The following are in response to Robert Huebscher’s article, Beyond Reinhart and Rogoff, which appeared last week:
Dear Editor,
I’d like to convey my compliments to Mr. Huebscher for his clearly written and well thought out critique of Reinhart and Rogoff, Lacy Hunt et al. Let me add a few substantive comments.
I agree with his emphasis on the importance of the dollar’s status as a reserve currency in the overall debt and cost equation. But there is a simpler way to explain it than the reliance on trade-driven flows and the example of Britain nearly 100 years ago.
Look at it from a monetary/capital accounts standpoint. As the reserve currency, there’s a structural capital demand for the dollar. At the margin, that appreciates the currency and will result in a structural US trade deficit as long as there is global confidence in the dollar.
I also have a quibble with the article in that it ignores the potential influence of the term structure of debt. While our debt may be affordable at 1% and 2% nominal interest rates (especially with inflation running at 2% plus) the reality is that not all of our debt is at a 30-year term. As Europe is discovering, turning over debt in an environment of questionable confidence can lead to rapidly increasing spreads and costs. The US faces refinancing risk in the future and those spreads are dramatically more flexible than is our ability to expand or contract our total debt level.
In other words, we do not really know whether the average lifetime cost of the debt we assume today will be 2% or 6%, and from a project finance standpoint, this is a material issue (or whether the real cost is 0% as today or 4%). What we do know is that the more debt we assume today, the greater the probability that at sometime in the future, spreads will increase beyond the level that would justify the projects financed through this means. This may be exacerbated by the property that government net revenues tend to be pro-cyclical, so in a global recession, it is possible that our ability to refinance debt is compromised precisely when our need to do so is greatest (as Europe is currently experiencing), further increasing costs.
Regards,
Eric Stubbs
Global tactical portfolio manager and economist
Dear Editor,
Your recent essays are a useful contribution to the important discourse regarding our way forward as a nation. Dr. Brock is a remarkable thinker; the airwaves are filled with opinions of lesser economists. (As you certainly know, John Mauldin is also a fan of Dr. Brock). Dr. John Hussman has also argued for an appropriate measure of government investments that produce attractive rates-of-return (certain infrastructure, education, and medical research), but not while ignoring debt levels.
However, your conclusion implies that government stimulus is the only way the US can grow its way out of debt. Putting the onus on government to "save" us has a low probability of success. You correctly note the recent record of misallocated capital in Solyndra and, the worst of all, the ethanol boondoggle. Of course these are only recent examples. Dr. Brock is clearly uncomfortable with that same record which, I'm sure, was the motivation for suggesting an independent board to evaluate projects. As with most government-directed projects, I'm certain the appointment of the "independent" board would be anything but.
Allow me to comment on your paragraph below:
Like Hunt, I am skeptical that there are sufficient opportunities for investment on the scale that Brock advocates, which is why I propose that we target the energy sector. Approximately half of our trade deficit is attributable to oil imports, so energy is clearly a big enough candidate. Alternative energy sources, such as wind and solar, are currently economically impractical because of the uncertainty of oil prices. Our government’s efforts thus far, through Solyndra-like loan guarantees and ethanol-like subsides, have merely resulted in a misallocation of billions of dollars.
