The HEYDAY of the American republic was the interwar period between Korea and Vietnam, writes Bill Bonner in this extract for readers of his Diary of a Rogue Economist from his latest book, A Modest Theory of Civilization: Win-Win or Lose.
The economy was booming. The US had the biggest trade surplus...the strongest manufacturing sector...the strongest currency...and the highest salaries in the world.
New York was the world's most dynamic city. California was its Shangri-La. And the debt from World War II was being paid down.
In the arts, too, America was on top of the world. Motion pictures were the leading artform; Hollywood dominated the industry. As for the plastic arts, nobody did it better than the auto designers of Detroit who, with their sparkling glass and dazzling chrome, created the finest works of art of the century.
Elected in 1952, Dwight Eisenhower ended the Korean War, balanced the budget, reduced US debt as a percentage of GDP by 16%, and reduced government spending as a percentage of GDP from 20% to 18% (not even Ronald Reagan was able to do that). He cut defense spending by nearly 30%. The Dow doubled, and personal incomes rose 35%.
Eisenhower also resisted the temptation to throw his weight around overseas. When Israel invaded Egypt in 1956, with the United Kingdom and France eagerly joining in, he refused to take part. But Eisenhower teamed up with the Soviet Union and threatened to sell British bonds if the UK failed to withdraw. He was no saint. But the hallmarks of his two terms were peace and prosperity, with relatively fewer win-lose deals imposed by the feds.
We should mention that Eisenhower was also ably served at the Fed by William McChesney Martin. Martin was a Latin scholar from Yale, who joined the brokerage firm A.G.Edwards after graduation and made full partner two years later. He gave such a good showing of himself that he was elected to head the New York Stock Exchange at age 31. Then, when World War II broke out, he was drafted and served as a private.
McChesney Martin had a simple and modest idea of his mission as chair of the Fed. He sought neither full employment, nor Dow 30,000 or 2% consumer price inflation. He neither appeased nor sucked up, neither to Democrats nor Republicans.
Today's Fed model – based on "dynamic stochastics" – would have been Greek to him...or perhaps merely ridiculous claptrap. Negative real interest rates...quantitative easing...and a $4.4 trillion Fed balance sheet – all would have been regarded like a quack hair-growing elixir – with faint hope and much suspicion.
As we've mentioned in earlier pages, the 1950s Fed chief saw his role as simply to "take the punchbowl away" when the party got out of control or to "lean into the wind" when the seas got choppy.
That is to say, McChesney Martin sought to loosen the money when the economy was lagging and tighten monetary policy when the economy was running hot. (Richard Nixon blamed McChesney Martin's "tight money" policies for his loss in the 1960 US Presidential election.)
Looking over our shoulder, back to when we were still riding a two-wheeler, whatever Eisenhower and McChesney Martin were doing, it seemed to work. GDP rose from $281 billion in 1950 to $540 billion in 1960. The rich got richer. The poor got richer, too. Jobs were plentiful. And an ordinary man with an ordinary job could support an ordinary family in a perfectly ordinary way.
So, you'd think that if you were serious about making America great again, you'd want to emulate Ike Eisenhower rather than George W.Bush or Barack Obama.
You'd want to end wars, not start them. You'd want to balance the federal budget, not run some of the biggest deficits in history. You'd reduce federal spending and cut the Pentagon budget, not increase them. You'd want less government, not more. And less debt, too, not more of it. That is, you'd want to do the exact opposite of the Bush and Obama administrations.
But when we look out on the comic splendor of the USA today, we see neither Dwight Eisenhower reincarnated in the White House nor William McChesney Martin redux at the Fed. Instead, what we see is another thing Eisenhower warned us against on January 17, 1961:
"As we peer into society's future, we – you and I, and our government – must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow.
"We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow."
What is today's nearly $22 trillion national debt? It is exactly what Eisenhower urged us to avoid – plundering the future...and mortgaging the precious assets of our grandchildren. But the old general didn't stop there. He also saw the Deep State taking shape:
"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted.
"Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together."
Why did George W.Bush make up the 'weapons of mass destruction' fantasy and attack Iraq, after he had promised voters a more 'humble' foreign policy? Why did Barack Obama continue the Middle East military misadventures, even after he had pledged to end them? How come Donald J.Trump – who repeatedly criticized America's losing wars in the Middle East and promised a new, "America First" foreign policy – got fully on board with the entire Bush/Obama program?
Why did the Trump government run $850 billion deficits...in peacetime, during an economic expansion...anticipating total debt of some $30 trillion to $40 trillion within 10 years? Why was the Fed being run by a disciple of Bush/Obama-era Fed chiefs, Bernanke and Yellen, rather than someone in the McChesney Martin tradition? And why would the Pentagon budget be increased, when it could be cut in half and probably still improve the safety of the Homeland?
Why? Was it because Donald Trump was such a genius that his methods were nearly divine...mysterious...inscrutable...beyond the comprehension of mere mortals? Did he (and many of our readers) see something we couldn't? Or did General Eisenhower, who saw more clearly than any of us?
Our working hypothesis in this book is that General Eisenhower was right. He identified two big temptations for the American Republic of the 1950s; subsequent generations gave in to both of them.
They spent their children's and grandchildren's money. Now, the country has a national debt of nearly $22 trillion. That's up from $289 billion ($2.4 trillion in today's Dollars) when Ike left the White House.
And they allowed the "unwarranted influence" of the "military-industrial complex" to grow into a monster. No President, no matter how good his intentions, has been able to stop it.