Steve Forbes Interview: David Malpass On How To Fix Corporatist America? (1) ~ MAKE MONEY BLOG$

Poorly Written Debt Limit

Steve Forbes: David, nice to have you with us.

David Malpass: Thank you, Steve, nice to be here.

Watch David Malpass’ interview with Steve Forbes here.

Forbes: Obviously, raising the debt ceiling’s going to be dominating the headlines. You don’t think the GOP’s playing its cards very well. In fact, they’re playing into the hands of the White House. Could you please explain?

Malpass: Yeah. You know, this is a tough issue, because it’s easy to demagogue. No one wants more debt, and so the Republicans are saying, “We don’t want more debt.” That’s true. But this particular debt limit is very badly written. It was written by Congress, so what do you think you’re going to get? A debt limit that’s kind of designed to put people on the spot, and to help Washington grow.

Forbes: How so?

Malpass: Remember what it is. The $14.3 trillion limit is in nominal dollar terms, and therefore as the country grows it has always gone up. And it also includes the fake money that’s turned over to the Social Security and Medicare trust funds. So even if you had a completely balanced budget, it would go up every year. And since we don’t have balanced budget, it needs to go up a lot every year – and there isn’t any way that you can stop that increase. You need to replace that debt limit with something more useful.

Forbes: What, marketable debt?

Malpass: I think marketable debt would be useful.

Forbes: Which is about, what – $9 trillion, $10 trillion?

Malpass: Yeah, it’s about $9.6 trillion right now and it goes up in lockstep with the fiscal deficit. So at least you have a common measure. I think it should be relative to GDP. We should have a lower debt-to-GDP ratio. Right now the ratio is at 66% or so, and heading toward 70%, and then toward 90%. That’s the red flag area, and we’re going to get there soon under current policies.

So, a better way would be to say, “Look, we’d like, for posterity, for the next 200 years, to get that debt to GDP limit down to 50% and then keep it there.” That would be a workable way to run our Constitutional Republic. The Constitution should have had that in there, but they never dreamed that a government would be so big and so irresponsible that they could borrow $14 trillion. So there’s that missing part of the Constitution the Republicans, I think, should focus on.

Forbes: So instead of focusing on a menu of budget cuts, which always seem to shrink – like buying a new piece of cloth and putting it in the washing machine, it always seems to end up smaller – you would suggest putting a limit, say, of 55% of GDP, and then have a glide path trajectory downward? And say, “Okay, that’s the path, Mr. President. You come to us with solutions on how to achieve it.”

Malpass: That’s right. The Republicans are in the minority. So, there’s a limit to what they can do. And the way Washington works, the president, whether Republican or Democrat, holds a lot of the spending cards. Because they have the details of the budget, they propose the budget every year. And so the responsibility needs to be very clearly placed on the president to spend within our means. And that means under spending the budget. Right now, the president says, “My hands are tied. I just do what you guys tell me to do.”

So one thing they could accomplish in the debt limit increase right now is to put the responsibility on the president for spending less. They could set a glide path on the debt-to-GDP ratio. And then I think, critically – and Congress won’t like this – they’ve got to give him a little more authority to actually do it.

Forbes: Like pre-1974 ability of president to hold the money. Not spending.

Malpass: That’s right. In 1974, Congress kind of took over. It was a bit of a coup against the Executive Branch power. It was Richard Nixon at the time, and they just took that responsibility on Congress – and what that’s meant is wild spending. And so we have a flaw in the structure. And instead, what the Republicans from the minority are doing – they’re the small party and they’re saying, “We’re going to make you spend less this year.”

They can’t really do that. And they tried that earlier in the spring, and the president said, “Fine, do you want me to shut down the government?” And they said, “No, no, no.” And we ended up with trillions of dollars of spending.

Forbes: So the likely result is another round of phony spending cuts, or very minimal, and the culture lives on.

Malpass: That’s right. I think best guess right now is fiscal profligacy. They’re going to spend like crazy, and the Republicans will do only a little bit out of this debt limit and then hope to beat Obama in 2012. I’d rather see them use this opportunity. We’re right at it – the election just occurred last November. The public spoke and said, “Spend less money.” So the Republicans have to look the president in the eye and say, “We demand that you spend less money. We’ll give you some power. You do it.” And I think that would help markets celebrate.

What’s The Market Reaction?

Forbes: Now, what’s the market reaction going to be to the likely scenario?

Malpass: I think it’s priced in. I think the market expects Washington to go on spending out of control. And so it would be a positive surprise if they didn’t, but the likely news is everybody’s already counted that in.

Forbes: Equity markets, as well?

Malpass: Yeah. U.S. equities have been underperforming the globe for years now, on the idea that the U.S. federal government is out of control. And the bigger structural reforms are being done outside the U.S. Other countries are improving their market orientation while we’re making ours worse. And so that means Americans are taking their money out of the country as fast as they can.

Forbes: This then gets to the dollar. First, the seeming paradox in all of this, given the size of the Fed’s balance sheet, given what’s happened to commodity prices – why in the world have Treasury yields, going out, been so long, so low, so long?

Malpass: You know, people talk about bond vigilantes. But in reality there is a huge demand for long duration safe assets. The world is aging; there are a lot of people turning 60 years old, 70 years old, not only in the U.S., but even more so in Europe, Japan and, very soon, China. And they simply have to buy long assets. So, people look at it and say, “Well, the U.S. –“

Forbes: So you might say Treasurys get it by default?

Malpass: They get it by default. If you’ve got the wolves, the market wolves are around the herd and what they do is cull the weakest countries. If a country is weak, they take down that country, and the bond market in that country.

But they don’t get to the old bull in the middle, and that’s the U.S. I think instead we’re weakening year by year, as a country. We’re spending our net worth, and so it’s a harmful policy to the U.S. as a powerful, free market leader of the world. But we’re not at too much risk of a tipping point, of falling off a cliff.

Forbes: So we’re not going to have a Greece scenario here?

Malpass: I don’t think so. We have much more net worth. Americans worked for 200 years putting together a rich country. And so we’re wasting away, whereas in Greece the government had –

Forbes: No savings to draw on. And no assets.

Malpass: Yeah. No national savings to draw down.

Forbes: Which Japan did. Which is why Japan can get away with the same kind of a low interest rate scenario.

Malpass: That’s right. To an extent, we’re following Japan’s path in malaise. And it’s been going on for years.

Forbes: So, in essence, the U.S. is similar to a person living off of capital instead of creating capital.

Malpass: That’s right. We’re drawing down our past wealth. The good news is there’s lots of past wealth in the country – built up in infrastructure, in private sector ownership of equities – which not every country has. So we can spend that down for quite a while.

Business’ Silent Partner

source:forbes.com
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