Note: This may be my single least favorite commentary I have ever read from my friend John Mauldin. It is filled with logical errors, poor assumptions and factual misinformation. I normally would not publish it, but I decided to molest it with annotations.
What the hell is in the drinking water in Texas? First W, then Rick Perry, now this.
-BR
~~~
The Answer We Don’t Want to Know
By John Mauldin
February 11, 2012
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What Is a President to Do?
Thinking About President Gore
Clinton on the Dole
And Then There Was 2012
The Fed Has a Printing Press
The Strategic Investment Conference in Carlsbad, California, May 2-4
Washington DC, Kansas City, and Europe
2012 will be the 11th time in my short life that I will be able to participate in the choosing of a president of the United States. While it may just be me, it seems like each and every election is cast as the most important election of our time and a defining moment for the American Experiment. The future of the Republic was being weighed in the balance, and only the proper outcome (which would of course be the election of the candidate you supported) would assure its survival. This week we will continue our meditations on the economic choices that confront the world, this time focusing on the US.
We will start with a thought experiment, in which I invite you to think about alternate histories. Just how important are presidents (or leaders in general) to the success or failure of the economy? And then how critical is the coming election this fall? We will assault a few of our most cherished beliefs, both from the left and from the right. If I do not offend you in the first few pages, I invite you to keep reading; I will get to you somewhere.
(Warning: I risk upsetting more people than usual, as this letter is centered on the politics of economics. I will do my dead level best to be even-handed, but there is just no pleasing everyone. So better to write what I think and at least have one person happy. Which is pretty much what I do every week, anyway.)
As I continuously argue, the most important issue facing the US is dealing with its deficit, just as that is the defining issue in much of Europe and will soon be in Japan. [BR: This is a s political, not economic or Fiscal assumption. While we need to deal with the deficit, it is not nearly the issue made out by the far Right -- the US has had bigger deficits, i.e., WW2, and resolved them] The longer we put off the decision, the more difficult the task and the more serious the economic impact. Without action, Italy all too soon becomes another Greece, but with real impact. They realize that and are making the efforts. But would it not have been easier for Italy with about 40% less debt-to-GDP? Perhaps not politically, at that time when they should have been working on it, but in hindsight I bet the politicians now wish they had done more. It seems we accept change only in the face of necessity and see the necessity only in a time of crisis (as one Italian more or less put it, long ago).
So we discuss politics, because the looming debt crisis (and its solution) is at its very core a political creation and must have a political solution. And once the bond market decides to provide its own solution by demanding much higher interest rates, it is too late. That’s game over, and a prolonged recession if not a depression will ensue.
But before we go any farther, and quickly, if you are an accredited investor (or professional investment advisor or broker) in the US, let me invite you to a live discussion/webinar with myself and Tony Fenner-Letto of Winton Capital Management this next Tuesday, February 14, 2012 at 10:00 a.m. Pacific / 1:00 p.m. Eastern. This presentation will be hosted by my partners at Altegris Investments. Winton Capital Management is the largest and arguably the best-known managed futures firm on the planet. We will discuss their strategy for dealing with today’s market environment. I will also share my current thoughts on the global economy and its outlook. Hopefully we can talk about something besides Greece (are you tired of Greece yet?).
You can get an invitation to the webinar by calling your Altegris representative at 800-828-5225. If you have not yet opened a relationship with them, I will have them call you if you register at The Mauldin Circle. A replay will be available to registrants unable to attend. I apologize for limiting this discussion to accredited investors, but we must follow the rules and regulations. I am working on doing a webinar in the near future that will not be restricted. Stay tuned. (In this regard I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)
One further note. At the end of the letter, I will give you information and a link to be able to register for my Strategic Investment Conference, May 2-4. I expect it will sell out, as always, so I would suggest making your reservation promptly.
Now, we start today’s letter in South Africa, as I wonder which continent I will finish it on. In order to be able to hit the send button while on layover in London, we’d better jump in.
I have long maintained that presidents take too much credit for good economic times and get altogether too much blame for bad ones. That is not to suggest that they can’t make a difference by promoting certain policies over others. Clearly they can. But I think we might find, if we think about what might have been if the “other guy” had been elected, that outcomes would often have been not very different. In fact, it is often not until after a president is gone that we see the results of his policies. Let’s start with recent history and work backwards.
Let me preface this by pointing out that we are dealing with just the economic outcomes of the election of a particular president. I readily admit that other areas, such as Supreme Court nominees, regulations, social policy, and foreign policy would, perhaps, change a great deal. These developments are important, and perhaps more important than mere economic outcomes; but for this letter, let’s just focus on the economic aspects of a particular election.
In what seems like an eternity, but was only a short time ago, we were learning more about “hanging chads” on punched election ballots in Florida than any of us ever wanted to know. The world marveled as the denizens of the last Superpower fought tooth and nail over whether a ballot counted according to whether the holes were punched correctly. The difference between President Bush and a potential President Gore was in the end just a small number of votes in just one state. It was the closest of elections, with the results literally hanging by a chad. So, it is not at all far-fetched to imagine what would have happened if Al Gore had won the election. How much of an economic difference would there have been? I would suggest, not all that much. [BR: We don't know, but this reeks of excuse making for one of our worst Presidents]
The market had already begun to collapse by the time Bush was inaugurated in January ’01. Could Gore have prevented a recession? The answer is no, because the weakness had already set in. There would still have been 9/11. [BR: Unsupported counter-factual conclusion -- we have insufficient information to conclude that Gore (or anyone else) would have ignored the same warning that Bush so fatefully failed to heed] That had been planned since Clinton’s presidency, when Gore was vice-president. [BR: Oddly implies some blame on Gore as Veep] An Al Gore as president would hardly have deterred bin Laden from his plans.
And the economic aftermath of the event would have been roughly the same. Greenspan and the Fed would have kept lowering rates and kept them low for too long, no matter who resided in the White House. Would Gore have nominated an old-school monetarist as Fed Chair? [BR: Perhaps, we don't know. Someone should ask him, or review his speeches for the 1999-2003 period] Hardly likely. Almost the entire establishment, both Right and Left, the latter of which Gore was a leading figure, were Keynesian to their core. And Greenspan (or Bernanke, or whoever) was not going to allow deflation on his watch, not without a fight, with his main weapon being low rates and easy money.
The regulations that fostered the housing bubble and the subprime crisis were already in place. [BR: I think John means radical deregulations that allowed private bankkers to abdicate lending standards and engage in reckless specualtion] Both parties were in thrall to Fannie Mae and Freddie Mac. [BR: However, disproven as a cause of the crisis, and now a wingnut talking point] Greed was already running rampant on Wall Street. Did I somehow miss loud, insistent calls for a tighter home-lending regulatory environment from the partisan leadership on either side of the aisle? No, there weren’t any. [BR: Ed Gramlich at the Fed and others demanded it -- they were shouted down]
Would consumers have borrowed less on their homes? Was anyone complaining (except those buying?) that housing values were climbing too fast? Indeed, my neighbors in Texas were lamenting our lack of participation in the seemingly nationwide skyrocketing of housing prices. [BR: Yes, some of us were]
Would we have avoided a subprime crisis leading to a credit crisis under Al Gore? [BR: Wrong question -- would a President Gore have effected policy that made it worse? Would he have appointed Harvey "Shred-all-documents-before-subpoena-arrives" Pitt as SEC chairman? Federal preempted of predatory lending laws?] Did the Democrats protest the laws, passed by a Republican Congress, that allowed a few investment banks to massively increase their leverage? [BR: It was a rule exemption passed by the SEC, not congress] Or did they also take the lobby money and vote for the legislation?
The repeal of Glass-Steagall? That happened in 1998 under Clinton, with the full support, yea, the insistent urging, of the Republican leadership. [BR: Actually, it was GOP sponsored legislation passed by a veto proof majority] (Shepherded by a certain Texas senator, who also called Alan Greenspan the “Greatest Central Banker in History.” I still fondly recall Senator Gramm, an economics professor in his prior life, who I think all in all was a very good senator, if just a tad overenthusiastic about Greenspan. [BR: A terribly misguided Senator who not only sponsored the repeal of Glass Steagall but also introduced the Commodity Futures Modernizaton Act of 2000, which exempted all derivatives from any Federal or State oversight or regulations] (Side note: The conference I just spoke at here in South Africa voted overwhelmingly that the devil’s actual surname was Greenspan, from a rather dubious list of choices. Ah, how we fall from Grace. But back to our historical meanderings.)
Yes, we would not have had the Bush tax cuts, which some mathematically challenged individuals think are responsible for the whole deficit crisis. [BR: A little more than half] The tax revenues that were supposedly lost due to the cuts? Tax revenues were actually up just a few years later. [BR: Irrelevant to lost revenue due tot ax cut analysis, as it was driven by population growth and inflation -- hence, a rather misleading statement here] To argue that the Bush tax cuts did not have a stimulative effect on the economy flies in the face of all credible nonpartisan research, which shows tax cuts do indeed provide a positive stimulus effect; so the recovery would have been even weaker without them. [BR: Yes, a trillion dollars combined with ultra low rates stimulated the economy -- but at a cost of blowing out the deficit]
But under Gore we would likely not have had the Bush spending increases (which is what he should be blamed for), as the Republican Congress would likely have continued policies started under Gingrich, which opposed spending wanted by a Democrat president and which resulted in the running of a surplus. It was only when Republicans could get credit for spending increases that they wasted the surplus. But my bet is that (sadly) they would have still figured a way to use up that surplus, post-2000. [BR: Again, we do not know that, to assume so reveals the excuse making for W that makes this column so disappointing]
Would a Gore presidency have reacted any differently to the credit crisis, in ways that mattered? There was initial bipartisan consensus (at least of a majority, although with some noted disagreements) of the need for a stimulus, although later there was serious disagreement as to what that stimulus should be.
Would Gore have launched a war in Afghanistan? To think he would not have is to ignore who Al Gore was. He was (and I assume still is) a very hard-nosed foreign policy and defense hawk, when he was in the Senate and as vice-president. Would he have gone into Iraq? Probably not, but when all the world’s intelligence agencies (even the French!) believed Saddam Hussein had weapons of mass destruction and was close to a nuclear weapon, who can say? [BR: I cannot think of any other serious Presidential candidate of the past 20 years who would have gone into Iraq after 9/11 ]
(I should note that they all believed that because they had tapped Saddam’s communication lines. His top scientists told him they were close, because they were afraid for their lives to tell him they were not. So even Hussein believed he was close to a nuclear device. It was all a colossal failure of the intelligence professionals – even those in Iraq! Without such “evidence,” Hussein might still be in power today. If it was not so profoundly sad, with such a tragic loss of lives, the irony would be just too delicious.) [BR: Nonsense -- As I wrote in March 2003, the intelligence was clear that there were no WMD -- VP Cheney's set up an alt-intelligence unit, because the pros refused to peddle the nonsense he asked for]
So, there would have been less accumulated debt, but not all that much in the grand scheme of things. [BR: It would have been less than half] The increase in debt under Bush just brought forward a few years the end of the Debt Supercycle. Instead of the necessity of dealing with the deficit in 2013, we might have gotten to 2016. But the math of the entitlement programs makes the Day Of Reckoning a future certainty. However, that is not the point.
The point is that the main economic events would have happened under either president. [BR: The key questions: Would a President Gore have responded as poorly as President Bush did? Would we have had a TARP? And a trillion giveaway to the banks?] Would there have been a difference in marginal tax rates? [BR: We simply do not know] Yes, but I do not think tax rates were the cause of the debt crisis, or the subprime crisis. Would Republicans have avoided the temptation to spend under a President Gore? Not if Hastert and DeLay were still in charge of the House, at least if they continued to espouse the same policies. Less deregulation? But the subprime problem was not caused by deregulation. [BR: Hmmm, this Kool-Aid is delicious!]
The economy would have been basically the same under either president, though a case could be made that there would have been less accumulated government debt. Differences? Sure, I can think of many, but not major ones. [BR: Wow, excuse making for the disaster that was the George W. Bush Presidency on an awesome scale, leading to an epic fail].
~~~
BR: You get the idea. This is an exercise in rationalization that suggests terrible decision-making isn’t so bad, because others would have made similarly bad decisions in the office of the President. It suggests judgement doesn’t matter when you are the leader of the free world. I disagree, and believe Bush was the “Costanza President. (If everything I say and think is wrong, than the OPPOSITE must be right.)
Here is the rest of John’s musing, unmolested by my annotations.
~~~
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