There are lots of reasons our economy crashed and burned back in late 2008. Lousy monetary policy, excessive government spending, bad housing policy (i.e. Fannie Mae and Freddie Mac), the failure of Pets.com, the weak dollar policy of every Bush Treasury Secretary, greedy investment bankers, stupid regular bankers, American Idol and Dancing With The Stars just to name a few. Or you could just blame the whole thing on George W. as many have. Go ahead. He doesn’t mind. He’s used to it by now.
But if you want to know why we’re still in this mess going on 4 years later, you need look no further than this recent article in the Financial Times by Larry Summers who headed up President Obama’s economic team. Here’s the quote that caught my eye:
So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less.
This is what passes for intelligent economic advice in Washington, D.C. We’re running a deficit of almost 10% of GDP, our debt is 100% of GDP and Larry Summers’ considered advice is to borrow more money. And he thinks it will improve our creditworthiness. Here’s his recommendation for how to spend the money:
At a time of negative real rates, accelerating any necessary maintenance project and issuing debt leave the state richer not poorer; this assumes that maintenance costs rise at or above the general inflation rate.
As my fellow Harvard economist Martin Feldstein has pointed out, this principle applies to accelerating replacement cycles for military supplies. Similarly, government decisions to issue debt and then buy space that is currently being leased will improve the government’s financial position. That is, as long as the interest rate on debt is less than the ratio of rents to building values, a condition almost certain to be met in a world of government borrowing rates of less than 2 per cent.
Hey, I’ve got an idea. Let’s just start another war. That’ll really accelerate “the replacement cycle for military supplies”. Hmmm. Who’s due for a Tomahawk prostate exam? Hell, somebody just tack a world map to the wall and throw a few darts. You see in Keynesian fun world, it doesn’t matter who you bomb or how you spend money. You just have to spend it and spend it and then you get mo money and you spend it and that gets you what? Mo money! Wait a minute. Hold on to your hat. Summers has given me another idea. He wants to use this new borrowed money to buy office space, right? Well, it just so happens that the US government already owns 14,000 empty buildings, so let’s “accelerate the replacement cycle for military supplies” by lobbing cruise missiles at the empty buildings! Then we can use the borrowed money to build new offices we don’t need. That way we can put some of those construction workers that are just laying around collecting unemployment checks to work. Then, then, we’d have mo money and mo money and pretty soon we’d just be rolling in it and the economy would be jumping and everything would be all better. Boy that Keynes was one smart dude. Good thing ol’ Larry went to Harvard to figure out how to do this stuff or we’d be in real trouble.
Sorry about that little Wayans brothers flashback. I have got to stop watching late night TV. Anyway, when a President gets high quality economic advice like this, he finds himself out on the campaign trail saying things like this:
I don’t blame President Obama. He got the best economic advice his party had to offer. Like Bush before him, who also got the best advice his party had to offer, Obama just doesn’t know any better. Good grief. Is there something in the water in DC that deletes all common sense upon entry to the city limits?
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: email@example.com or 786-249-3773.
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