Philadelphia Reflections

The musings of a physician who has served the community for over six decades

1 Volumes

Chapter Twenty-Six Bretton Woods, Woodstock, and the American Century

Chapter Twenty-Six Bretton Woods, Woodstock, and the American Century

Swashbuckler

{Privateers}
Howard Hughes

In 1947, Howard Hughes was summoned to Washington to testify at a Senate hearing. Claude Pepper, Democrat of Florida, was in the chair, clearly angry about Hughes' conduct of munitions contracts, including flagrant non-performance. Three wooden flying boats had been commissioned for $18 million but not produced, people had been killed in crashes of test planes, and the newspapers were full of obscure allusions to unspecified wrong-doing in high places. Although the Hughes hearings were front page news for weeks, in those days it was only necessary to walk in and sit down if you wanted to watch them.

Under the circumstances, it would have been understandable if Hughes had been reduced to a trembling mumbler, probably advised to "take" the Fifth Amendment with every question. Congressional chairmen, particularly Claude Pepper,

{Claude Pepper}
Claude Pepper

quite regularly grandstand and bully the helpless witness at hearings like this, since it portrays them to the voters as heroic defenders of the public interest, and could even forward their chances of becoming a Presidential candidate. Hughes the scapegoat seemed to be in for a public flogging. The first step was to haul him before the committee and then keep him waiting for an hour or so, while the members attended to important public business, maybe even had to go for a roll-call vote or something. You could tell that things were not going according to the usual script when Hughes himself arrived quite late, accompanied by quite a large staff or retainers. When Pepper still delayed the hearing, Hughes called for a newspaper and elaborately read the comic pages.

The Texas swashbuckler didn't look the part. His accent and tailoring reflected a New England boarding school, and while his mustache resembled that of his friend Errol Flynn, he had a voice like a lion and lightning retorts that would do credit to Bill Buckley. Reminding the Chairman that he had been deafened in the crash of a racing plane, he asked him to repeat the question. Sorry, please repeat it again. And again, and again. Pepper was beside himself.

{The Spruce Goose}
The Spruce Goose

Flustered, Pepper tried to reverse the treatment. Senator, I have already answered that question. Well, answer it again. No, I stand on my previous testimony. I forget what you said. Have the stenographer read it to you. Her transcript is not complete. Very well, my own secretary will read it back to you.

{Glomar Explorer}
Glomar Explorer

As if to demonstrate that he hadn't defrauded the government, Hughes, who always test-piloted his own planes, flew the H-4 about a mile in less than a minute during what was supposed to be a taxiing test on November 2, two months after his congressional testimony.

In another strange and unexplained footnote, the Glomar Explorer was a ship built in Philadelphia and used in Project Jennifer in an attempt to salvage a sunken Russian nuclear submarine and discover any secret technology it might contain. This was long past the time when Hughes was supposed to be disgraced and banished from Government contracts. The Senate hearings obviously had no effect on his status, and indeed might even have been entirely staged to mislead the Russians and others. Like so many things in his life, this episode has no readily obvious explanation.

Only in retrospect is it possible to see that Hughes was involved in lots of top-secret matters, and the bravado of his defiance -- not to say contempt of Congress -- might have had roots in some sure knowledge Pepper would not dare touch him. The CIA commissioned him to build the Glomar Explorer to find a sunken Russian submarine, using a phony story of manganese recovery. The supposed political victim of the much later Watergate break-in, Larry O'Brien, is said to have once been a Hughes employee; on the other hand, Hughes was very close to the Nixon Administration. There were inevitably many ties between his Las Vegas gambling empire and Cuban underworld figures, as well as Hollywood figures. Hughes was an owner of the Dallas movie theater where John Kennedy's murderer Lee Oswald tried to hide and was captured. It is not possible to judge Howard Hughes by the usual standards; this eccentric billionaire was capable of doing unimaginable things and it will be remarkable if spectacular news about him ends with his death.

European Common Currency

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Christian Noyer

Philadelphia had the recent pleasure of a visit by Christian Noyer, the Governor of the Banque de France, offering to a Federal Reserve Bank audience a view from inside the Eurosystem's monetary policy. Mr. Noyer was a designer of the Euro, or common currency of Europe. A charming and polished man of education, he brought along a document which hangs in his office, dated June 5, 1779, signed by John Jay on behalf of the Continental Congress, sent to Benjamin Franklin to give to Caron de Beaumarchais. Since Independence Hall is visible from the upper windows of the building where he was speaking, it was a charming touch.

{http://www.philadelphia-reflections.com/images/europeancentralbank.jpg}
European Central Bank

The European financial system consists of one monetary policy, set by the European Central Bank, but twelve (soon to be twenty-five) fiscal policies, set by the various governments. This was once thought to represent a major difference from the American Federal Reserve, but in fact, it hardly matters. Our fifty component states are not permitted to run deficits, but our federal government runs deficits, plenty of them, and it turns out to make little practical difference if a Central Bank must float bonds to pay for a deficit arriving in one envelope or twelve. What matters is the size of the total. From that starting point, the central bank struggles to modify matters to restrain inflation, or combat unemployment. The main tool at the bank's disposal relates to the fact that governments no longer fear to print more money than they can redeem in gold. They print money, all right, but the spigot is now turned down when inflation begins to appear. In theory, at least, inflation is not possible if the central bank is able to maintain this policy. Of course, if money created in the past comes flooding in from abroad or out of mattresses, there might be a problem. Central bankers seem like terribly powerful people until you count up the people they can't control. The first is the politicians who create those deficits.

European politicians believe their constituents prize security above all else, a condition known as socialism. High taxes, high unemployment, and slow economic growth are considered more tolerable in Europe than sacrificing pensions, health care, and other features of the social safety net; out of this come government deficits, then maybe inflation. The central bank is told to make the best of it.

Then, there is the long-term bond market, which in the past responded to a flood of money by reducing the value of outstanding bonds, which results in higher interest rates.

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Euro

Recently, however, long-term interest rates have failed to rise in response to rising deficits, and speculation abounds as to why that should be so. It creates uneasiness to hear that the finances of the world are simply a "conundrum". And finally, foreigners will flee from an inflated currency, eventually triggering a devaluation. A few years ago, Argentina refused to devalue, but the result was a devastating recession when their foreign trading partners refused to deal with an unrealistic currency.

A government which refuses to respond to these "signals" from the bond market and foreigners, will be forced to take some undesirable actions. In Europe, it is to oppose globalization of the economy, thereby hurting everybody but especially poor nations. And the internal European unemployment is shifted as much as possible onto the backs of immigrants, even migrants from within the European community. Take that far enough, and you get serious threats to world peace. Even within the European community, many of the policies which protect the welfare state will consciously injure their own economic growth. Reform is resisted.

Many needed reforms are obvious to policymakers in Europe, and the American example would often seem to be convincing. But it isn't, because Europeans terrified of losing their welfare state recognize that the American model includes a large amount of contempt for socialism, no matter how otherwise successful it is. The interesting thing has been that the Scandinavian countries have an equally extensive welfare safety net, but have nevertheless prospered by adopting free-market reforms. There are signs that this experience is beginning to convince Europeans it is possible to work their way out of the dilemmas.

After his talk, which avoided mention of many of these concerns in the mind of his audience, Governor Noyer was even more charming in cocktail-party mode, but one thing made his face turn beet red. When asked what the John Jay letter was all about, he had to admit he hadn't the foggiest. It was just something hanging on his wall that seemed appropriate for a trip to Philadelphia.

Making Money (3)

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David Altman

Daniel Altman draws attention in the January 1, 2006 New York Times to Ben Page's estimation of compensating rises in federal tax revenue after tax cuts. Page (for the Congressional Budget Office) says revenue increases will only offset 28% of tax loss. The Laffer theory (that tax cuts pay for themselves) may be overstated but it's kind of right. Not only is the full amount of the tax reduction immediately released to the private sector, but only 72% of it ever needs to be borrowed and repaid. Tax cuts may not pay for themselves but they fully stimulate the economy immediately; 28% of the stimulus is permanent.

Mr. Altman then comments taxes could never be cut to zero, because lenders would then refuse to lend; surely no one disagrees. But it's extreme to say tax rates must currently be at a point "on the curve" where reducing them further will not generate a worth-while gain in tax revenue to be effectively re-injected back into the economy. All of any tax cut is always a windfall for the private sector; that's its purpose. Ben Page just says that only 72% of this one needs to be borrowed; the other 28% is a permanent cost-free saving for everybody. If you chose to stimulate the economy by increased government spending, all of that would have to be borrowed, all of it would have to be repaid.

But cheers for Mr. Altman, who notices the role of lenders, who place limits on how far you can stretch this idea. You can't cut taxes to zero because lenders won't lend to a government without income. And even as taxes approach zero, lenders will raise interest rates. That gets us to the currently inverted yield curve; why aren't long-term bonds able to command higher interest rates? If they rose, the interest cost would eventually wipe out the free ride for tax cuts.

Well, the big artificiality in this Calder mobile is the fixed exchange rate for Chinese currency. The Chinese are inexperienced, rightly fearing chaos if they allow their currency to float upward against the dollar. When they solve their problem, unless God helps us they bungle it, American bond rates will tell us whether it's safe to cut taxes some more. Interest rates on American long-term bonds will rise, perhaps too uncomfortably high levels. At that point, no government -- R or D -- would cut taxes further.

Buying Corporate America with Cheap Money

{Privateers}
The Rock of Gibralter

In the summer of 2008 Philadelphia was astonished to read that the rock of Gibraltar, our family controlled Rohm and Haas had been sold to Dow Chemical company for $15.4 billion; corporate control will shift to Michigan. A week later, the Hercules Powder Company of Wilmington was sold, and then Budweiser Beer was sold for $56billion to a Belgian firm. The big old philanthropic families were cashing out.

While it may be true that taxes and philanthropic inclinations will lead this cash mountain to be transferred to non-profit foundations of benefit to the local communities, these sales are all a blow to the prestige and vitality of the cities which were once power centers of the world. Worse still, these prominent families with access to expert investment opinion may have reached the conclusion that it was better to have the cash than the business, or better to have the flexibility to shift the cash to more promising investment opportunities. Maybe they seek to diversify, or flee to gold, or invest in commodities, the next coming bubble. To what extent the falling value of the dollar motivated the purchase by foreigners or through foreign intermediaries is unclear, but it would surely be a consideration for foreigners to ponder. Worse still, these families may have decided they need to transfer more of their assets abroad. The glamorous investment advisors to large universities and major foundations are certainly advising their clients to invest much or even most of their funds to foreign investments.

Under the circumstances, one would wish that foreign investors would shrug off considerations of national pride and concentrate purely on the economics of their transactions. But not likely; just as we grieve to lose these brand names, they must be thrilled to show off their new possessions, and eventually to use their control to shift power. The Secretary of the Treasury makes the unhelpful declaration that a strong dollar is important since he does not need to continue that avoiding a steep recession is more important.

That's the way it is. Keynesian economics waters the currency causes a fire sale of assets and fires the flames of inflation. Now, what?

 

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4 Blogs

Swashbuckler
Your author is probably the only person still alive who attended the Senate hearing of Howard Hughes. There is probably a lot to this story yet to emerge.

European Common Currency
The European central bank has done a good job, but European culture is a little slow.

Making Money (3)
{http://www.philadelphia-reflections.com/images/daltman.jpg}Under the right circumstances, tax cuts are partially a free ride for us at the expense of foreign countries with fixed currency rates.

Buying Corporate America with Cheap Money
Threat of recession-induced America to reduce interest rates, and thus to cheapen the dollar. The rest of the world seizes the opportunity to buy huge American corporations on the cheap.