of the Flies.
Did anyone really listen to George Bush the other night? I did. I see that Rush Limbaugh did as well. Limbaugh has phrased it as, "You Democrats had 60 years to try it your way. Now we're going to try it our way." Is that worth doing? I say yes, as I will explain below. But let's be clear: it's going to cost a lot of money. We are going to have to exercise power to make this happen. Exercising power means spending money. It does not mean balancing the budget, reducing spending, or any other thing.
We will get smaller government when people want it. No one alive today in the U.S. has ever seen small government. It sounds scary. Democrats, and their allies in the media, make sure it sounds scary. Grandmothers will be tossed in the street. Poor people will die of starvation. What a cold, cruel world these Republicans envision. People will only support a party of small government when they are sure that that stuff won't happen. And the only way to make them sure is to demonstrate it. Paradoxically, because of our history since FDR, the only way to demonstrate it now is to spend a bunch of money to create a demonstration.
Picture New Orleans 2.0, the shining city in a bowl. It's a kind of town we have a lot of in the United States.
Many people of modest means, but they own their own homes. Or at least it says they do on their mortgage. Someday the mortgage will be paid off and they really will own their own homes. They will be land owners. For sure their children will be. Think about that. Think about how different that is. They care about this place. They care about their homes. They care about their neighborhoods. They care whether their politicians are crooked. It's no one else's responsibility to keep things up. This is their place. They own it.
So we do this our way, and yes, we spend some money – a fortune, frankly – to get it off the ground. Know what we'll have when we're done? People who want smaller government. Homeowners. With jobs. Why will they want big government? They won't.
And that's how we win. But we can't get there unless we make it happen; unless we exercise power; unless we spend money. We have to demonstrate to people that our ideas work.
We know where to get the money. It's a Good Thing to get the money, because doing so weakens the Chinese and allows us to take care of survival in the face of some other people who are just as scary. And instead of sitting here quietly waiting for the next Democratic administration to come in and click the ratchet one more notch to the left,
we can reverse some of the harm they've caused, and demonstrate that our ideas are better. This really does all play together. And it really is "conservative" in the strongest sense of the word. It's just not the same old short-term thinking, like we're used to from our politicians. It's not "small ball." It's playing to win, as opposed to playing not to lose.
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and here is the question:
These are assumptions the the author makes to lead to his conclusion EXCEPT:
A. Bush's actions are based on his understanding money the way a financier understands money.
B. China will contintue to be a passive investor.
C. No passive investor will ask for debt repayment as a politcal move.
D. Bush is a fiscal conservative.
E. Loans made to the US from China are made before Chinese domestic programs have been fully vested.
you are the FIRST person I have ever heard say that having the Chinese be a primary funder of our operational budget is a GOOD thing for the United States and a bad thing for the Chinese.
I also don't understand your logic about battleships versus T-Bills. Ignoring the fact that the money for these two items doesn't really come from the same place, you do realize that the Chinese government is MORE than capable of doing both if they so chose? The United States isn't the only nation in the world capable of selling bonds.
Currently our public debt is not a major problem. But as debt continues to rise, and there is little reason to believe it won't, our debt service continutes to rise OR we begin to monetize our debt. Neither of these options are terribly appealing.
I suspect that every President we have had, at least for the last 100 or so years, is fully aware of the power of fiscal policy. Good to hear that the current President understands what it does also.
I completely agree with you regarding small government and reality. Ronald Reagan understood this as well. That's why Ronnie never saw a spending increase he didn't like. He talked a good game about welfare moms and such but he didn't do much about them.
He left that in the hands of his successor, George HW Bush. Course George pere was faced with the uneviable task of paring back spending or facing other more significant economic problems. He got 1 term in the White House for all of his efforts.
The truth is that the American people vote with their wallets. They don't much care about deficits or debt. That's why we elect people that DO. Because if we simply kowtow to the voters on these matters we have the current fiscal policy of high deficits and profligate spending. And that is simply not a viable long term solution.
Whether you want to accept this or not, sooner or later, our government must pay back the debt. But paying debt back with more debt we are doing nothing but creating a bigger problem. And in 12 years, when the SSA comes looking for its money from the Federal government, we are going to be in a world of hurt.
...is Priceless. Methinks that's the new symbol of our Party as we rebuild New Orleans in the absence of the Baton Rouge Democrats. Non?
It is more likely conservatives are unable to control republican congressmen...State flooding is not a federal problem...the federal government already purchased louisiana once...Bush's speech indicates a very expansive view of the role of the federal government and the federal military...if the US citizens wants it - that is fine - but we should have the opportunity to vote for it - rather than have what was supposed to be a conservative president turn into a liberal idealogue at the first sign of water inside a city that was built below sea level...
Your vision of NOLA 2.0 sounds great to me. Hope it all works out that way.
Ditto your vision of the purely salutary effects of our national debt load. It kind of sounds like funny money to me, but I'm not an economist, so I can't tell you if your theory holds water or not. I will say that it is a novel doctrine for conservative Republicans to espouse.
Regarding big government/small government: if government spending as a function of GDP is a reasonable measure, I don't see it in the historical tables for the US budget, published by the White House. Check table 1.2, beginning on page 23, AFAI can tell Republicans have no basis for claiming fiscal prudence, now or ever. Please explain if I'm missing something there.
Your plan sounds great, you have the White House and majorities in both Houses of Congress, so it should be clear sailing. You'll almost certainly get at least a good running start on doing it your way. Good luck, and try not to mess up. We'll be watching to see how you do.
Cheers -
...which of course makes the very point -- Bush is pissing it away, along with his famous "political capital."
Another way to think of it: if it is a force to be squirted on the world to change it, it is the Chinese who are squirting it, and when they stop, we sure will be changed. For the better?
You are 100% correct. I think that Katrina may prove to be a watershed event,(yes,pun), in that it gives a historic opportunity to contrast an enterprise approach to a socio-economic set of circumstances as opposed to the proven failed, entitlement approach of the Left.
- There's a little thing called interest. Even if you children don't have to pay off the principle we borrow, they will be making interest payments on the money every year. Real money. Money collect as tax dollars that gets sent - as you put it - to China. You honestly think this is a good plan?
- Even if you can convince people that borrowing tons of money for goverment spending on things you want to spend it on is a good thing, that doesn't mean it is a Conservative thing. Conservatism has to stand for something. It sure as heck doesn't stand for Big Government.
I also don't understand your logic about battleships versus T-Bills. Ignoring the fact that the money for these two items doesn't really come from the same place, you do realize that the Chinese government is MORE than capable of doing both if they so chose? The United States isn't the only nation in the world capable of selling bonds.
The same was said of the Soviets, but they weren't able to buy both guns and butter at the same time. Besides, China's long-term outlook isn't the sort of thing that makes them a very good investment. Why does everyone buy US bonds and not Chinese? It's because they understand that the US economy is growing at a stable rate and the ROI will be better over the long term.
There's an excellent piece in Foreign Affairs that runs the numbers and examines the US debt in context. The basics of the US economy are sound, and the idea that we'll suddenly collapse because of all our debt is ridiculous - the current level of debt, while not good, is hardly catastrophic and certainly not unprecedented in our history.
"It must be very strange to be President Bush. A man of extraordinary vision and brilliance approaching to genius, he can't get anyone to notice. He is like a great painter or musician who is ahead of his time, and who unveils one masterpiece after another to a reception that, when not bored, is hostile.
Hyperbolic? Well, maybe." Powerline 7/22/05
Maybe.
When national debt exceeds a certain percentage of national GDP, other nations and economists - who may not see money in the way that YOU see it, but nevertheless make investment decisions - start to see the economy as shaky. Usually this is right around 5% of GDP, as far as I can tell.
This leads to a drop in foreign investment; which would be disastrous to our economy. I don't have to spell the spiral this creates out for you.
Cheers
... has proven time and again that national indebtedness and inflationary policy will always bring about a collapse of the system requiring an entire financial restart from scratch, with much suffering inflicted upon the population in the process.
The only time it hasn't happened is... the cycle we're currently involved in.
It's great while the good times roll, but foreign governments and banks are diversifying out of the Dollar and are sending up signal flares that they will be continuing this process.
The only reason foreign nations continue to buy our debt is right now we're all in the same boat together. If the Dollar collapses it will bring down a lot of other people with it. So they are trying their best to keep it afloat as long as possible while adjusting their own financial position to be able to weather a Dollar storm.
Furthermore, it is never the case that the debtor pulls the strings. In the end it is always the creditor that calls the shots. We were the largest creditor nation prior to the 1970's. Now we are the largest debtor. This is a significant problem and any policy that furthers our indebtedness is not good for America in any way shape or form.
History doesn't care how clever we think we are. If we continue this path we've been going down since the Federal Reserve was created in 1913... and there is no indication we won't, then we are destined to wind up rubbing shoulders with the Romans and Chinese and many many more inflationary fiat systems before us.
The same was said of the Soviets, but they weren't able to buy both guns and butter at the same time. Besides, China's long-term outlook isn't the sort of thing that makes them a very good investment. Why does everyone buy US bonds and not Chinese? It's because they understand that the US economy is growing at a stable rate and the ROI will be better over the long term.
A. This isn't a guns and butter debate. Nick was suggesting that the reason the Chinese aren't buying battleships is because they are investing in US T-Bills. This is a dubious claim. But the claim has nothing to do with butter(aka social spending) in China. Nick's comment would be more along the lines of saying "The Chinese aren't spending guns OR butter but rather on foreign investment instruments".
B. US bonds are the most secure debt instrument in the world. They are what all other fixed income debt instruments compares themselves against. China's bond options come with significantly higher risk than US bonds and, as such, provide a higher yield. But, as with your first point, this is irrelevant to the discussion. The discussion isn't WHY China is investing in US T-bills. The discussion is about the benefits to the United States of China investing in our bonds.
The basics of the US economy are sound, and the idea that we'll suddenly collapse because of all our debt is ridiculous - the current level of debt, while not good, is hardly catastrophic and certainly not unprecedented in our history
Which would be why I said that our debt is not currently a major problem. Our debt isn't going to cause a sudden collapse. What it COULD DO is start to create a major drag on our economy. Public debt service could, at some point, force taxes to go up which would cause a drag on growth, since these taxes would not be used to pay for additional growth or services. The other option would be to monetize the debt, or make more money to pay off the debt. The obvious problem with that is that it could very easily lead to significant inflation, never a good thing.
Yes, because we were so much more powerful and influential in the '70s than we are now.
... that you opted to write this post during a significant rally in Gold and Silver... which is historically a bang on indicator of financial instability and loss of confidence in paper currencies (especially the Dollar as it's the reserve currency of the world).
It must be very strange to be John Hinderaker.
Cheers -
...don't happen instantly.
How long did it take for the poor fiscal policy of Rome to finally catch up with the empire? Two centuries? It took 40 years from the peak of the Chinese inflationary era to finally kick in. 4 years for the Great Depression to finally settle in after the speculation (and as a result... indebtedness) mania had peaked in 1929.
I think an argument could honestly be made that our ability to say "dance" and the rest of the world starts dancing is not as strong now as it was in the 1970's, yes.
Thanks. My initial reaction is "finally someone who get's it." Oddly enough I was raised on a diet of very similar argument from my father. He didn't view the debt as a big deal and he was alive when it was a much bigger part of the pie than it is today. Like you he held the view that national debt is a sort of never-never situation where neither the borrower or the lender ever really wants the debt to go away. And the kids paying off the debt? Even if they ever wanted to, they are going to do so with cheaper money anyway.
He died before China became the 'headline du jour' --- in his time it was Russia. He did live to see the end of the Soviet Union and was of the opinion that, while Reagan and the spend them into oblivion approach had a lot to do with it, the real end game was 'blue jeans, Coca Cola and rock and roll.' Although he was not a fan of two the three he believed that their system simply could not stand against consumers, real consumers. We could afford guns and butter, they simply could not. And although he and several other fellow officers were criticized at the time for claiming Castro was trouble as he was coming to power, he was adamantly opposed to the embargo; he always felt the way to destroy Castro was with tourism and investment; more 'blue jeans, Coca Cola and rock and roll.'
But there is even more to the argument for China as lender. I'm not sure that it necessarily draws down too much from their ability to build a military machine because it is their choice whether to buy our paper or not. But it does create a situation where it is not in their best interest to cause trouble. If they hold enough American paper attacking us would be cutting off their own nose to spite their face. When the Japanese were buying everything in sight from the Empire State Building to Pebble Beach people were bemoaning the disaster. But at the end of the day they couldn't take the asset home to Japan with them even if they wanted to. Similarly China has no long term interest in seeing the destruction of America, hotheads and blowhards in the PRA not withstanding.
And I like the argument about money as a force sent out into the world to make change. Bush's program of democratization in the Middle East is having slow but discernable results. We've seen the results in Lebanon and last week the Saudi government ordered the Jeddah Trade and Industry Chamber to allow women full participation in their chamber elections. It isn't women in the parliament, but try to imagine that happening even 5 years ago. And it can't be viewed as simply a 'sop' to temporarily placate women; once water starts dripping through the dam it is impossible to stop.
All in all, a nice assessment. I'm sure it will draw criitcism from right and left but if nothing else it should cause us to think about it.
It is all so painfully slow, but the history of man is written in thousands of small steps and then the inevitable leap.
-------------------
The Chinese aren't throwing their money away. Do you really, honestly believe that by collecting interest on an enormous amount of money China is stunting its national development? As far as I can see, the only way your argument would make sense is if the US were ever willing to default on its loans.
Which I humbly suggest might be a bad thing in the long run.
Where on Earth do you get the idea that our civilization is in decline? I can imagine some definitions of "civilization" for which that sentence would make sense (not that I would agree), but none that also make sense with your next sentence, "Surviving won't have that much utility if we all end up as savages clubbing one another." Are you actually suggesting that we will decline technologically? The only way that'll ever happen is in a worldwide nuclear war, and I utterly fail to see how our domestic policy will prevent such a thing.
As for your point about the new New Orleans, as a liberal I think it sounds wonderful. I think that an awful lot of Democrats would support efforts to help people own their own home. But I don't understand why you think these ever-so-much-better-than-us Americans of the future would suddenly stop voting with their wallets. They'll still want to pay low taxes and receive all the benefits that government can provide, exactly like us. Do you think there will ever be a point in history where nobody can make an argument like yours about the end justifying the means?
the whole Soviet guns and butter argument doesn't seem to apply. During the Soviet era I don't seem to remember buying a whole lot of consumer goods which said "made in the Soviet Union" which means we weren't shipping the Soviets boatload of dollars with which they could buy guns or butter. It's different with the Chinese. Didn't some financial mag refer to the whole thing as the "Mother of all factoring deals?"
Here's my question/concern for the economists. I can see why China may be loaning us cash at the current time; China doesn't have anything better or more remunerative to do with it while it builds up its infrastructure etc. But I am worried about making our entire economy dependent on cheap Chinese provided dollars in the same way I am worried about the fact that our entire economy is dependent on cheap foreign provided oil. The concern is that you are then handing the provider of this essential item the power to deny you that item.
If we allow our economy to be dependent on massive infusions of cash from China in the form of loans, what happens when China progresses to the point where it has better things to do with those funds than loan them to us cheaply? What happens when China turns off the spigot in favor of domestic consumption, investment in Asia or India, etc.?
I am not sure Nick has convinced me he's made a conservative argument for huge debt. Maybe it's more of a neoconservative argument. His argument reminds me of why my clients hate most financial planners. Most of my clients are old time fiscal conservatives (and Republicans). Up by the bootstaps kind of guys who own their own businesses and are now worth millions. And you know what, to a man they all own their own homes free and clear. And when some young aspiring financial planner comes along and tells them they ought to mortgage their real estate to the hilt and invest the difference, they send that planner packing - because you don't let the Bank own you, which they do when they own your house.
I am just not comfortable with China owning my country.
is a smaller piece of the GDP than at almost any time in modern history. If they (whoever 'they' are) were going to get nervous the time to have done that was under Reagan; they didn't do it then why would they do it now? Besides, our debt as percentage of GDP is practically stellar compared to other nations in Western Europe for example.
hope so! If not he needs a stiff drink and some serious rest :-)
this is true, ramping up huge amounts of debt, subject to interest, is not a sustainable policy of governance; just because in the past we have not been negatively affected by our poor decisions does not mean that we, or our children, will not be affected so in the future.
Our spending truly is epic these days; if you don't take my word for it, ask the boys over at CATO:
http://www.cato.org/pubs/pas/pa543.pdf
Cheers
You mean when the deficit hits more than five percent, I presume. However, the debt can also be a problem. At a level around 60% of GDP, interest on the debt becomes a problem because if there is a recession, fiscal policy options become really expensive. As you can see from this: http://zfacts.com/p/318.html a recession would really put the government in a tight spot. Borrowing a lot of money for a stimulus package would become very expensive, should interest rates increase.
those pigs should be flying, or at least wearing gobs of lipstick.
Anyway, I hope NOLA ends up the way you describe it, I think everyone wants that kind of change and in many different places. Bush has the ball let's see where he can run with it.
Frankly his speech the other night is more what I would have liked to have heard after 9/11. In addition to going and stomping out terrorist rats around the world we should have begun investing more heavily in new alternative energy programs and conservation. But I suppose one out of two disaster recoveries isn't bad, I just hope the NOLA reconstruction doesn't look anything like the democratization of Iraq...
You are 100% correct in that I used the word Debt instead of Deficit unintentionally - my mistake.
There is little doubt that interest rates will continue to increase for some time....
I will never agree that borrowing money from the future is sound fiscal policy.
Cheers
Public debt, in relation to GDP, is most certainly NOT lower than at almost any time in modern history.
http://www.gpoaccess.gov/usbudget/fy06/hist.html
Public debt to GDP ratio will higher in 2005 than in all but 4 years of the past 50.
Current projections have out debt ratio at it's highest since 1954, when we were still paying back WWII debt, within 2 years.
Our debt ratios are actually comparable to most other Western nations.
http://www.cedarcomm.com/~stevelm1/usdebt.htm
Although I don't imagine you will agree with the tone of the author, you an verify his data (it's taken from the White House documents) if you feel he's made a technical error.
Our debt to GDP ration has skyrocketed. Crazily enough it only slowed down and started to reverse since we broke from the Gold Standard for good during Clinton's term. The reasons for that are complex and I think anyone trying to identify it with Clinton alone is making a big mistake. But the assertion that our Debt to GDP ratio is at historic lows is extremely way off.
... that Nick is right in the sense that debt by nations, especially a nation as dominant as our, is simply not measurable using the same metrics as debt by companies, individuals or even "lesser" nations.
No one has any experience with economies as large as this, even in the heyday of the British Empire, so I'm not sure that even the best of economists has the wherewithall to all project what actually happens. An old chemistry prof of mine had an expression 'if it happens in a drop it happens in a gallon' (and vice.) But that may not apply when the batches is as big as the ones we are talking about.
You can't view economics in a historical context because the interplay of economic relationships is evolving based upon the increasing level of civilization of various parts of the world, the increase in globalization, the advent of multi-national corporations without political ties and the free flow of capital. Debt only has endpoint consequences when it is secured. A point that Nick made very clearly. Personally, I want parts of the Chinese politico-socio-economic stucture to such a high investment in the US that military engagement is never a viable option.
demonstable
I think that an awful lot of Democrats would support efforts to help people own their own home
I submit that Democrats say they want this, but in their heart-of-hearts they know that all that does is create more Republicans. Dependency is the unwritten plank of the Democratic Party platform.
about China.
China has a major problem that they are unwilling to deal with. It is a problem that plagued numerous Asian tigers.
Their currency is pegged to the dollar. While that is helping them right now by ensuring that their goods remain relatively inexpensivce, sooner or later, it will cause a very untenable situation in their economy as no one will want Yuans because they are artifically overvalued. They will then be forced to float their currency which will cause a whole lot of problems for them.
Let me get this straight, you want to take my money and use it to fund your grandiose schemes about how to make the world a better place?
You want a chance, and the right to use my money, to "demonstrate to people that your ideas work?"
And you want to call this conservatism?
You are proposing bigger government as the best way to smaller goverment. My mind reels.
Things are getting way too Orwellian for me...
I submit that Democrats say they want this, but in their heart-of-hearts they know that all that does is create more Republicans
While I realize that many people here view Democrats as panderers and craven the reality that they have the same goals as Republicans. They simply disagree with how to get to them.
Manhattan is the richest place in the country, if not the world, and yet it is chock full of Democrats.
The Chinese aren't throwing their money away. Do you really, honestly believe that by collecting interest on an enormous amount of money China is stunting its national development? As far as I can see, the only way your argument would make sense is if the US were ever willing to default on its loans.
Which I humbly suggest might be a bad thing in the long run.
Right, the card we have is that we could default on our loans. This should keep the Chinese loaning money to us, since if they stop, our economy will collapse and we will default. However, that's not the larger point. I think you have to follow the stuff, not the money. It's not good that the Chinese are taking all of our production. Who owns whose debt is more or less moot.
...don't change.
They haven't changed in a couple thousand years. The fundamentals of debt to income ratios, interest rates and their effect on the economy, borrowing against the future, inflationary policy, etc. are cyclical and predictable.
The means we go about putting these principles into action change, the medium of exchange changes, but the fundamental nature does not change.
Reading the Roman documentation for monetary policy almost 2000 years ago... you almost can't tell the difference between what they were doing then compared to what we are doing now. The leaders then were fighting the same demons we are fighting now, and with a few exceptions, they almost always opted to follow the same self destructive paths that gave them a short term benefit where the bigger price wouldn't have to be paid until it was no longer their problem.
I meant deficit, I thought deficit, I typed 'debt.' You get to choose whether to accept it as simply fingers engaged before brain.
In the end, it comes down to simple economics. Debt as a % of GDP that exceeds GDP growth is not sustainable. Projections over the next 10 years clearly show this unsustainability.
It would be interesting to see if there are any conservative ECONOMISTS who agree with this entry. I'm sure there are plenty of pundits, bloggers, etc.
you are willing to bet the future of our nation, of hundreds of millions of people, that what applies in the Micro does not apply in the Macro? With little evidence that this is true?
As another poster above succinctly wrote, there were many Romans who argued quite convincingly that despite their ruinious economic policies, their nation would last in perpetuity; is this really the example that we wish to follow?
Consider the alternative; cutting spending, for God's sake! Isn't that why I vote Republican? I'm 26 years old, and can easily see myself still being alive when this debt gamble collapses; forget the children!
Cheers
China decoupled from the Dollar a while ago, bud. :)
Warren Buffet in real life? If they were cyclical and predictable, it would be very easy to make a lot of money.
It happens pretty often. I think that most people, even economists, associate the two so closely that it is easy to have some mental dyslexia on it.
As for deficit to GDP you are correct that it isn't at a terribly large rate currently. HOWEVER, there is a bit of shell game going in this regards. Our deficit to GDP ratio is basing the deficit on our GROSS revenues. IOW, they are treating the SS income as revenue. While true from an accounting standpoint it is, in truth, nothing more than an accounting trick. If we treat the SS debt the way we SHOULD, as an above line revenue, then our deficit to GDP ratio goes from a manageable 4% to over 5%. We're still not in a danger zone in that regards but we start to get into more trouble.
Regardless I think we sometimes focus too much on deficit to GDP and not enough on debt to GDP.
... is not the same thing as understanding the fundamentals that have suceeded throughout history on a national scale of economics, and the ones that have brought some of the greatest nations to their knees.
And as a matter of fact, yes I have applied these principles as a part of figuring out which companies are good to invest in and which aren't and it has worked out extremely well for me. Much of what I learned was by taking the time to understand what makes a business sustainable and profitable. The same fundamentals held true for the US until we change our policies and it's what shifted our government into indebtedness and it's what has caused our citizenry to finally have a negative 0.6 savings rate now after having a 10% savings rate just 10 years ago.
That is not sustainable and you can see that foreign nations are recognizing this by not investing in us at the same rate as before and looking for ways to diversify their current Dollar holdings into other vehicles.
It's still pegged against the dollar.
From your article...
China's currency had been pegged at 8.28 against the dollar for a decade, but the adjustment allowed it to float against a number of currencies.
The Chinese government simply changed the peg.
so I'm not sure that even the best of economists has the wherewithal to all project what actually happens.
The implication being that the President has a firmer grasp on the situation than the best economists? I tend to go with the economists but look for the near consensus position -- through out the strongest dissent from each flank and take the middle.
It's probably wrong but it seems like a better bet than banking solely on the President's economic genius, regardless of who sits in the office.
Nick's argument frankly is less about economics and more about politics. Spending money is good for Republican electoral futures and frankly that is more important than the long-range economic stuff since who really knows or understands this anyway.
- you are the FIRST person I have ever heard say that having the Chinese be a primary funder of our operational budget is a GOOD thing for the United States and a bad thing for the Chinese
Yes, I suppose that Reverend Ike was a little before your time. It was Reverend Ike who said, "When you owe the bank a thousand dollars, you have a problem. When you owe the bank a million dollars, the bank has a problem." Reverend Ike is a very wise man.
you will note that I did the same thing. :)
Cheers
that we aren't talking about banks. We are talking about government. It would be wise to not confuse the two.
The US cannot realistically default on their loans to ANYONE.
The truth is that the American people vote with their wallets.
I disagree. The American people vote with OTHER people's wallets, and Congress helps that farce every step of the way.
When the Dems say that we need to 'tax the rich' to pay for whatever new program they want, people agree that 'the rich' are Bill Gates, Donald Trump, and others. But the 'rich' are also the folks making $200,000 a year living in New York, Washington, or L.A. where that isn't as much money comparatively. Or the small businesses that file under the 104 0as well, that give so many millions of people their jobs. But these folks pay the same tax rate as the uber-wealthy. They're all 'rich'
When the GOP pushes tax cut after tax cut (a good thing) and then spending program after spending program (a demonstrably bad thing) they are equally culpable. It says "You can have all sorts of candy and dessert, and someone else will pay for it. Don't ask who, eat your d*mn candy you ungrateful brats."
If people directly related their tax burden to the government programs out there, people would change their behavior, both in consumption of programs and their voting habits. But since we hide the tax burden by allowing businesses to withhold money each pay period, people tend to forget the total cost of the government.
I would prefer eliminating the withholding and make people send a check to the government each month for their taxes. You can guarantee that people would start to freak out.
But that's another post.
It is no longer fixed to the Dollar alone, which means it is now able to fluctuate against the Dollar pretty significantly. This was a big deal... I followed it pretty closely.
http://www.chinadaily.com.cn/english/doc/2005-07/21/content_462216.htm
They are going to continue to adjust the exchange rate depending on what's going on. It is no longer fixed to the Dollar at any rate. The part you quoted was simply the initial change in the value.
More:
http://money.cnn.com/2005/07/21/news/international/china_yuan/
http://fistfulofeuros.net/archives/001769.php
http://www.washingtonpost.com/wp-dyn/content/article/2005/07/21/AR200507210
0351.html
Fiscal jellyfish will say it is different this time. Free market zealots will be in denial. Shills will continue to wave the pom poms for more debt. I believe Cheney said "debt doesn't matter" or something to that effect? When the Chinese and other creditors are not as reliant on the great mindless consumer market of the USA (are those pigs looking for the Walt-Mart trough?), then
the music stops and the game is over. Many in the US will never really understand a financial crisis until it hits home. My family or descendants will be out of the country by then, God willing.
"My family or descendants will be out of the country by then, God willing."
You can always go now....
When I say that people vote with their wallets I am merely stating that people like politicians who give them the most benefit for the least cost.
This is why entitlements are such third rail topics. Unless a politicians can come up with a way to make voters think they are paying less and getting the same, voters don't want entitlements touched. Republicans TRIED to convince people of that earlier this year and most people were unconvinced.
While I agree that people would be more critical of spending if they had to write a check, it is simply not feasible in our society.
on an open exchange? If not then it is pegged. The MECHANISM for setting the rate may change but it is pegged nonetheless.
A:) it's quite simple - you don't go to war with a country when you have a lot of money riding on that country. For instance, China loves to rattle sabers over Taiwan - but doing something about it would ensure that those debts would be declared null and void. China is using capital that could otherwise go towards their military to buy US bonds - which in general is a good thing in terms of ensuring that no side benefits from confrontation.
B:) TheForeign Affairs article deals with this in some depth. Our relationship with Asian companies is one of mutual advantage - they invest in the US, which provides them with their largest export market. If they do something to cause the US economy to crash, they suddenly lose their biggest market - which is why they have every interest in keeping the US economy strong - and we have every interest in keeping that arrangement afloat. It would take a major reorganization of Asia's entire economic base for that arrangement to change.
Again, the scenario you describe would require foreign investors deciding to cash in their chips enough to produce a drag on the economy - which would in turn weaken their own export market and negate any benefit in the long run.
Think of it this way - a business will often go out of its way to please its best customers, especially if they know that will lead to increased contracts from them in the future. Asia is doing exactly that right now.
That doesn't mean we should keep piling on the debt, but it also doesn't mean that we should be terrifically worried about it either. The 1980s was filled with horror stories about how Japan would eclipse the US economy and take over - and the Japanese economy is just now coming out of a long and miserable recession, while the US economy continues to grow.
Great essay, and thought-provoking. I tried real hard to be as positive as you are, and I think you've largely succeeded, as far as the NOLA and Chinese debt, and so on. However, I remain very cautious on the small government point, and I wonder if the course you are prescribing has us declaring victory by changing the defition of what it means to win.
And instead of sitting here quietly waiting for the next Democratic administration to come in and click the ratchet one more notch to the left, we can reverse some of the harm they've caused, and demonstrate that our ideas are better. This really does all play together. And it really is "conservative" in the strongest sense of the word. It's just not the same old short-term thinking, like we're used to from our politicians. It's not "small ball." It's playing to win, as opposed to playing not to lose.
The problem is that this all depends on how things are done. Given that after the Reagan revolution conservatism was always defined as a struggle in part to reduce the size and scope of government, particularly the federal government, to suddenly embrace the exercise of government power seems to me to be redefining "victory". I suppose that is precisely what you are suggesting that we do. Sacrifice one pillar of conservative principles in order to advance others; take a long-term view; etc.
In order for this to make sense, what we gain must be greater than what we give up. If we're going to abandon the "small government" concept (sure, we can pay lip service to it, but know that we're actually going to go exercise power by spending money and creating new departments and such), then I must ask what we will gain to replace that pillar of conservatism.
Your partial answer:
I say the next priority is to reverse the decline of our civilization. Surviving won't have that much utility if we all end up as savages clubbing one another. We all just got a very clear demonstration of what that looks like. We've seen it before, too. In fact we've seen it almost everywhere that Democrats have had their way in imposing their values on citizens through government dependency programs. There is a message in this. It is that the "ratcheting" has to stop. Like it or not, we either spend money to have our values reflected in this society.
Now, forgive me if I misunderstand or mischaracterize your pont here, but this to me sounds like the ascendancy of social conservatism at the expense of fiscal conservatism. Because we conservatives generally believe that our civilization is on the decline, we should take a page out of the Liberal/Democrat playbook and spend money, use power, in order to reverse that trend. Even if that means sacrificing principles of lower taxes, smaller government, and so on -- at least in the short-term. In the long run, you expect that the new ownership society will want smaller government and lower taxes.
In short, it seems to me that you want to buy a new electorate.
I must ask, if this is indeed what you are proposing, how we conservatives stop ourselves from getting into the fractious values debate that have riven the Democrats for these many years. We will still agree on strong defense; but lacking the common ground of fiscal conservatism, we will end up with profound differences over social values questions. When you go from agreeing on two of three core ideals to agreeing only on one of two, I think that shift will be profound in what it means to be a conservative and what it means for the Republican Party. I'm not convinced that the shift will be to the good.
I'd appreciate the community's thoughts on this.
-TS
Thanks for the encouragement; you understood my reasoning. I will need to sell property here before leaving and the family part will take time. I'll send you a confirmation post when I settle.
You are arguing a point I'm not making.
I NEVER said that getting China inextricably tied to our economy was bad. It's a great thing and the reason why our politicians pay lip service to pushing for reform in China while at the same time opening our legs for them more and more.
My initial point was that it is flawed thinking to suggest that because they invest in our bonds they can't invest in battleships.
Again, the scenario you describe would require foreign investors deciding to cash in their chips enough to produce a drag on the economy - which would in turn weaken their own export market and negate any benefit in the long run
If public debt becomes so high as to lower our international bond rating you can be sure that lenders will come a knockin for their pound of flesh. And they will do it without concern for larger overall concerns.
Why didn't (primarily) France and Russia not want to go to war with Iraq? It was the billions of dollars in debt that Saddam's Iraq owed them, and the commerce and trade that they had with the former dictator.
The difference is that the bank can probably recover most, if not all, of that thousand. Whether you owe a thousand or a million, if you can't afford to pay it back, you are still broke.
Respectfully, I don't think that this approach will really work the way you expect it to.
You said that they would have trouble when they float their currency, and no longer peg it against the Dollar. That's exactly what they have done.
This is only the start of that process... it will float more and more over time (0.3% a week I believe?) and are commited to letting market forces drive the value of the Yuan. This means that we are going to be paying more for our imports, which will increase the price of our goods, etc. etc.
That it's not traded on an exchange doesn't mean it's not floating now. Which was all you seemed to specify in your original post.
This is the first step towards the ultimate goal of having it freely stand entirely on it's own. The day of the Dollar dominating and driving it are over. They no longer have to worry about people not wanting it like you suggested.
- ramping up huge amounts of debt, subject to interest, is not a sustainable policy of governance
Sure it is. You're applying a slogan that is appropriate for individuals to a huge institution. That makes no sense. Institutions are not mortal. They can continue to grow forever. Virtually every corporation of size has debt in its capital structure, and that debt has grown as the company has grown. Here's why:
If a company can borrow at 5% interest, and can invest the cash in something that produces a 10% return, they can pay the 5% interest and have another 5% left over. They are going to keep borrowing and doing more of that as fast as they can. The strategy is sustainable, so long as there are opportunities out there that pay more than the going interest rate. There has never been a time when there weren't such opportunities.
The same thing applies to governments. So long as the economy continues to grow, they can pay more and more interest, allowing them to take on more and more debt, which they (can) invest in things that make the economy grow even more. Lather, rinse, repeat. Until the Sun burns out.
Thank you for the sanity and common sense.
the wrong thing. If you'd followed the issue in the 80s you'd know the Soviets financed themselves by oil and natural gas exports to Western Europe.
...perhaps we just have very difference perspectives on how much the Chinese currency needs to float before it has a signficant impact on trade between the US and China.
I took your comment about allowing it to float at face value as meaning any sort of float... so... there ya go.
We could default on China loans as a reaction to them pestering Taiwan and it would not affect our ability to raise capital from anyone but the Chinese. And what are the Chinese going to do? Send a repo man?
You think that using our treasury bonds as a political tool in which we selectively choose who we will and won't pay back, would have no impact on anyone but the Chinese?
Ok. Whatever you say.
... have destroyed their businesses and countries by projecting into the future in the manner you just did.
"So long as the economy continues to grow..."
This is the pivotal point upon which the inflationary supporters always wind up getting killed by. Sustainability can not depend upon growth. It has to be able to withstand a flatline or even a withdrawl for a time.
The killing blow always happens when that perfect pause in the economy comes when the debtor is too highly leveraged and the margin calls or credit collectors come calling because they have their own people they need to repay.
The Yuan is in a very desirable situation right now.
But that won't always be the case. When the dollar turns around and the Yuan weakens, that is when they will have problems.
It doesn't much matter how they peg the rate. By having their central bank control the value, they insulate it from market forces. The longer they do this the more likely it is to get wildly out of whack.
My initial point was that it is flawed thinking to suggest that because they invest in our bonds they can't invest in battleships.
They may be able to, but it doesn't make sense for them to do so. A battleship doesn't earn them any money. It costs them money. And why build up a huge fleet of battleships when you can get rich instead?
China only has X amount of money to spend each year (without themselves going into unsustainable debt), which means they can either invest it or spend it on battleships. It's better for us (and everyone else) if they do the former rather than the latter.
If public debt becomes so high as to lower our international bond rating you can be sure that lenders will come a knockin for their pound of flesh. And they will do it without concern for larger overall concerns.
Except the chances of that happening are unlikely. An investor looks at the fundamentals of an investment - and the fundamentals of the US economy are the strongest in the world. There isn't a market in the world that has the fundamentals we do, and our position in the world economy is crucial to every other market out there. A massive capital flight out of the US is unthinkable at the present. Where would that money go then? Asia - who are dependent on exports to our market for their economic strength? Europe, whose share of the world market is expected to decline 3-5% by 2020? Russia? South America?
We're the 800lbs gorilla of the world economy. And unless something very massive happens, we're likely to stay there for a good long time. And that's precisely why the current economic condition is perfectly sustainable over the long term. The worst thing we could do is try to engage in protectionist measures to try and fix a non-existent crisis - thus upsetting the balance and sending the world economy into decline.
I concur that people want more for less. The problem is the relationship between what the majority of the country contributes to the operation of the country, and the benefits we give out in return.
But I'd disagree that it isn't feasible to make people send in a check every pay period to the government instead of having their employer do it. It migh tbe less efficient, sure, but it certainly is feasible.
It also has the positive effect of making people realize exactly how much of their income goes to taxes and allows them to evaluate every two or four weeks whether they think that's a fair trade off. I bet we'd see a lot less pork, a lot less in entitlement creep, and a much higher demand for an efficient government.
If we stop helping people forget the relationship between payday and sending money to the government, people will think about government much differently.
I think most countries understand politics. The fact is that countries in Africa, Asia, and South America nationalized industries and defaulted on loans with monotonous regularity throughout the 70s yet never suffered for a lack of foreign investors. We're at least as credit worthy.
a fallacious argument, as it completely ignores the business cycle; namely, that there will be booms and busts, the economy and market will grow and shrink. There is a zero percent chance that the economy will continue to grow ad infinitum; and the longer the cycle is delayed, the harder the downfall is.
It isn't a slogan. You say that:
"Institutions are not mortal."
And yet, they are, as undoubtedly every nation and business has had a beginning and will have an end. Tell the vast majority of failed businesses out there that they were not mortal....
And, now another question has occured to me: if it is such a sure bet that the gov't can invest in something that consistently achieves a 10% return, on a massive scale, then why would anyone dream of loaning money to the Gov't at 5% interest? They could make much more investing elsewhere.
Cheers
"A massive capital flight out of the US is unthinkable at the present."
That would not be good for anyone. However, investors are trickling their capital out of the US.
Foreign banks are showing interest in becoming net gold purchasers instead of sellers for the first time in a loooong time. Russian and Asian central banks have said they are going to be reducing their Dollar holdings slowly.
A single large entity suddenly fleeing the US Dollar would certainly cause a huge disruption for everyone around the world... which is why we have to pay even more attention to the slow deflation.
It doesn't matter if your tire blows out in a second or has a slow leak over weeks. Either way you are going to eventually be stuck on the side of the road watching traffic fly by. At least with the blowout you might take others out with you and you'll have more people who need help getting safely out of their cars. ;)
the real question is: How will Republicans convince America this is so? Sounds a little shaky to me. I mean, Republicans have always used spending against Democrats, and now they want to spend? And Democrats have always used lack of spending against Republicans and they're currently criticizing the spending. Sure, we need to spend to survive, but Americans will decide according to their prosperity. Perhaps many Americans want money spent domestically and not abroad. Just a thought.
If you want to compare our bonds to those of 3rd world nations that would certainly give us more flexibility.
Whether most countries understand politics is irrelevant. Most INVESTORS view T-Bils as the most secure investment instrument in the world because it has the MOST LIKELY chance of getting paid. This is why we can pay lower yields than, say, a Zimbabwean bond.
I have to say that this is the most surreal thread I've read here at RedState. If jjayson comes onto this thread and starts supporting the premises made here then I'm going to need a shot of whiskey.
For our purposes, institutions are immortal. If some of their debt comes due, they simply roll it over. They can do this perpetually.
Someone should have told Argentina!
I have to say that this is the most surreal thread I've read here at RedState.
Understatement of the year. :)
Bottom's up!
The Weimar Republic
Hungary
Mexico
The US Confederate Army
The Ottoman Empire
China (twice!)
Greece
Yugoslavia
Ukraine
Bolivia
Peru
Rome
whee!
- you want to take my money and...
No. Did you even read the piece? You spend your money however you want. Maybe you won't, but at least somebody out there is going to buy some goods from China or Japan. At that point the money is China's, or Japan's. Not yours. We're going to borrow their money, and spend that.
Why will they let us do that? Because they can't stop. If they ever stop, we will have to take your money. And then you won't have any money to buy their stuff. And then they will have a big unemployment problem, and domestic unrest and stuff. And they don't want that.
See, after you get your stuff and have it safely at home, we borrow the money you gave them for the stuff. Now you have your stuff, and we have the money. What the Chinese have is a piece of paper. This is a good deal; don't complain about it.
It sounds Orwellian because you have to think long-term... 20 or 30 years, to understand it. For most of my adult life, liberals ran this country. Democrats had a huge registration advantage almost everywhere. That's gotten closer in recent years, and now the GOP may even be a point or two ahead. But that's not because the public has embraced fiscal conservatism. It's because the Democrats scare people on defense. Someday they are going to fix that.
The Democrats have built a huge base constituency out of two basic groups: government employees, and people who are dependent on the government for transfer payments. Not a few of the government employees are part of the huge machine that makes the transfer payments, or provides in-kind services to such people (the social workers, etc.).
If by spending money now, we can turn some large fraction of the transfer-payment recipients into homeowners with jobs, then we can expect a future that has fewer recipients and needs fewer government workers. We don't get to claim our winnings until that happens, but we do get to claim them. And when we do, the Democrats won't have the voters... we'll have 'em, because they will be homeowners with jobs instead of people living in projects on a monthly check from Uncle Democrat.
When there is an electoral majority in favor of lower taxes and smaller government, we will get it. But we're not going to get it until then. So we either make it happen, or we have to keep crabbing about how "the people" keep electing these porkers.
I'm assuming you're including those folks who've given us "No Child Left Behind", the Medicare Prescription Drug Benefit, Energy Bill, Transportation Bill, etc.? How do these particular investments figure into the strategy?
If you argue that borrowing isn't necessarily bad, I can agree with that.
But how the government is wastefully spending it is bad. There is no excuse for it.
Bush is doing nothing but encouraging wasteful spending by not vetoing any spending bill set before him.