Tyson – Enough to Make an Investor Chicken February 28, 2003February 22, 2017 I am still in computer hell, just a different circle. Not that life isn’t very good — e.g., I got to sit next to Paul Volcker on the Delta Shuttle yesterday. Dr. Volcker was the Fed Chairman pre-Greenspan who, I believe, was hugely important in keeping our economy from spinning off the tracks. He is a great American hero and the best kind of public servant. I had spent a day with him in August, 1982, under the aegis of the New York Times, when the Dow was 777 and our economic problems, intractable. I came away feeling that maybe the world would not end, after all. Wish I felt as optimistic today, but I think we have some more tough times to go through first. (I left Dr. Volcker alone for most of the flight, but did get the sense that he thinks a good bit of the current game plan — e.g., getting rid of the estate tax — is nuts.) I’ve been more or less gloomy about stocks since the first of these columns (this is the 1,746th, so it’s been quite some time now) . . . and have for the last year or so been worried about real estate prices . . . and long-term bonds are a scary bet these days, with massive budget deficits and a war that will be financed with tax CUTS (???), suggesting possibly higher interest rates ahead (which hurt long-term bonds) . . . so it’s hard to know where to put your money these days. I’ve made some suggestions in the past, some of which have worked out, some of which have tanked, and with several of which the jury is out. I owe you an update, and if I ever ascend from computer hell, you might get one. But for now, lest you assume we have for sure hit bottom, I offer you this sobering piece by Dr. Laura D’Andrea Tyson, former key Clinton economics advisor, currently dean of London Business School, in the February 24 Financial Times. (I would just link to it, were I not in the twice aforementioned very, very hot place.) Imagine it nicely indented, and in a different color. Dr. Tyson writes: “The Bush administration is poised to unleash war in Iraq as the first demonstration of its muscular new foreign policy. According to the “Bush doctrine”, military force can be used pre- emptively to attack nations judged to pose significant future threats; and to replace despots with freedom-loving democrats who espouse those moral values George W. Bush assures us are “the same in every culture, in every time and in every place”. His bold agenda is made possible by America’s overwhelming military power. But it also reflects a moral certitude where none should exist and lacks a financial strategy where one is essential. “Predictably, Mr Bush’s most recent budget calls for another huge increase in military expenditure. But initially it did not include money to honour his commitment to help rebuild Afghanistan. Only when this omission was exposed was $300m added for this purpose. Nor does the budget cover the costs of war in Iraq or of occupation, humanitarian aid and reconstruction. According to William Nordhaus of Yale University such postwar costs could reach $100bn-$600bn over the next decade. No wonder some officials are already claiming Iraq must pay for its own reconstruction. And no wonder Turkey is sceptical that Washington will honour its offer of a $26bn aid package in exchange for its support for the war. After all, that package is also missing from the Bush budget. “What is in the budget is another round of massive tax cuts worth $1,500bn over the next decade. Even excluding long-term Social Security and Medicare liabilities, the budget projects a large deficit that will persist long after a war in Iraq is over and the economy has recovered. Based on the administration’s own questionable assumptions about economic growth and lower real per capital spending on almost everything other than defence and homeland security, this budgetary imbalance is likely to reach $2,000bn over 10 years. This is exactly when the federal government should be building surpluses to cover its promises to future pensioners. A more responsible set of assumptions would make the shortfall substantially larger. “How does the administration plan to finance these mammoth deficits? Notwithstanding its unilateralist claims that America’s destiny should not depend on decisions made by an “illusory international community”, the White House is implicitly assuming that the rest of the world will foot a sizeable share of the bill. The US already absorbs about 5 per cent of the world’s savings. It borrows about $200m from the rest of the world each day to cover its savings gap. The Bush budget will increase that gap to as much as 9 per cent of gross domestic product by the end of the decade. Will the rest of the world be willing to cover a gap of this size and, if so, on what terms? There is no reason to think the US will find itself in a buyer’s market. “Indeed, there are already worrying signs that foreigners are beginning to reduce their massive holdings of dollars and dollar-denominated assets. As this adjustment takes hold, the dollar is beginning to weaken. It declined briefly during the last Gulf war and rallied when the war was over. But at that time, the US current account deficit was less than 2 per cent of GDP. President George Bush Snr had already been forced to break his promise not to raise taxes so as to reassure global capital markets that the US was acting to reduce its structural budget deficit. “Now, with the US much more reliant on foreign savings, his son clearly intends to increase these deficits. Meanwhile, the president’s economic advisers are trying to convince the markets that deficits do not really matter. However, this time the costs of war, together with the Bush budget and foreign policy agenda, may well trigger a sustained decline in the dollar and a reduction in America’s ability to borrow from the rest of the world. “Americans face painful choices. Structural deficits will mean more expensive imports and higher interest rates. These will depress private sector spending to make room for financing Mr Bush’s budgetary priorities. The result will be lower national investment and living standards. Or, confronted with the deleterious effects of structural deficits on the dollar’s value, on interest rates and on growth, the US might face deep cuts in education, healthcare and retirement benefits. “Such cuts may be the only way to fund Mr Bush’s imperial ambitions and his munificent tax relief for the wealthy. Indeed, many in Mr Bush’s inner circle are ideologically committed to reducing the government’s involvement in such social programmes. But because the programmes are popular with voters, it is politically advantageous to undermine them in an indirect manner. The administration has already signalled its desire to privatise Social Security and, more recently, Medicare. The prospect of looming structural budget deficits can be adduced as a justification for doing so, even though those deficits are self-inflicted and avoidable. “The US is the world’s only military superpower. It may indeed have the might to pursue a pre-emptive foreign policy that is breathtaking in its audacity and arrogance. But the US is also the world’s largest debtor nation. It will need a sound financial plan to convince the rest of the world that helping to finance its global ambitions is a good idea. Right now, none exists.” Life will of course go on. We will muddle through. But it certainly has — and in barely two years — become quite a muddle. Time, I guess, to propose another tax cut for the best off.