Opinion

Felix Salmon

Lagarde, Juncker, and Greece’s solvency

Felix Salmon
May 26, 2011 17:10 UTC

Christine Lagarde’s international campaign to become the next head of the IMF is an attempt to maximize her credentials as the choice not only of Europe but of the rest of the world as well. The job is hers, at this point: once the US falls in behind Lagarde there’s no question that Lagarde will get the job, and with Hillary Clinton now waxing enthusiastic about how “we welcome women who are well qualified and experienced to head major organizations such as the IMF”, it’s going to be hard for the US to support anybody else. So Lagarde’s latest world tour should be seen as maneuvering to make her life as easy as possible when it comes to dealing with increasingly-powerful shareholders such as China and Brazil, after she starts in her new role.

Meanwhile, Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, took it upon himself to come out in public and say just how bad the Greece situation has become. The key date we’re counting down to is June 29 — that’s the day on which the IMF is due to disburse its next tranche of aid to Greece. But before that can happen, the “troika” — the IMF, the ECB, and the EU — have to agree that all of Greece’s funding needs for the next 12 months have been covered or guaranteed by someone. Which they haven’t. “I don’t think that the troika will come to this result,” said Juncker.

If the IMF doesn’t come up with the money, Greece is in real trouble:

“If the Europeans have to acknowledge that the disbursement from the IMF on 29 June cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF’s portion of the financing,” Juncker said.

“That won’t work, because in certain parliaments — Germany, Finland and the Netherlands and others too — there is no preparedness to do so,” he said.

Why is Juncker saying this? Neil Hume quotes David Mackie of JP Morgan, who reckons that Juncker is twisting the arms of various Eurocrats to ensure that Greece gets access to the European Financial Stability Fund sooner rather than later. If EFSF terms get agreed before June 29, then that’s exactly the guarantee that the IMF is looking for, and the IMF’s funds can get disbursed.

But there’s another possibility: maybe Juncker is pressuring the euro zone to install Lagarde as IMF managing director before June 29. Lagarde has “earned a reputation as the most uncompromising opponent of a Greek debt restructuring among euro zone ministers,” according to Daniel Flynn, and it’s pretty much impossible to imagine that her very first act as managing director would be to throw the euro zone into crisis by denying Greece its scheduled tranche of IMF aid. After all, the tougher that the IMF becomes on conditionality, the more likely a Greek restructuring becomes.

The deadline for installing a new managing director at the IMF is June 30; I’m sure that a lot of Europe would like to see Lagarde get the job a few days earlier than that. And so maybe that’s what Lagarde’s jet-setting is all about: shoring up enough global support that she can sail through the nomination process very quickly. The G20 countries will be asking her about a possible double standard: why should the IMF be generous to Greece, when it’s been so tough on many other countries in the past? Lagarde, I imagine, will give an answer along the lines of Daniel Davies’s comment here:

The purpose of defaulting on the debt would be to improve Greece’s access to credit? And by putting its deficit funding at the caprice of international capital markets rather than other EU governments, Greece gains political independence? I suppose it is the land of the Pyrrhic victory, but even so; I am unconvinced that gaining the sort of freedom to set its own fiscal policy enjoyed by, say, Ecuador is really worth all that much.

btw, I don’t really know what the difference is between a liquidity problem and a solvency problem in this context, and I don’t believe anyone else does either.

What Davies misses here is the distinction that the markets make between ability to pay and willingness to pay. Once a country has defaulted on its debt, its ability to pay on new debts naturally goes up — it becomes more creditworthy, not less. But just as your credit score goes down rather than up after you declare bankruptcy, so do the markets tend to punish countries which have recently defaulted, on the grounds that if a country is prone to default, it’s not a good idea to lend to that country.

In the case of Greece, the markets would be utterly unconvinced by a “soft restructuring” which left the country’s debt-to-GDP ratios looking unsustainably large for the foreseeable future, and which kept alive the risk of a second restructuring — or even devaluation — down the road. And there’s no realistic chance of a coercive “hard restructuring” which would involve outright default on existing debt — not in the next year or so, anyway.

But still, I do think that there’s a difference between a liquidity problem and a solvency problem in Greece. The solvency problem has been apparent ever since this Greek government came into power and came clean on the country’s finances; the liquidity problem is the kind of thing which Juncker is talking about. Defaults are generally caused by liquidity issues rather than solvency issues, which is why Greek bond yields are so much higher now than they were at the beginning of 2010. But solvency is still important, and Lagarde faces a stark choice the minute that she becomes head of the IMF.

Either Lagarde will attempt to persuade both her shareholders and the markets that Greece’s debt burden is actually sustainable, or else she’ll have a Nixon-in-China moment and announce that in order to bring Greek debt down to a manageable level, there will need to be a broad restructuring of its liabilities. My guess is that by the time she’s finished her current tour, Lagarde will have a very clear idea of whether Plan A — the muddle-through-and-hope approach — has any chance of success at all. And if I were the Chinese, or the Brazilians, or the South Africans, I’d be trying to impress upon her in the starkest possible terms that it doesn’t. It’s not the job of the IMF to facilitate a state of denial in Europe and Greece. Indeed, that’s one reason why I’m uncomfortable with Lagarde getting the job in the first place. Despite the fact that she seems certain to get it.

COMMENT

Whether or not Greece has any realistic hope of paying the rest of Europe back has a direct bearing on whether the rest of Europe will want to keep bailing out Greece’s creditors at par – i.e., financing Greece. That’s what we are adding.

Posted by MazingerZ | Report as abusive

The decline of US stocks

Felix Salmon
May 26, 2011 13:43 UTC

Aaron Lucchetti takes a detailed look at the US decline in global stock-market listings today, and finds a bunch of US companies deciding to list overseas:

In all, 74 U.S. companies have done IPOs in foreign countries since 2005, raising about $13.1 billion, according to Dealogic. That is a small fraction of the more than 650 U.S. companies that have gone public on U.S. exchanges since 2005. Still, such capital raising abroad was much less common before.

The numbers here seem high to me: if you’re a US company which has gone public since 2005, there’s a greater than 1-in-10 chance that you’re listed overseas. 74 companies is a lot of companies: we’re clearly not talking about one or two exceptions here. And if you look at the example given in Lucchetti’s piece, the Seattle-based but London-listed water-purification company HaloSource, there’s no obvious reason to discount it as some unique outlier.

I would love to see a quantitative comparison here, however, rather than the qualitative “much less common.” Did some small but significant proportion of US companies always list abroad? I guess what I’d really like to see here is a chart of the ratio of foreign IPOs to domestic ones, for US companies, on say a rolling five-year basis, going back as far as there’s data. Does the current level around 10% constitute a big spike upwards?

What seems certain is that the US stock markets just aren’t particularly interesting when it comes to new listings any more. LinkedIn made a big splash, yes, but mostly just because of its huge opening-day pop. And it wasn’t even the biggest IPO last week — Glencore raised much more money, has a much higher valuation, and chose to list in London and Hong Kong. And as Bob Greifeld noted when he announced Nasdaq’s bid for the NYSE, In 2010 the US generated only 16% of the capital raised worldwide and attracted only one of the 10 largest global IPOs.

Meanwhile, this week’s big share offering — of AIG — is looking decidedly sluggish, as though the US stock market really isn’t capable of digesting such things. (To be fair, the syndrome is global: the same thing seems to be happening to Glencore as well.)

Lucchetti waves his hand vaguely at the economic implications of all this, quoting a venture capitalist as saying that “we’re losing the ecosystem that has helped buoy the US economy over decades.” But a venture capitalist would say that — she just wants as many ways to exit as possible.

The more immediate implication, I think, is for individual investors. Even today, most US investors think of stocks in terms of US listings and tickers; if you watch CNBC all day, you could be forgiven for thinking that nothing matters unless it has a US ticker. But realistically, anybody investing in equities over a long-term time horizon is going to have to have a comprehensively global outlook. And while millions of investors still get their hands dirty with individual US stocks, buying this one rather than that one, trying to do anything remotely similar with global stocks is a non-starter. Just buying them is hard enough; doing real homework on them and picking between them is almost impossible, given the huge size of the global stock-market universe.

As a result, investing is going to have to become much more index-driven than it is right now, dominated by top-down global asset-allocation decisions rather than bottom-up stock-picking. And that in turn is going to drive correlations higher and increase the amount of systemic risk in global markets. I also suspect that the decline in US listings presages a relative decline in US markets. As US investors begin their exodus out of domestic stocks and into global stocks, the US stock market is likely to underperform its foreign counterparts. As they say, follow the money. It’s not here, any more. It’s there.

COMMENT

What about reverse IPOs? Hundreds of Chinese companies have ‘gone public’ in the US in this way in recent years.

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Why clearXchange is great for payments

Felix Salmon
May 25, 2011 21:08 UTC

If you want to keep your revolutionary payments system top secret, here’s a piece of advice: launch it in Arizona. That’s what Bank of America and Wells Fargo did in April, with their new clearXchange system; nobody noticed, until they put out a press release today.

ClearXchange really could be a game-changer, though. I spoke to Mike Kennedy, the Wells Fargo executive who’s leading the project, which right now is a joint venture between Wells, BofA, and Chase; he reckons that by this time next year, the program will not only be rolled out nationwide but will also be available to pretty much anybody with a bank account. (For the time being, both the sender and the receiver of the money need to be a customer of one of those three banks, and right now the sender needs to be in Arizona.)

ClearXchange is a clear competitor to the likes of PayPal and Popmoney, but it’s not an existential threat to those companies. Instead, the reason I like it is just that it brings peer-to-peer payments where they belong, to the level of the bank account. And it’s likely to set a new benchmark of $0.00 for the cost that consumers pay for such payments.

Up until now, most payments mechanisms, including PayPal, necessitated opening a new account. PayPal is now moving away from that system, and is trying to do deals with banks where its technology can get integrated directly into the banks’ own software and mobile apps, allowing people to send money to each other even if they don’t have a PayPal account. ClearXchange works much the same way: if I want to use it to send money to you, I just pull up my own bank’s mobile-banking app and use that. I don’t need to go to some separate clearXchange app. The first time you receive money from it, you’ll get a text message or an email telling you that you need to link your email or phone number to your account; after that, the money should just automatically appear in your checking account.

None of these technologies are cost-free, as far as the end-user banks are concerned. But processing checks isn’t cost-free either, and banks do that for free. In general, as a matter of public policy, there’s a strong interest in having the $865 billion which changes hands between Americans every year clear at par: the amount the sender is down should be exactly equal to the amount the receiver is up. That’s one of the reasons why so much of that $865 billion is transacted in cash, and it’s a big annoyance with PayPal and Square and other services which have a tendency to charge money for the service of facilitating payments.

What I’m hoping is that clearXchange will help make that service a basic part of what banks do whenever you open a checking account — that electronic peer-to-peer payments will just get added to the list of free services along with electronic bill payments and fee-free check clearing.

But that doesn’t mean that all banks will encourage their customers to use clearXchange technology instead of PayPal, Square, Popmoney. If those vendors can come up with a way of sending money which is cheaper and easier and safer and more efficient for the banks, then the banks will use those services rather than clearXchange. In any case, it’s all going to be pretty much invisible to the end user, who just sees their own bank’s website or app.

So I hope that the other big payments providers stick around, to provide competition for clearXchange and act as a force preventing the banks from charging for the service once it reaches ubiquity. We want this to be like bill pay, which is generally free at both ends of the transaction, and not like debit-card usage, with its fast-rising interchange fees (until Richard Durbin came along). And now that clearXchange has launched, I’m more optimistic than ever that we might actually achieve that goal.

COMMENT

The banks are playing the float game by taking out of the sending account but not putting it into the receiving account for 3 business days.
It is an electronic transfer. There is no need to prove funds availability.

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Joe Weisenthal is right about the Ira Sohn conference

Felix Salmon
May 25, 2011 17:57 UTC

Joe Weisenthal says I’m wrong about the Ira Sohn conference. But that doesn’t mean he thinks that David Gaffen is right. Gaffen reckons that people go to these events so that they can trade in and out of stocks in the space of 10 minutes. Weisenthal, by contrast, sees value somewhere else entirely:

It’s not often that you get to hear the thought process and reasoning employed these financial professionals. Within the broader scope of financial media, you hear a lot of managers and pundits making their arguments in broad strokes, with lines like “We’re bullish on US banks because of low rates, yada yada yada…“And that kind of stuff really is useless. But these are professionals who usually have portfolios of just a handful of stocks, who have done a tremendous amount of research on each one before pulling the trigger, and frequently they do have original insights.

So you shouldn’t go out and by MBIA just because a manager likes it. But if you’re looking for original thinking on stock selection, the speeches, presentations, and letters of big hedge fund managers is frequently some of the best stuff around.

This is a good point. The best way to extract value from Ira Sohn presentations is to concentrate not on the stocks that the hedge fund managers are talking about, but rather on their methodology. At the very least, you’re likely to learn a few ways of looking at a company that you hadn’t thought of before. These fund managers, then, can improve the way that investors do their own research on companies, even if they’re not going to be delivering up great investment ideas on a plate. Use their methodology on a stock which none of them are looking at, and you might just be able to find a hidden gem.

There’s another way to look at the fund managers’ investment techniques, and that’s as a way to evaluate the managers. The idea here is that the managers who have the smartest techniques are likely to be the best managers to invest in. On this front, I’m far from convinced: as I told Gaffen, the analyses presented to the Ira Sohn conference are really sales pitches more than they are transparent views into how hedge fund managers think and invest in the real world. For all their joined-up thinking at Ira Sohn, most successful fund managers in reality use techniques which they would hesitate to admit to in public.

But in any case, you’ll never get the important nuance about how these fund managers think from reading news reports about the conference. So I still don’t see the point in sending a bunch of reporters to cover it.

COMMENT

“Most successful fund managers in reality use techniques which they would hesitate to admit to in public.”

Felix, oh, c’mon.

Just because most people aren’t winning in the market doesn’t mean nobody is. These winners aren’t fairies and leprachauns — there are a number of them and we know many of their names.

Just because someone is making money, they must be a crook?

You can read many many years of Warren Buffett’s letters if you want. There are dozens or hundreds of ways of analyzing whether a company will do well over the long haul found in his letters and speeches alone. All legit and this just from one man! If you work really hard and keep just his openly shared strategies in your head all at once, you will do very well.

Warren Buffett has been outstanding but he is not alone; a significant number of other managers are smart enough, creative enough and hard working enough to outperform over the long haul.

Hedge fund managers, with the possible exception of Rennaissance Technologies, aren’t day traders anyway. Day trading doesn’t work well when you are so big that you move the market.

Well, these men certainly don’t need your approval to be winners. Most people are humble enough to feel very grateful when smart people share their ideas. Buffett’s annual meeting is full of such people (many very good investors already) who aren’t too proud to admit that they have much more to learn.

So what motivates these people?
(1) Ego. If you are one of the smartest, most talented people around and few people know it, that is not much fun.
(2) Attract more investors, I agree.
(3) Light a fire under your good ideas. If you have a great idea, buy some shares, and don’t tell anybody, it may take a long time for the market to discover these insights. If you help investors see what you saw, that could be a trigger to help move the stock.
(4) Take criticism. If your grand thesis has holes you didn’t see, its better to have smart people tell you then to suffer losses in the market later.

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The Gingriches and Tiffany: When a loan becomes lobbying

Felix Salmon
May 25, 2011 15:27 UTC

Amid all the convoluted explainers and analysis of the deal that Newt Gingrich and his wife had with Tiffany, one crucial point seems to have been missed. So well done to SpyTalk for picking up on this:

At the same time Tiffany & Co. was extending Callista (Bisek) Gingrich a virtual interest-free loan of tens of thousands of dollars, the diamond and silverware firm was spending big bucks to influence mining policy in Congress and in agencies over which the House Agriculture Committee–where she worked–had jurisdiction, official records show…

Tiffany’s annual lobbying expenditures rose from about $100,000 to $360,000 between 2005 and 2009, according to records assembled by the Center for Responsive Politics, a nonpartisan government watchdog organization.

There’s enough confusion over the Tiffany’s deal that it certainly looks unusual — while Tiffany’s does extend interest-free loans of up to one year to top clients, Gingrich’s account was open for two consecutive years, despite the fact that Gingrich claimed to be paying no interest on it. And in any case it seems unwise, to say the least, to accept an interest-free loan of more than $250,000 from a company which is lobbying your committee — no matter how rare or common such loans might be.

There’s an irony here: we only know the loan was interest-free because Newt Gingrich went on TV to say so, in order to try to portray himself as fiscally prudent. But now we do know that, the loan begins to look more like an undisclosed lobbying expenditure on the part of Tiffany. Which in many ways is even worse for Gingrich. There must be official rules about accepting interest-free loans from companies lobbying your committee. Is there a case to be made that Callista Gingrich broke those rules?

Update: I just spoke to Newt Gingrich’s press secretary, Rick Tyler. He said that the deal the Gingriches got was the same one that Tiffany’s offers to anybody else: interest free financing for 12 months. And that all debt with Tiffany’s was paid off within a 12-month period. If there was hundreds of thousands of dollars of debt outstanding for a second consecutive year, which there was, then that was new debt, associated with new jewelry purchases.

Is it OK for a Congressional staffer to accept an interest-free loan from a company which is lobbying that staffer’s committee, just so long as the same offer is available to the public generally? I’m not sure about that. But Tyler, for one, sees no problem there.

Update 2: Tiffany spokesman Carson Glover emails to say that the company’s lobbying was aimed at the Natural Resources Committee, which has jurisdiction over mining, and not the Agriculture Committee, where Callista Gingrich worked. This is more persuasive to me than what Tyler is saying: if SpyTalk is wrong that Ag has jurisdiction over mining, it’s much harder to say that there’s anything scandalous here beyond the sheer amount of money that the Gingriches spend on jewels annually.

COMMENT

Advice to the GOP, better dig up Reagan

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Bordeaux datapoints of the day

Felix Salmon
May 25, 2011 13:36 UTC

I’m a little late to this, but Shanken News has the latest Bordeaux export league tables, and they’re quite astonishing. The US is now only Bordeaux’s sixth-largest export market, in both price and volume. Meanwhile, the top spot on the dollar league table — held since time immemorial by the UK — has now moved to Hong Kong.

The numbers: in 2008, the US imported 1.75 million cases of Bordeaux, at €141 per case. By 2010, imports were down to just 1.36 million cases, and the average price per case was a mere €72. That’s wholesale, to be sure, but even at wholesale it’s hard to find decent Bordeaux at €6 per bottle.

China’s just a little bit cheaper. It imported 771,000 cases of cheap Bordeaux at €69 per case in 2008; by 2010 its 2.5 million cases were averaging €65 apiece.

And Hong Kong is a whole different world. In 2008 it imported 381,000 cases, which were worth €197 each on average. By 2010, imports had risen to 791,000 cases — still a fraction of the other countries on the league table. But the average price per case was a whopping €371. That’s well over four times what American importers are paying.

At the very top end of the market, the same thing is happening. “Last year, Hong Kong became the worldwide center of wine auctions,” Shanken News reports: total auction sales there outgrossed London and New York combined. To a first approximation, of course, wine auctions are Bordeaux auctions, especially in Hong Kong.

My feeling is that this is a positive development for the wine world more generally. Bordeaux is no longer the benchmark of quality that it once was: it can’t be, if an entire generation of non-Chinese wine drinkers is growing up never drinking the stuff. Instead, the world of wine is becoming more heterogeneous, and wine lovers are exploring many different regions, from California to Italy to Australia to Spain, as well as the Rhône and other bits of France far from the Garonne River. Such areas won’t attain cult status in Hong Kong for a while, if ever. But they’re just as easy to fall in love with as Bordeaux, and variety is always a good thing, with wine.

(Via Veseth)

COMMENT

What would be truly intriguing to see is how much of that wine is for the Hong Kong market? How much of the wine purchased in London is being exported to Hong Kong and then re-exported to China? I would venture to say that at least 20% of the HK purchases or more are re-exported to China both legally and illegally. Wouldn’t that be very interesting to know just how much to get a more accurate picture of what HK is drinking/buying and what is ultimately be drunk/purchased in China?

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Counterparties

Felix Salmon
May 25, 2011 05:55 UTC

Josh Tyrangiel on the new Bloomberg.com — Bloomberg

Gorgeous and genuinely interactive information visualization from the OECD — OECD Better Life Index

Before-and-after pictures of the Joplin, Missouri tornado devastation — 22 Words

Why The New York Times replaced its Twitter ‘cyborg’ with people this week — Poynter

Person biking hit by car near SLU Park lands on his feet — Seattle Bike Blog

Dominique Strauss Kahn’s friends allegedly attempting to bribe maid’s impoverished family in effort to get case dropped — NYP

Visa’s black card tops the list of the Worst Credit Cards on the Market — Cardhub

COMMENT

The old bloomberg.com was a functional work of art.

There is a reason that people spend 100,000 to restore a 57 chevy they bought out of a junk yard for $1,000.

There is a reason that people in the Met play 200 year old violins.

Some things can’t be improved much as some people might try. The old bloomberg.com was one of those things.

The new one looks like MSBC.com with a financial focus.

I’m heartbroken.

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Lorenzo Bini Smaghi vs Greece

Felix Salmon
May 25, 2011 03:16 UTC

Aditya Chakrabortty has an enjoyable take-down today of Lorenzo Bini Smaghi:

Two weeks ago he warned the struggling Greeks: “Default or debt restructuring is a dramatic economic and social event for the country which experiences it – I would call it political ‘suicide’– which leads many into poverty.”

What’s wrong with this argument? Well, to use a technical term, it’s balls. More precisely, it’s the sort of everyone-says-it-so-it-must-be-true balls that’s been a hallmark of European policy-making ever since the banking crisis broke out.

When it comes to spouting conventional nonsense, Bini Smaghi has a fine pedigree. In 2007, he wrote: “The Irish example shows that it is possible to prosper in the monetary union while having a higher potential growth rate than the rest of the union.” It was the spectacular wrongness of this conclusion that prompted bloggers to award the eminent central banker a new name: BS.

Aditya is absolutely right that some kind of debt restructuring in Greece is necessary — it’s the failure to do one which would constitute a long and very painful suicide. On the other hand, while he’s right that the economic costs of default can be low, the political costs can be very high. As indeed Aditya’s favorite paper on the subject says: “The political consequences of a debt crisis, by contrast, seem to be particularly dire for incumbent governments and finance ministers”.

What’s more, in the specific case of Greece, the economic costs could be substantial too, if the restructuring isn’t done with international support. We’re talking about a country which is still running a substantial primary deficit, and which has no access to the international capital markets. A unilateral default, in that situation, cuts off all external funding sources, forcing extreme austerity overnight in order to bring the budget back to primary balance. It’s worse, economically and fiscally, than the status quo — even though the status quo is not sustainable.

So the reason to do a “soft restructuring” is just that the EU will play along and continue to fund Greece’s deficits. It won’t solve the insolvency problem, but it will reduce Greece’s debt-service payments and allow the country’s creditors to continue to hold Greece’s debt on their books at or near par. What’s more, it’s politically survivable for the current government, where a full-on default would probably (but not certainly) see them kicked out quite dramatically.

Why is Bini Smaghi so opposed to such a deal? It’s not some high principle that if you’re going to go to the trouble of restructuring your debts, you should do so in a once-and-for-all fashion. Instead, it’s simply that the ECB is a major creditor of Greece, and Bini Smaghi is fighting in the ECB’s corner. Someone is going to have to talk him around, though. Because if the likes of Bini Smaghi and Jean-Claude Trichet don’t play ball now, the end-game in Greece could be very drastic and chaotic indeed.

COMMENT

So the purpose of defaulting on the debt would be to improve Greece’s access to credit? And by putting its deficit funding at the caprice of international capital markets rather than other EU governments, Greece gains political independence? I suppose it is the land of the Pyrrhic victory, but even so; I am unconvinced that gaining the sort of freedom to set its own fiscal policy enjoyed by, say, Ecuador is really worth all that much.

btw, I don’t really know what the difference is between a liquidity problem and a solvency problem in this context, and I don’t believe anyone else does either.

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When the Pentagon is captured by its vendors

Felix Salmon
May 24, 2011 21:50 UTC

Companies from General Motors to Coca-Cola have long had a complex relationship with their suppliers — it’s important for those vendors to do well, but at the same time no one likes getting ripped off to the point at which the vendors are doing spectacularly well and the big organization doing the buying is seeing its expenses rise dramatically year after year.

Unless, of course, you’re the Pentagon:

The Pentagon is very encouraged by Wall Street’s response to aerospace companies and arms makers, even as U.S. defense spending flattens, the top U.S. weapons buyer said on Tuesday.

“We are monitoring the health of our industry as it is seen by the financial community,” said Ashton Carter, undersecretary of defense for acquisition, technology and logistics. “And the information there is very encouraging to us.” …

The median stock price for the industry’s to 20 aerospace and defense contractors is about 92.5 percent of their 52-week trading highs, he said.

Trading at this level, Carter said, shows “continuing confidence in the health of our industry that is higher than it is for global information, automotive, steel, energy, telecom and information technology sectors.”

Carter is the man in charge of spending a huge chunk of the Pentagon’s mind-bogglingly huge $750 billion budget. It’s his job to get value for money; if defense-contractor stocks are rising even in the face of defense spending which is purportedly flattening, alarm bells should be ringing. But Carter seems to be mistaking them for some kind of congratulatory jingle.

Brett ArendsMW-AI615_dfense_20110211154303_MD.jpg had a good column on this in February, which included the chart at right. We’re spending more on defense than at any point in US history, bar the height of WWII — and even that level isn’t far off now.

In 1960, when President Dwight Eisenhower was leaving office, military spending in today’s money totaled just $350 billion.

Half of what we spend today.

In 1970, when the Vietnam War was raging, we spent $450 billion. The most Ronald Reagan spent on defense was about $550 billion. Even in 1942, the year after Pearl Harbor, we only spent $350 billion.

Today, $750 billion.

Actually, the figure is much higher if you include veterans’ benefits, the cost of the wars in Afghanistan and Iraq, and the interest on the debt to fight those wars. As Arends notes, even the most fiscally conservative lawmakers seem incapable of suggesting that America’s current defense spending is out of control, or even needs any cuts at all. After all, it would be downright unpatriotic were America’s arms manufacturers to make anything other than record profits this year and for years to come.

But one can’t help but hold out some wistful hope that the people spending the billions don’t consider excess profit at defense contractors to be a point of pride. Was it ever thus? Or is this new?

COMMENT

Um, Felix, want to run the numbers again using % GDP?

Using the inflation adjusted GDP from 1945, $750b of military spending would be 25% of GDP. We’re at around 5% right now.

These are just first numbers I could find on the web.

Do I have this wrong? Because this seems to me to be the exact kind of statistical shenanigan that, when done by others, drives you crazy.

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