"Clinton's Folly?"

U.S. Garage Sale

Corporations that file for bankruptcy typically have their debt discharged -- zeroing out their shareholders -- and their new equity issued to erstwhile creditors.

What's the equivalent for sovereign nations?

Put it this way: what would Alaska fetch on the open market?

Seward's Folly

When Secretary of State William Seward orchestrated Alaska's purchase from a financially crippled Russia in 1867 -- pundits of the day derided it as "Seward's Folly" -- the price was a measly $7.2 million.

Today, who knows?

One trillion? Five trillion?

We sell it to the Chinese for the upper end of that range, and -- poof! -- we retire what we owe them and even get a little extra to pay down what we owe Japan, South Korea, and the Gulf States.

Sell High, Buy Low

True, Alaska isn't exactly close to China -- I doubt even Sarah Palin can see it from her front yard.

But then, the Falklands Islands weren't exactly near Great Britain. For that matter, neither was India.

And both of those were colonized when "cutting edge technology" consisted of quill pens and carrier pigeons.

Who knows, if we play our cards right, a couple years down the road, maybe we can buy it back cheap -- just like we bought Rockefeller Center back from the Japanese a couple years after they purchased it at the peak.

P.S.: wait till you hear my idea for keeping Social Security solvent (it rhymes with "schmwaii").

The Fed & Unintended Consequences

The Fed, Commodity Prices & Economic Recovery

Twelve hundred miles (give or take) from Wall Street, me thinks that a not-so virtuous cycle has emerged regarding the government's various and sundry efforts to nurse the economy back to health.

The dynamic goes something like this:

Step 1: the Federal Reserve and Treasury essentially borrow and/or create money -- at this point, trillions of it -- then direct it where they think it's most needed (not necessarily to me or you . . . but that's another post).

Step 2: the markets ("Mr. Market") take note of all that deficit spending, and drive down the dollar while pushing up commodity prices.

Step 3: elevated commodity prices retard recovery.

To take just one example, at $80 a barrel, oil is likely twice what supply and demand would otherwise dictate at the moment. Meanwhile, "stores of value" like gold -- now around $1,100 an ounce -- drain money that would otherwise fund economic growth.

Step 4: the Federal Reserve and Treasury, noting anemic growth, serve up another helping of stimulus cum deficit spending (see Step 1).

How long can this go on?

As many commentators have now noted, eventually one of two things happen: 1) economic recovery kicks in, and the government can taper its rescue efforts; or 2) the U.S. bumps up against the natural limits of its ability to borrow (not a bright line).

The "canary in the coal mine" for this kind of kind of fiscal/monetary tightrope is Japan, which is a good 15 years ahead of the U.S. on its trajectory of boom, bust, and (non)recovery.

The lesson for policymakers would seem to be, "don't do what Japan has done."