Recovery Requires Stability

The essential difference between politicians and investors is that when uncertainty rises, politicians generally want to do more, while investors generally want to do less. “Doing more” usually means increased public expenditure and economic regulation. “Doing less” means reducing investors’ exposure to risk; they sacrifice a higher rate of return for a higher level of security.

In other words, politicians are naturally at cross-purposes with investors. Which helps explain why the bulk of the world is poor; in most countries, politicians are too busy fomenting ethnic and class hatreds to worry about maintaining the sanctity of contracts. As a result, investors invest elsewhere. But when politicians focus on reducing uncertainty--preserving the peace, keeping meddling to a minimum--investor confidence burgeons and growth blossoms.

In the United States, the 1980s and ‘90s have been decades in which the political class restrained itself; productive investment more than filled the void. In the ‘70s, the toxic combination of wage-and-price controls and energy socialism drove the Dow Jones industrial average down by 40%, adjusted for inflation. By contrast, the ‘80s were a decade of tax cuts, deregulation and trade expansion. The result: the Dow rose 300%. And in the ‘90s the markets cheered as a would-be activist Democratic president was stymied by a Republican Congress; even after the correction of the past few weeks, the Dow is up 250% for the decade.

The lesson of this century can be summed up as less politics, more economics. Not surprisingly, most politicians, who pride themselves on their “leadership” and “vision,” won’t agree with this minimalist approach. But they might take some instruction from the success of Warren G. Harding. After the tumult of World War I and Woodrow Wilson, Harding pledged “normalcy” in the 1920 election and won in a landslide. Almost seven decades later, George Bush offered little in the way of a rhetorical “vision thing,” but he did serve up a post-Soviet “New World Order.”

George Soros’ Quantum Fund and other so-called “hedge funds” have been big winners in this new order. Although they hardly qualify as altruists, hedge funders are by definition optimists; they forgo consumption today in hopes of more tomorrow. In recent years, Soros bought Russian government bonds, which, in view of the enormous risk inherent in anything Russian, were paying as much as 80% interest per annum.

Soros was gambling that a) the Russians would get their act together and b) the West, having spent trillions to win the Cold War, would be good for a few more billion to prevent Russia from re-Bolshevizing. If Russia had recovered, Soros would have been able to enjoy a whopping return. Instead, he’s out $2 billion.

There’s no need to feel sorry for Soros, but his experience is a warning: The world is growing less stable. From Russia to the Persian Gulf to Pakistan to India to North Korea to Japan, the optimists are being proved wrong.

But what about the principal pillar of normalcy, the United States? Whether one blames Ken Starr or Clinton’s own libido, this presidency is broken. The man who should be a stabilizing force in a time of world crisis is now a destabilizing force.

And that leads Lawrence Lindsey, a former Federal Reserve Board governor now working as a private economic forecaster, to conclude that the near-term future is dim. Lindsey, who advised his clients to bail out of Asian markets in the summer of 1997 and to get out of U.S. stocks this spring, anticipates a worldwide contraction, including a mild recession in the U.S. What about Asia? “They’re already in a depression,” he says.

Lindsey’s prescription for a brighter future is a pragmatic mix of his free-market Republicanism and emergency internationalism. He supports an open world economy, but he also believes that $500 billion in nonperforming debt held by big banks will have to be written off.

But what’s needed most, Lindsey says, is the restoration of strong leadership in the White House. And, he adds, that can’t come from Clinton.