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Tuesday, October 28, 2008


testing galbraith

jamie galbraith has written what i think will be one of the seminal books of the oncoming sea change in american public perceptions of the role of government and its relationship with business. this interview with bill moyers highlights all the major points of that book as well as galbraith's views on how to remediate what is now obviously the worst financial crisis since the 1930s with the damaged but still rehabilitatable institutions of the new deal.

as a philosophical conservative, i find much of what he says to be very compelling. the truth is that the post-reaganite vision of "conservatism" in the united states is really something of a radical departure from what i would call burkean conservatism -- indeed, should not be called conservatism at all but rather perhaps regarded as a form of corporatism (to borrow a term from mussolini). many of the social aims that a christian moral philosopher like john locke or a bourgeois trustee like edmund burke would have espoused are found nowhere in the increasingly brutal republican party platform but are instead on the tongues of men like galbraith and economic historian james livingston -- who correctly divine the prosperity and indeed integrity of our society to be endangered by the abuse of government in channeling of wealth into the hands of a predatory few looters, and seek proper political, legal and economic redress to stave off disaster. one of the eventual outcomes of this financial collapse will be the revelation that the program of the republican party since goldwater -- shifting the tax burden from capital to labor, deregulation of enterprise accompanied by restrictions on trade unions -- was in fact an slow-burning economic disaster for a consumer economy, though one disguised for some time by the lifting of regulatory limitations placed on indebtedness which had been enacted following the collapse of 1929.

but i hesitate at that point of praise, for -- as the following exchange with moyers illustrates -- galbraith takes almost as an article of faith the supremacy of the american dollar, and from that point of departure prescribes a massive reinvigoration of government without worry as regards the lack of domestic savings in the united states, which requires us to continue to borrow very heavily from savings-rich developing nations like china.

BILL MOYERS: But, you know, you and everybody else have been reading or talking to or calling for more spending, more spending because that's the only way you say to get capital into the system. But where's that money going to come from, Jamie?

JAMES GALBRAITH: The government has no problem with money. What we're learning, first of all, is that the dollar remains the anchor currency of the world. The euro is the one, is the currency that's collapsing right now, not the dollar.

Uncle Sam's credit is excellent. Uncle Sam can borrow short term for practically nothing these days. Everybody wants to have Treasury Bills and bonds because they're safe. Uncle Sam can borrow for 20 years at 4.3%. That's the same rate that the United States could borrow at for 20 years in the last month of the Eisenhower administration. So from our point of view, we're actually well placed, I mean, as the government of the United States is well placed to take the lead in pulling the country and the world out of this crisis.

BILL MOYERS: But even Barack Obama's website calls the deficit America's "Domestic Enemy." Even he's aware of the fact that the deficit's beyond sight.

JAMES GALBRAITH: Well, the deficit isn't beyond sight. The deficits in the Bush administration in relation to the size of the economy were never all that large. They were certainly larger than they were under Clinton, but that was in part necessary because of the changed economic situation, the collapse of the dot-com bubble in 2000.

The United States government's credit is good. The deficit is a financial number that people are going to have to get used to because there is no way in these circumstances of avoiding an increase in the deficit. One of two things can happen. The government can take action and help stabilize the economy in which case we will have more spending but also more employment.

Or the government cannot take action and let the economy collapse in which case we will have much less tax revenue. The deficit is going to be larger either way. There is no way of avoiding that. The only question is do you work to have a good economy or do you accept a terrible economy?

BILL MOYERS: What are the negative effects of a soaring deficit?

JAMES GALBRAITH: Well, the one thing I would have worried about is that we might not find lenders who are willing to provide funds to the U.S. government, that the Chinese or the Japanese might decide that they would rather be in some other currency and that we'd then have trouble with inflation. But that's not going to happen.

It's not going to happen because, as it turns out, the major alternative, the euro, simply isn't viable as a reserve asset for the rest of the world. It's the dollar or nothing
. So the United States basically can finance itself to the extent necessary to deal with this crisis. And I'm right now quite sanguine about that, quite confident that we won't face a problem.

galbraith makes many good points, but his view of the state of vendor finance is i think too narrow and fundamentally backward-looking. government deficits were in fact pretty significant, but were only a fraction of total financing needs and so don't take the full dimension of dollar-based indebtedness. interest rates have been low; does that imply that they will remain so? if it truly is "the dollar or nothing", why do we discount the idea of nothing -- or rather, different denominating currencies in different spheres of activity?

the united states has an official debt of $10tn -- only $6tn or so is actually borrowed, the remainder being an internal transfer between the general fund and social security -- and $3tn of that being drawn on foreign creditors.

now, the united states is faced with attempting to draw, on the estimation of deutsche bank, in excess of $3tn more in the coming fiscal year -- much of it inevitably from these same foreign creditors, though the domestic flight to safety will surely abet the funding of the treasury for some time. and they will be attempting to do so at a time when global trade is collapsing, likely resulting in much narrower current account deficits for the united states and a much lower flow of vendor finance (indeed, if any at all, for china will soon have concerns at home which it may employ savings to address). this is enough to spark discussion of quantitative easing in the united states. indeed john jansen probably summarizes the expectations of many bond market operatives:

Simply stated, the profligate spending upon which the government has just embarked will cost the taxpayers dearly.

i sincerely hope galbraith is right, because we are calling plays out of the keynesian playbook even now under the management of treasury secretary paulson (though he carefully directs the benefits like the predator he is). if the direction of the obama administration under the advice of paul volcker continues down this same path -- and if galbraith is wrong -- we will create a dollar crisis, the effects of which will make the credit crisis we have seen to date seem child's play.

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from perrone: you know, GM, as much as I've tried to get all terrified about a looming dollar collapse, the prospect just ends up seeming counterintuitive to me. when the pound lost its standing as the reserve currency, it was because the dollar was there to take its place. what's there to take the dollar's place, really?

and then you've got another fairly monumental barrier to inflation --credit's gone, so the global money supply is fucking collapsing.

know what I mean?

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hi perrone -- check out the comments put forward by nouriel roubini today.

i completely agree that there's utterly no threat of inflation on current data. just the opposite! what's happening to credit is overwhelming every government effort. indeed the dollar might continue to strengthen -- as we're finding, the dollar like the yen became a carry trade funding currency as greenspan held rates low.

there is a prospect, i think, out in the future of the united states desiring more financing than it can procure as its current account deficit narrows with the contraction in global trade. and there would be some temptation to monetize in that event. i don't subscribe currently to a "hyperinflation" scenario, but it could happen.

roubini, however, makes a solid intuitive argument against it. and there are other avenues besides monetization to secure financing. for example, the US could borrow in other currencies to attract reasonable terms (a la carter bonds).

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