My Conversation With the Next President

The "script" that follows assumes the highly unlikely situation (actually downright improbable) that Bonddad becomes the Treasury Secretary in the new administration. The script makes no points regarding who will win, because frankly it doesn't matter. The next president -- whoever that is -- faces a daunting federal fiscal environment.

BD: Wow -- this room really is shaped like an oval. Who would have thought that.

Pres: Welcome to my new digs, BD. How was the confirmation hearing?

BD: Next to visiting my proctologist I can't think of a better time.

Pres: Great to hear it. So, as you know BD, I made a lot of promises about what to do. I want to start in on those promises right away.

BD: Mr. President, you won't be able to do much of anything except raise taxes and cut spending.

Pres: Why is that BD?

BD: Let me walk you through be basic logic, Mr. President. First, let's start with a question. If you really think something is a good investment would you buy more or less of it?

Pres: I'd buy more of it.

BD: And what would that do to the price?

Pres: That would send the price higher.

BD: Do you think the converse is also true -- that if you don't like something you'll buy less of it and that will send the price lower?

Pres: Yes.

BD: Congratulations Mr. President, you have just passed supply and demand 101. Now -- let's take a look at a long-term chart of the dollar and see what it says.

Pres: that sure looks like no one likes the dollar. Why is that, BD?

BD: Because the US' books aren't even close to balanced.

Pres: That's not what the press reported! They said the budget deficit was coming down!

BD: Look! Monkeys are flying out of by butt!

Pres: You mean the budget isn't balanced?

BD: Let me answer that with another question. If you balanced your books every year would you have to borrow money?

Pres: No.

BD: Then why has the Federal government had to borrow at least $500 billion dollars per year since 2003? Here's the information from the Bureau of the Public Debt:

09/30/2007 $9,007,653,372,262.48 09/30/2006 $8,506,973,899,215.23 09/30/2005 $7,932,709,661,723.50 09/30/2004 $7,379,052,696,330.32 09/30/2003 $6,783,231,062,743.62 09/30/2002 $6,228,235,965,597.16 09/30/2001 $5,807,463,412,200.06 09/30/2000 $5,674,178,209,886.86

Pres: Wow. That's a lot of debt. How is it there was this huge divergence between the debt issued and the reporting on the deficit?

BD: Because the nation's press is full of a bunch of no-thinking idiots. Anyway - the bottom line is we owe a lot of money. And currency traders are starting to look at that mountain of debt and our lack of dealing with it in any meaningful way and they are thinking, "I'm not sure the US is serious about dealing with this debt. Let's start to sell the dollar."

Pres: But isn't a cheap dollar good for exports.

BD: Yep. It's also a great way to manufacture inflation.

Pres: Inflation?!?!?!?! How's that?

BD: Most of the world's commodities are priced in dollars.....

Pres: And a drop in the dollar's price is the same thing as an increase in the price a commodity priced in dollars, right?

Pres: Put a gold start by the president's name.

Pres: And that's a reason why oil prices are spiking, isn't it?

BD: Yep. Welcome to the world of inter-related markets.

Pres: So, we've got to do something about the dropping dollar to slow down inflationary pressures before we do anything else?

BD: Only if you want to help out the country. Otherwise, do what the last President did.

Pres: Why do we have to deal with the dollar now as opposed to later?

BD: Two reasons. First, every time a politician says, "I'll deal with that later" he never does. Secondly, there is growing talk in the world about various central banks dropping their pegs to the dollar. There is also talk about moving away from the dollar as a reserve currency and moving into the euro. If that happens, expect the dollar to drop more. If that happens we approach a "Katy bar the door" scenario". In other words, if we don't deal with it now, the financial markets may deal with it for us. And that would really suck. Think Argentina in Engllish.

Pres: Wow - that sounds pretty bad.

BD: Not if you think an 18% drop in your country's GDP and 60% of your population in poverty is a good thing.

Pres: So BD, what should we do?

BD: Raise taxes and cut spending. How you do that is your business.

Pres: I think you're right.

BD: Wow -- you actually listened. Color me impressed.

The point to the previous script is plain: whoever gets elected faces a terrible fiscal situation. It also means that a lot of the campaign rhetoric is, well, rhetoric meant to get someone elected. When whoever wins gets into the job, a hard reality will set in.