Wednesday, September 19, 2012

Romney, America's Churchill?

I have not become the King's First Minister in order to preside over the liquidation of the British Empire. Winston Churchill

I can imagine President Romney repeating some version of Churchill's view at his first State of the Union address.  "I did not get elected President to act as liquidator of the American Empire."

In Churchill's case, he likely meant what he said without realizing that liquidation was the most likely outcome following their military losses (which destroyed any sense of British superiority among the colonized) especially given Americans' anti-imperial sentiment at the time. 

A President Romney, if such proves to be the case, might not not mean what I imagine him saying and might even desire just such an outcome.  After all, Bain Capital did evidence some expertise in profiting from liquidations.  This is, of course, a serious allegation- disingenuously seeking the office of President of the United States merely to profit from empire liquidation.

Yet, judging from the now infamous (or laudatory, depending on perspective) video of Mr. Romney's unvarnished views, he seems well aware of America's precarious fiscal situation and even used the term "bankruptcy" in reference thereto as if such was a perhaps preferable certainty. It might also explain Romney's apparent inability to capitalize on the poor economy.  Like John Paulson, Romney might be betting on a crisis. 

Audience member:
The debates are gonna be coming, and I hope at the right moment you can turn to President Obama, look at the American people, and say, "If you vote to reelect President Obama, you're voting to bankrupt the United States." I hope you keep that in your quiver because that's what gonna happen. And I think it's going to be very effective. Just wanted to give you that. 

Romney: Yeah, it's interesting…the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it.' It's just made up money, and this does not augur well for our economic future.

You know, some of these things are complex enough it's not easy for people to understand, but your point of saying, bankruptcy usually concentrates the mind. Yeah, George.

Yet such an outcome is not a fait accompli (although we might well be seeing, as Churchill put it, the end of the beginning of that process).

As Alicia Munnell of the Boston Fed noted in reference to the use of the SS "Trust Fund:"

The conventional argument, and the one just alluded to, is that whether or not government saving actually occurs will depend on how the assets in the Social Security trust funds are used. If the reserves are used to finance current consumption - for example, to pay for current outlays in the rest of the budget - no real saving will occur. On the other hand, if the government alters its spending and taxing patterns to produce surpluses at the federal level - not just in the Social Security trust funds - the nation will enjoy higher saving and investment. 

That argument is basically correct. The only difficulty is that it characterizes all government spending as consumption. Clearly, the building of roads, bridges and other types of physical infrastructure is just as much an investment as the construction of any factory in the private sector. Equally important, however, is investment in human beings, because future output will depend upon having a healthy and educated work force. In other words, money spent on nutrition programs for pregnant women, on health care for poor children, and on Head Start programs will contribute just as much as physical investment to ensuring that we produce lots of income in the future.

The implication is that if we were doing a careful and serious job of assessing whether trust fund surpluses were adding to national saving, we would have to do more than look at whether the non-Social Security portion of the budget were in deficit or surplus. If the Social Security trust fund surpluses were used to finance new health or educational programs, they would be adding to future income just as surely as if they had been invested in General Motors stock.

In other words, and applying her views more broadly (including a wider range of investment options), it seems to me Americans need to choose (and soon).  Either we liquidate or we invest in making the nation much more efficient at producing and distributing the goods to whom they have been promised- in effect, making real the money "made up" by the Fed.  Neither choice will be pleasant and the latter may not be feasible given the divisive politics of today, although I have faith, should the political will be found the technology would be possible.  "Kicking the can down the road" makes the former option an eventual certainty.

Whether President Obama is the man for the latter job remains to be seen.