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Monday, February 2, 2009

Borrowing Against Tomorrow

When the U.S. Treasury borrowed during World War II, indebtedness made sense. Other than Pearl Harbor, the U.S. mainland was never attacked. Heavy borrowing meant to fund our national defense ensured we would emerge largely unscathed as a nation in the aftermath of the war.

It's also important to remember that, with the dollar defined as one thirty-fifth of an ounce of gold during the war years, the U.S. was an excellent credit risk. Contrary to former Treasury Secretary Robert Rubin's admonition that deficits equal high rates of interest, despite total debt larger than our economy, the Treasury was able to borrow at the lowest rates of interest in the world. We were a good bet, thanks to to the soundness of our currency, not to mention that the purposeful nature of the borrowing, when it came to protecting our individual and commercial interests, ensured a quick post-war economic recovery that would make paying it off very simple.

Fast-forward to the '80s: Even though our yearly deficits under Ronald Reagan rose in nominal terms, Treasury rates fell during his presidency. The fall was first and foremost the result of better dollar policy from the Reagan Treasury, and it should be noted that a more credible dollar combined with tax cuts made the U.S. a worthy debtor. So while our aggregate debt rose under Reagan, investors in no way blanched; our growing economy during the Reagan '80s comforted the buyers of our debt.

Of perhaps even greater importance during the Reagan years was the nature of the spending. Revisionist history says the Soviet Union was no threat, but at the time, fear of the Soviets was very real. Contrary to the austerity crowd who suggested at the time that we were borrowing on the backs of future generations, it would have been more realistic to say we were borrowing in the '80s to build up our military so future generations would not have to.

Ultimately, our heavy deficit spending on the military bankrupted the Soviet regime, and deficits fell in the '90s as we enjoyed what many termed a "peace dividend." There was a real purpose attached to the '80s deficits when it came to protecting the homeland that made them a very good buy. So long as we were safe, so was our capitalistic economy that made us the richest country in the world. And so long as our economy grew, the size of our national debt would shrink relative to GDP. In short, the Reagan deficits made a lot of sense.

Moving to the present, President Barack Obama has made plain that future deficits of the trillion-dollar variety will be the rule until we fix what some consider the worst economy since the Great Depression. And given the orgy of spending that occurred on the watch of former President Bush and the profligate GOP, there's no credible opposition in Washington to Obama's spending plans.

Importantly, if Obama's spending initiatives mostly involved protecting the homeland and our capitalistic ways from terrorists, the resulting deficits wouldn't matter as much. Sadly, the spending isn't targeted at defense. While the military surely won't be ignored under Obama, a great deal of government spending going forward will be meant to "stimulate" the economy through other means. Rather than aggressive spending meant to protect the homeland, Obama is essentially asking investors to fund a massive giveaway program stateside. The federal government will prop up corporations and pay individuals to work, all with money taxed or borrowed from the private economy.

Simplified, the Obama economic plan is one whereby we'll run deficits to fund welfare programs that, by definition, will slow economic growth. Indeed, individual stimulus will involve taking from the productive to aid the less productive, and it's easy to see how this will cause the productive among us to reduce their efforts.

Read it all here.

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