Presidential election campaigns are a source for speculation. How would life
change in a second Obama term or with a Romney victory? The economy and the
financial markets will be discussed as a single topic.
The Federal Reserve's negative interest rate policy
(inflation higher than interest rates) distorts both markets and the economy.
Most voters care whether the distortions are in their personal interest.
"What this country needs is a good five-percent savings rate," would
invigorate the presidential race. Neither presidential candidate (Romney and
Obama are assumed) will say this.
From the evidence, neither knows about the Federal
Reserve's zero-percent, savings-rate policy. Neither seems aware of the
constituencies they would attract. First and foremost are the voters who saved
for retirement but are struggling to pay the rent. Is there a single public
voice speaking on their behalf?
There are pension plans that will never pay
beneficiaries if such low interest rates persist. There are good businesses
tottering because they must compete with bad businesses that can borrow at 1%.
The bad businesses run their operations like a roulette wheel. They always ran
their businesses like a roulette wheel, but before Simple Ben took over the
world, a 5% interest rate purged their foul practices from the economy.
There are small- to middle-sized banks that fight for
survival because the bloated, Too-Big-To-Fail banks leverage their inscrutable
balance sheets in daffy, derivative trades off minuscule interest rates. There
are small- to middle-sized companies that traditionally borrow from small- to
middle-sized banks, many of which were wise enough to forego Wall Street's
antics and bonuses, only to find they must shrink their loan books because they
are not members of the cabal. Of course, all of the above destroys jobs and
precludes hiring. Yet, we can count on Romney and Obama to restrict their
discussions to abstract job, housing, tax, and spending solutions.
This predicament came to mind when reading last week
that Mitt Romney "criticized Bernanke for printing too much money."
Such a foray seemed improbable, and, in fact, the quotation was an inaccurate
extrapolation from another statement which is neither here-nor-there.
Back to the main point, Mitt Romney's two economic
advisers, Greg Mankiw at Harvard and Glen Hubbard at Columbia , are just what you would expect if
you expected nothing at all. Since Romney chose them, we can assume Romney is
N. Gregory Mankiw sided against the 99% in the April
18, 2009, New York Times, under the headline: "It May be Time for
the Fed to Go Negative." You can read all about it in "The 8%
Solution." A quick search for Glenn Hubbard's quantitative
easing position was unavailing, but to watch the documentary Inside Job
is to know we have, as they say, "a team player."
Aside from Simple Ben's negative, interest-rate
policy, these mastodons are incapable of planning for the future since they are
working so hard at preserving the past. Glenn Hubbard published a forgettable
budget plan in the April 25, 2012, Wall Street Journal. Larry Summers,
gadfly economist, university president, and presidential adviser, responded to
Hubbard's effort in the April 27, Financial Times. Summers rooted for
President Obama's "plan that would cut deficits by more than $4 trillion
over the decade."
Why even bother proposing or revising a budget that
only cuts $4 billion over a decade when the U.S. Treasury is a couple of
trillion dollars in the hole each year? Expecting that such debates will alter
the nation's direction is far-fetched.
It is naïve or vain to offer constructive criticism, but here goes: Stop making
10-year budget proposals. Concentrate on next year. Even that exceeds Washington 's interest
and ability, but at least there is a chance of concentration and
accountability. We need look no further than Larry Summers to know how wrong
and unaccountable are the brilliant economists who dominate public policy.
On February 7, 2000, Treasury Secretary Larry Summers
presented the 2001 federal budget. The brilliant economist (he always seems to
be described as "brilliant") averred: "This is a budget that
preserves our progress and builds our future.... With respect to debt, this is
a budget that...provides for the elimination of the national debt by 2013. That
is, in effect, a major tax cut, in two respects. It is a major tax cut because
it removes the burden of the interest payments on $3.5 trillion from the
American people, and ensures that principal payments will not need to be made
in the future."
Summers missed both the forest and the trees. When he
spoke, it was obvious that recent federal budgets had caught a tailwind from
Internet IPO's, stock-market gains, and stock-option cash-outs. That was the
main reason for the-then recent federal surpluses. It required some
intelligence to, say, disentangle a collateralized bond obligation, but the
huge boost in government revenue was a matter of simple identification.
Hope may spring eternal, but the presidential victor
in 2012 will dictate an economic policy that is stuck in the mud. What then,
will break unsustainable imbalances and market interference? Lacking an
untoward event, we will wait for the markets to revert. The currency and bond
markets cannot be controlled forever. The form and speed of a reversion is
unknown. The world is full of surprises. If rising inflation of things (not
asset prices) is recognized by the general public, a scramble for stuff would
upset the asset price-fixing of central banks.