Just as America proved to be such a safe haven for immigrants in the latter 19th and early 20th centuries, it is now seen as a safe haven for wealth attempting to escape Europe’s tax collectors and financial chaos and recession in Europe, and for foreign central banks newly enamored of the dollar.
America, of course, is not the only safe haven, safety being a relative term. Rich Italians, Greeks, and Spaniards are pouring hundreds of millions of euros into pound-denominated properties in London. Other nervous Europeans are taking their euros to Germany, the Netherlands, or Switzerland. John Makin, a resident scholar at the American Enterprise Institute, notes that “investors are so desperate for safety that they are willing to accept virtual zero returns on ‘safe’ (U.S., German) short-term sovereign notes.” With so much capital flowing into super-safe treasury IOUs, interest rates on U.S. ten-year bonds have fallen to only 1.5 percent, half what they were a year ago. In real terms (adjusting for inflation), yields are negative.
So, just how safe is the American safe haven? Much safer than almost any other place, but not quite as safe a haven as it appears. The nonpartisan Congressional Budget Office warned last week that absent drastic changes in policy a politically gridlocked America will see its debt climbing to an unsustainable, Grecian, 200 percent of GDP within 25 years. It doesn’t take much to imagine that along the way to the inevitable inflationary spurt the Federal Reserve Board would print a new supply of dollars sufficiently large to drive down the value of the greenback and the real value of any income from investments here.
Lest you think this impossible, mark the words of Chris DeMuth, a colleague of mine at the Hudson Institute. DeMuth pointed out to a dinner group convened by the Legatum Institute, a London think tank, that debt has become the tool politicians use to placate voters here and now, leaving the not-so-trivial problem of future repayment to their successors. Unless some institutional changes are made that hold these politicians to account for their spending decisions, they will continue to overload the national credit card. And no such effective institution has yet been devised by any democratic government, unless you believe that a balanced budget amendment to the constitution, such as those in Spain and Italy, will do the trick. If you do, I have a bridge in Brooklyn that I would like to sell you.
There is worse. Hopes that economic growth will provide the increase in tax revenues needed to cut the deficit are fading. Harvard economist Robert Barro points out in the Wall Street Journal that growth is so sluggish that “it is not a recovery at all.” Growth is now less than 2 percent, and even that figure is seen as threatened by the problems in Europe, slowdowns in China and Brazil, and uncertainty over the direction of policy in the U.S.
Businessmen are crying out for certainty, but administration economists with whom I have spoken deny that uncertainty is a factor retarding the recovery. That’s odd for liberal Democrats. Over 50 years ago, President Lyndon Johnson, of the liberal wing of the Democratic party and the creator of the largest expansion of the welfare state since Franklin Roosevelt’s New Deal, proposed to Congress that it get the economy moving by cutting spending and lowering taxes—in a sense, a Tea Party precursor. Cut spending and taxes right now, he urged, to eliminate uncertainty. This left-leaning president delivered a State of the Union Address that argued, “The most damaging and devastating thing you do to any businessman in America is to keep him in doubt and to keep him guessing on what our tax policy is.” Add guessing as to health care costs and from many businessmen’s point of view you have a recipe for inaction, for not expanding staff. Tenured academic economists might think businessmen don’t need certainty, but then they are not the best judges of what makes risk takers run.
The good news is that neither the current sluggish recovery nor the possibility that seekers of financial safety will find their investments less well treated in this safe haven than they are hoping is preordained. Man made the problems we face, man can solve them—with a bit of help from German chancellor Angela Merkel and International Monetary Fund director Christine Lagarde. Alas, the powers that be seem to lack a sense of urgency.