“BUT IT’S GOOD YOU’RE MAKING IT SNOW, ANTHONY, IT’S REAL GOOD. AND TOMORROW—TOMORROW’S GONNA BE A REAL GOOD DAY!”

1/7/09

Much of Wall Street waxes enthusiastic about the markets for a number of reasons, perhaps the most groundless of which is the upcoming Obama stimulus plan. Even reasoned, experienced voices, like Art Cashin, one of the few people on the Street who have my respect, while not blindly enthusiastic about the plan like their younger ingenuous and myopic colleagues, cite the stimulus plan as a possible reason to be somewhat enthusiastic about the markets.

Mr. Obama pledges to give the economy a massive shot of fiscal adrenaline. In the process, he will run deficits that, if such a thing is indeed possible, exceed those bestowed on us by the ever vigilant fiscal conservatives in the Bush administration and their henchmen in the (until 2006) GOP senate. This plan is doomed. The Obama plan will not work for the reason that these “Take money out of one pocket, put it in another, and let the Keynesian multiplier (which, mysteriously, only seems to work when the money passes through government hands) work its magic” plans only work when they are used as a prod to get the Fed to loosen up on the money supply, and then only ephemerally. But there is something else working against the Obama plan.

In the 1930s and 1940s (The end of the former and the first half of the latter featured a fiscal stimulus plan that finally did work: World War II. Think about that in the current geopolitical context.), the government engaged in a fiscal stimulus plan that is cited as a model for, or at least a logical comparison to, the proposed Obama plan. The debt used to finance the resultant deficits was held to a relatively small extent by the Fed but mostly by American investors who felt wealthier and more confident as a result and thus more willing to spend and invest in America. But things have changed. We don’t save in this country any more. In fact, in the new America, saving has come to be regarded as a pusillanimous manifestation of a lack of optimism, and we all know that the most grievous secular sin in modern America is a lack of optimism. But I digress. The point is that we don’t save and thus must import, or create out of whole cloth, our capital. Thus, the even more gargantuan mountains of debt with which Mr. Obama and the Democratic congress will endow us will be held largely by the Fed but also by Chinese, Middle Eastern, and other foreign investors. The experts tell us that the former is no problem because inflation is impossible in an economic slump. (Bear in mind that most of the experts were either not yet born or still in exclusive boarding schools in the late ‘70s and early ‘80s ,where they learned the techniques of living, thinking, and investing in an echo chamber. But the inflationary ramifications of a rapidly expanding Fed balance sheet will be addressed in a later post.) Experts who are full throated internationalists will argue that the latter is no problem because foreign investors will be similarly optimistic and willing to invest in America. We are the world; we are the children, after all. There doubtless is something to the one world economy argument, but at the very least foreign investors have far more wide ranging investment alternatives and propensities than did holders of T-bonds in the ‘30s. At worse, our national interests might not occupy a high priority in their range of thought when selecting investments (which doesn’t make them all that different from most people on Wall Street, come to think of it, but it’s still something to consider). At worst, if the world economy continues on its present course, these investors may not have the willingness or the wherewithal to continue to finance our shameless profligacy. Think of the throttling back of, say, Dubai’s and Abu Dhabi’s ambitions. Of course, foreign investors may not have any choice…for now. (Think Cleavon Little in “Blazing Saddles” holding a gun to his head in order to get the townsfolk to back off on their threats to get rid of the new sheriff, who happens to be Cleavon Little.) But these are not foolish people who fritter away their time reading (oh, sorry, listening…reading is too strenuous for the modern American) about the latest exploits of Brittany Spears or someone named Jay Lowe or watching ESPN 24 hours a day. Eventually, they will develop a large and sufficiently prosperous middle class and will no longer need us to borrow their money to buy their products. But, again, I am digressing.

The major point is that, since we no longer save, we have to import capital. Thus, a major stimulus package will have to be financed with debt that will largely be held by foreigners. Unless we can keep the international Madoff scheme that characterizes the modern global economy going for an indeterminate length of time, we may not be able to import capital. And, even if we can, at the expense of offending the unabashed internationalists who dominate economic and political thinking in New York (and, yes, even Chicago) and Washington, perhaps being beholden to the Chinese and Middle Easterners might not be such a favorable economic and financial development.