Tuesday, February 16, 2010

Is Our National Defense As Sound as the Dollar?

In the 1950s, Egypt nationalized the Suez Canal.  Britain and France invaded.  America opposed the invasion.  The Eisenhower administration had no need to sent the marines.  It simply threatened to sell sterling bonds and vetoed IMF support for the pound forcing its devaluation. Pecunia was indeed the nervi belli.  Egypt kept the Canal.  One can picture a British gentleman, a veteran of the colonial wars, muttering over his brandy "I could understand superior arms, but the balance of payments?"

Greece, whose debt is owed in euros, a currency it can not print, is facing a major debt crisis.  While the country itself is an experienced deadbeat (Greece spent half its modern independent existence in default), its debt crisis is is putting great strain on the euro and the euro zone governments. 

Yet Greece's fiscal wantonness is not any worse than that of the U.S., which can print the currency it borrows in.  How secure are we in borrowing and borrowing?  Harvard professor Nigel Ferguson is an insightful student of financial history who knows what he is talking about. He warned in the Financial Times last week (2/10/2010) that "A Greek crisis is coming to America.

Surveying the wreckage fiscal stimulus has wrought, Ferguson courts all the popularity of a biblical prophet by warning us "What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch."  I might add Keynes himself would agree. 

Ferguson writes, "On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic."

The bond markets may seem rather remote from our national security, but beware. Great empires require sound money and a good credit rating. Constantine's solidus held its value for 700 years and the Roman empire survived another thousand years in the East. Alexander Hamilton correctly viewed Great Britain's ability to borrow funds as essential to its military success as its navy.  America's currency and its debt earned a reputation worthy of trust which we rode to becoming a superpower.

Yet, sadly, neither a sound dollar nor a triple A credit rating seem high on Mr. Obama's national security agenda.   

Sic transit gloria.

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