Greecing the Skids

It is superfluous at this point to rehash the usual news bits about the Euro crisis. Suffice to say that states have consistently borrowed too much in order to fund their social welfare benefits, and now they are running up against the limits of such borrowing.

Yes, the immediate crisis was brought on by a fall in tax revenue, from the recent and continuing depression. However, we must ask how healthy a fiscal system is that fails whenever everything stops going right, all the time. Governments have grown accustomed to mortgaging their futures (or more to the point, someone else's futures) in order to pay for their present. Sadly, the future is now.

How will this play out? Smarter people than I are puzzling through the intricacies of how bad the car crash will get; but in general, we are about to return to the era of recurring sovereign defaults. Whether through an outright repudiation of their debts, or through monetary debasement of the Euro which would fund "grants" to the debtor countries, the problem children of Europe are going to escape their obligations for now, at the cost of driving up borrowing costs in the future.

An interesting question that I haven't seen addressed elsewhere is: how will the bond investors be compensated for their loss? It is one thing when you are a Latin American country borrowing from overseas banks; you can expropriate from them without pity and even with glee. But when your major lenders are German and French banks, and you have to live with these people even after you default, there needs to be something in it for them.

In earlier eras, when a profligate government had to periodically default on its debts, it would do so by borrowing from its own banks, who would face the certain prospect of losing their money every decade or so. In exchange, they were given lucrative monopolies over domestic lending and money creation. (An example of this can be seen in Mexico under Porfirio Diaz and thereafter.) The deal was worth it to the banking elites, for whom the periodic defaults became just another cost of doing business.

So what concessions will the big European banks extract from their governments? Or will the governments simply nationalize the banks, as many are itching to do? And if they do, what happens next?


Obama the Moderate Republican?

One of my father's coworkers recently said that he would vote for "the moderate Republican who is running unopposed for the Democratic nomination." It's certainly a clever line. And while most conservatives these days would be bemused at the thought that anyone could think President Obama a moderate Republican, given his interventionist domestic policy and disregard for the Constitution and so on, it occurred to me today that the characterization has some merit.

To understand how, we must remember that the Republican Party has not always been a party of small government. In previous years, people that would be derided as squishes or "RINOs" (Republicans in Name Only) were the conventional elite of the party. This was the faction of Nelson Rockefeller and the like.

In fact, the more I thought about it, the more President Obama reminds me of one moderate (really, progressive) Republican in particular, from times past: President Richard Nixon.

Now, I'm not talking about President Obama's apparent liking for enemies' lists, or his campaign's documented use of cheating and dirty tricks to defeat Hillary Clinton during the 2008 primaries (to say nothing of what his allies might do elsewhere), or any of the other sordid comparisons you might be tempted to make. I'm strictly talking about the policy programs of Presidents Obama and Nixon. Consider:

Both presidents came into office while America was embroiled in foreign wars started by presidents of the other party, having campaigned on a promise to end those wars. Both presidents discovered that to do so, they needed to ramp up the intensity of the conflict. (Though Obama seems content to cash out of Iraq and focus on Afghanistan; admittedly, he has two unwanted wars to handle.)

Both presidents favored deficit spending to stimulate the economy, coupled with interventionist policies designed to favor some domestic groups at the expense of others. For Obama, I mean the health care bill primarily, along with the nationalization of student loans and the repeated interventions into the home mortgage market, among others. Nixon, of course, imposed price and wage controls across much of the economy and severed the link between gold and the dollar, to escape the accumulating consequences of his own and President Johnson's massive deficits.

Both Nixon and Obama put in place major environmental policies; remember that Nixon instituted the Clean Air Act, which Obama's EPA has used to dramatic effect. Both, too, were committed to expanding the social-welfare state: Nixon pushed for and won passage of the Supplementary Security Income (SSI), an expansion of welfare, along with automatic Cost-Of-Living Adjustments to Social Security.

In many ways, the Republican Party then was just as Progressive as the Democrats were; Theodore Roosevelt was, after all, a Progressive Republican and one of the leaders of Progressivism of the time. It is only more recently that the Progressive platform of massive societal restructuring through the heavy hand of government, to create a New Man who would be a compliant member of mass society rather than an uncooperative individual, has been cast out of the Republican Party—by the rise of small-government conservatism on the one hand, and newly active religious blocs on the other.

So yes; in many ways President Obama would fit into the mold of a Progressive Republican from days of yore. The difference is that today is not a Progressive moment; and Obama is running against the tide of history in trying to make policy as if it were. We should see a clear demonstration of that in a few months.


How Partisan Opportunism is Eroding Civilian Control Over National Security

Recently, the Obama administration apparently cooperated with reporters working on a story about the Stuxnet virus inflicted on Iran, essentially confirming that the United States is now launching cyberattacks against other countries. The blowback from this has been immense, with even senior Senate Democrats attacking the leak as reckless and harmful to the interests of the United States. (Hat tip: Instapundit.)

This follows after an earlier episode in which the Obama team claimed credit for stopping the latest underwear-bomber plot in Yemen, antagonizing British intelligence and blowing the cover of at least one agent who had managed to infiltrate al-Qaida. In general, the Obama team seems to have utterly ignored the maxim about loose lips sinking ships.

The partisan implication of this have been well hashed over by other blogs. What I want to focus on is how such behavior by the civilian leadership will tend to encourage the military and intelligence services to simply stop telling the White House what they are doing.

At the beginning of President Obama's term I had lunch with someone who would know, who told me that the military was being very careful with what information they were giving the White House, until they could verify that he could be trusted. The reasoning is simple: if a politician is going to reveal all of your secrets for personal gain, then your duty to the civilian leadership may well be outweighed by your larger duty to the personnel you command, the objectives of your mission, and the greater interests of the United States as a whole. (Something like, "We had to deceive the village in order to save it.")

So now that President Obama is getting desperate, in the face of an electoral defeat that seems more and more likely as time goes on, the national security establishment is going to be mighty tempted to cut the White House out of the loop altogether for anything important. In the short term I can't blame them; the danger is that for the long term, this kind of behavior could well lead to the defense establishment forming its own independent policy, free of civilian oversight. (More so than they already do, of course.)

This is why public-spirited politicians generally don't shoot their mouth off about national-security secrets. President Obama is doing real damage to the authority of the Presidency, and our elected government in general.


Being Paid to Borrow

On Friday, the 10-year Treasury yield ended up below 1.5%; shorter durations are even more ludicrous. At a time when inflation is something like 2% (and that's assuming you trust the official numbers, which I don't), what this means is that the Federal Government is essentially borrowing money for free, at worst—at best lenders are effectively paying real money to the Treasury for the privilege of letting it spend their assets.

I suppose that if ever there was a good time to run trillion-dollar deficits forever, this might be it. Of course, that all depends on whether the Treasury can roll all of its debt over into longer maturities before rates shoot back up…

Why are rates so low? John Mueller argues that interest rates are being driven down because of the Dollar's status as a reserve currency; something like $4 trillion is being held by other nations not to pay for our exports, but to stabilize their own currencies. This creates a serious problem, driving inflation and causing interest rates to decouple from fiscal and monetary policy. In short, politicians no longer suffer automatic consequences from borrowing loads of money.

Worse, if we were to stop borrowing so heavily, all it would do is to drive interest rates even lower as foreign buyers bid up the diminishing stock of Treasury bonds remaining. Eventually, the temptation of free money would grow intolerable to any responsible politician, and we'd start overspending again.

What can be done about this? Mueller suggests going back to gold as an international reserve. Short of that, I'm not sure how we solve the problem. Assuming that it is a problem to be solved.