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Listen as Stephen Moore discusses the FOMC’s commitment to indefinitely purchase additional agency mortgage-backed securities at a pace of $40 billion per month and the continuation of Operation Twist through 2012.

In addition, Stephen shares his thoughts on the state of the presidential race and where we are headed on November 6, 2012.

Stephen Moore Webinar – QE Infinite and The Presidential Race

Wade: Stephen Moore, one of my favorite people, who happens to also be senior economic writer for the Wall Street Journal editorial page and a member of the Journal’s editorial board. To remind people who haven’t been on with us before, he is an economic commentator for CNBC TV, not MSNBC; Steve, that surprises me.

Stephen: Actually, I was on Chris Matthews’ show last week.

Wade: Steve in 1999 was a founder and president of the Club for Growth, which was an incredibly powerful organization at the time and still remains in terms of impacting the political dialogue and particularly at the primary level toward people who are very focused on debt and tax-related issues. Stephen and I met when he was a senior fellow in economics at the Cato Institute, where he had published dozens of studies. The two of us became fast friends over the concept of a new direction for Social Security. Stephen, it’s been too long. I’ve missed you.

Stephen: Me too, Wade, and it’s great to be with you again.

Wade: Well, I am going to announce early as people are listening to this that we are having a contest, so you want to listen to Stephen very, very carefully. We are having a contest, and that advisor who correctly submits an electoral map of the winning states – by the way, the tiebreaker is guess the popular vote for the winning presidential candidate – wins a trip for two to Washington, D.C. for three nights and four days. Second place has dinner with Stephen. No, I’m just kidding, Stephen.

So please look at your announcement to do that. We’re hoping to have several hundred submissions. It’d be a beautiful time to be in D.C. You can go during the inaugural, although we do not have tickets for that, or you can go at another time to D.C. I would strongly recommend you go at another time because there are many times that are more enjoyable than the inaugural. So I’m going to announce that quickly, and that’s a great way to lead in.

I think let’s keep people waiting on the politics for a second, Stephen, because we said this call was going to be about two things: One was QE Infinite and the presidential race. Although I don’t think the QE incident is going to have a lot of impact on the presidential race, I think it’s a huge statement. I’d love for you to start talking about that a little bit if you will.

Stephen: Sure. Well, what is different about what Ben Bernanke announced last week from any of his previous actions over the last four or five years since this Great Recession began and the banks collapsed back in 2008 is that this is QE3, technically, but we’ve actually had about three or four previous actions by the Fed to inject money and liquidity into the economy to try to put the foot of the accelerator in terms of getting growth back.

A couple things that were interesting about this one: First of all, you’ve dubbed this QE Infinity, and I think that’s actually a fairly accurate way to describe this because what’s different about this from previous actions by the Fed is that this was the first time the Fed, A, did not have a time limit, and B, did not have money. They didn’t announce how much they’re going to put into the economy. They did say $40 billion a month, but they didn’t really say how long that’s going to happen. So this could be half a trillion. It could be a trillion. It could be 2 or 3 trillion depending on what happens to the economy over the next couple of years.

One of the things if people want to kind of follow where the economy is at right now and the Fed’s latest predictions about where it’s headed, I would urge people to read Ben Bernanke’s statement, which did not get enough publicity. It was quite dire, actually. It basically said we’re not creating the kinds of economic growth that the Fed wants to see, that we’re really lagging on job growth, and they weren’t very optimistic about the fact that the jobs would come and that the growth would come absent this fairly radical action by the Fed.

The Fed clearly is doing this because they see growth much weaker than we would all want to see it at. I think that’s a pretty obvious thing just looking around the country. Now, will this work? That’s the big question, and I’m somewhat skeptical. First of all, I agree with you, Wade. I don’t think this is going to have much of an impact at all before the election. I mean that this kind of money injection usually takes about at least three to six months for this kind of action to percolate into the economy, so I don’t think it’s going to change the course of events over the next 50 days.

But I do think that there’s a mistake being made here, and you and I had talked about this the other day, that what the Fed is doing and what so many other central banks are doing around the world in Japan, China, and in Europe is they’re trying to make up for really bad fiscal policy through monetary policy. History teaches us again and again that monetary policy cannot compensate for bad fiscal policy, and across the world there’s overspending and too much debt. I just don’t think printing more money is going to solve that problem.

Wade: So, let’s remind everybody. What maturity are they focusing on? They’re focused on mortgages and agencies this time, correct?

Stephen: That’s right. Just to go through the short history of this: QE1 was back in – I’m getting the timeline a little confused – I think it was late 2009, early 2010, and QE1 was the purchasing of between half a trillion and a trillion dollars of mortgage-backed securities.

Then QE2, which I think was late 2010 or early 2011, was when they purchased close to a trillion dollars of 30-year Treasury bills. That was essentially monetizing the debt. You basically have the Fed purchasing the debt that the Treasury Department is issuing. The Fed gets money by printing it, so this is just a way of, as we as economists call it, monetizing our debt.

Then this latest action, you’re right, is basically more of what we did with QE1, which is purchasing mortgage-backed securities. These are 10, 20, 30-year mortgages. One of the things that I worry about is when we say the Fed owns these mortgages, that means we all own them because the Fed is owned by the United States taxpayer. One of the things to worry about is that they’re buying these mortgage-backed securities in many cases at par, but we know that a lot of them are these toxic loans that are probably worth 50, 60, 70 cents on the dollar.

Wade: So, a couple questions. If you have this much buying pressure on basically US paper and mortgages, the two questions I have are: What does this do to the yield curve, number one, and what does it do, perhaps more importantly, to the spread between US governments and agencies and corporates? Do you have a thought on that?

Stephen: Okay. On the first one, let me answer that question in a more broad way if I could because I’m not an expert on the mortgage market and so on. But I want to alert people to this kind of paradox that’s to some extent a result of these actions by the Fed. Well, we now have a situation – and we talked about this a few months ago, but it’s actually more punctuated now than it was then – where people are buying these Treasury bills; not just the Fed, but investors are buying these Treasury bills.

A 10-year Treasury bill is at what, 1.6, 1.7%. The CPI just came out the other day. The CPI is somewhere around 2.5 to 3%. So these negative real interest rates are an incredible phenomenon. I mean that basically means, just to put this in very much layman’s terms, people are buying 10-year Treasury bills today, Wade, and the government is saying in 10 years I’ll pay you back less money than you lent it to me for. That’s what a negative real interest rate means.

I don’t see that lasting much longer. I mean, I just think that it’s a reflection of fear and trepidation in the market, and once the economy gets going and that money stops going into the safe investment that protects your principal of these low interest rate Treasury bills into venture capital funds or equities, whatever, you’re going to have an increase in these interest rates. I always tell people, look, we’re all going to talk to our grandchildren, Wade, and we’re going to say there was a time in America you could get a mortgage for 3.5%. I just don’t see these rates staying this low this much longer.

The Fed action, especially with QE2 when they bought up all those Treasury bills, was to keep the long-term bond rate low, but it already is so low. I mean, I guess what I’m saying is the problem with the US economy – it has many problems right now, right, Wade – but one of the problems is not that interest rates are too high. I mean they’re as low as they’ve been since the Great Depression.

Wade: Yeah, it’s unbelievable.

Stephen: My point is that by the Fed saying we’re going to keep edging these rates down, I don’t see any economic bump from that.

Wade: Now, Japan, if you take this to the midpoint of 2015, you are somewhere in the range of 1.25 billion, a trillion. When I read Bernanke’s statement, I interpreted that there was not a timeline, but the expectation was it would go through 2015. Am I understanding it correctly?

Stephen: Yup.

Wade: So the midpoint is 1.25 trillion.

Stephen: But that wasn’t an endpoint. He just said I think we need to do this through 2015. He wasn’t saying it’s going to stop in 2015.

Wade: Part of that is his specific strategy of being much more transparent and signaling markets. So part of that is also a signaling strategy, is it not?

Stephen: It is, and look, let me just say this. My feeling about the Fed generally is I’m not a Ron Paul guy, but I do think we need rules. I do think, and this is not just the United States but all countries around the world, they put way too much power in the hands of a few people that are supposed to be wizards behind the curtain. What happens if this guy isn’t a wizard? What if you pull back the curtain and it’s just a man? I mean Ben Bernanke is not God, and we have given these incredible powers to him.

What I’m saying is I think one of the mistakes these countries make, including the United States, is we should just have a rule. Just tell people what the policy is going to be and you create a kind of more stable environment. What destabilizes the economy is when the Fed is making these decisions that nobody knows what they’re going to do in six months. So at least now they’ve said here’s our plan for the next two or three years. I think that’s an improvement.

Wade: Now, Japan announced a 127 billion monetary purchase targeted slightly differently, but realistically the same approach. So their economy now is what, 60% of the United States’? Does that sound right, Steve?

Stephen: I’m sorry, say that again, that what?

Wade: Japan’s economy is what, about 60% of the United States’ economy, or it’s a bit less than that?

Stephen: Did you say 60%? Well, Japan’s economy has been in such a state. I don’t know exactly, but China just recently surpassed Japan as the second-largest economy in the world. They’re both still only roughly half of what the US economy is at.

Wade: Correct. So, that would say that 127 billion is somewhere in the range of the $250 billion in our terms, right?

Stephen: Yeah, that’s right.

Wade: The EU’s relatively blanket statement to purchase, how does that compare to the US and Japan’s monetary action?

Stephen: Well, Europe’s monetary actions have been bigger than ours because they’ve had so many actions by the European Central Bank. There again, I think you point to Europe and say wait a minute, this is going to work for the United States, why hasn’t it worked very well in Europe? Again, I would go back to what I said at the outset. I think if you look at Europe it’s clear Europe’s problem is not monetary. It’s not a monetary problem. It is a problem of overspending, of debt burden that investors just feel they’ll never be able to be pay back.
You’ve got a problem in these countries from England to Spain to France to Greece, where people are rioting in the streets because you can’t take away benefits. People in these countries have come to view these government benefits as kind of a human right. I just think that all this monetary action in these countries in Europe is only delaying the day of reckoning when they have to get serious about the entitlement problem there.

Wade: Well, I don’t think you’re going to find a lot of people disagreeing with that.

Stephen: Yeah, well, I mean anybody who looks at it dispassionately, most everyone would agree with what I just said. The problem is nobody in Europe still wants to own up to that. This is my frustration; you can hear it in my voice: There’s no indication in Europe that these countries are willing to make those choices even though it’s obvious what they have to do.

Wade: Well, you know, the irony is, of course, that the US has had the strongest of the recoveries of those three currency belts, and none of us are satisfied. We have an election which all of us presumed would turn on that and that’s not exactly occurring; but why don’t we transition to that because that is what’s on everybody’s mind now with, I think, 48 days to go. So how do you read what’s going on, which is an election, I think, that no smart person would have been predicting these polls four months ago, would be my assumption.

Stephen: Yeah, alright, so my quick assessment and one thing I want to caution everybody listening to the show about is stop paying too much attention to what I call the beauty contest polls, which are who do you like more or who are you going to vote for.

Wade: The most important one is who do you want to have a beer with, isn’t it?

Stephen: Is what?

Wade: Just kidding.

Stephen: Yeah, right.

Wade: Who do you want to have a beer with, yeah.

Stephen: That’s right. I mean I’ll just give you some statistics because I just think these polls right now are kind of meaningless. I mean at this stage I went back and looked at just recent presidential races. At this stage Michael Dukakis was winning. At this stage Jimmy Carter had a six-point lead over Ronald Reagan. At this point a week ago, John McCain was beating Barack Obama until the economy collapsed. So, what I’m saying is these polls right now are certainly worrisome if you’re a Republican, but they’re not really that predictive of who’s going to win the election.

Now that said, there’s no question; it’s obvious that the last two weeks have been very good for Barack Obama, and they’ve been very bad for Mitt Romney. I was at the Tampa convention. The Republicans got no bump out of that. In fact, I was looking at the polls. Mitt Romney’s acceptance speech was rated by voters the least-liked speech of any presidential candidate of either party for the last 30 years.

This gets to a point you and I were joking about prior to the conference call, which is Mitt Romney in some ways is Republican’s Michael Dukakis. I mean the voters are having a tough time warming up to this guy. He’s just not a really good candidate. Now that said, even though he’s not a very good candidate, I still think this race is almost totally a coin flip at this point. I mean you might give slight odds to Obama but not big odds. I think this one is going to be fought tooth and nail up to Election Day.

I think the debates which are coming up – I think the first one is October 2nd or 3rd – are crucial. The good news for Mitt Romney is expectations are so low in his debate that if he does even fairly well he might get a bump out of it.

Wade: Well, you say that, but you know, I went through every poll before our call today. I’m not sure North Carolina should be called a swing state because if it’s a swing state, that generally means Republicans are not going to win.

Stephen: That’s right, if Republicans don’t win North Carolina. But I will tell you with almost absolute certainty unless the bottom really falls out on Republicans that North Carolina is going to go for Mitt Romney, although it went for Obama last time.

Wade: Well, I know, but that was 330 electoral votes. But every one of the other states, I believe, Ohio, Florida, New Hampshire, Virginia, even though Wisconsin is not a swing state, Michigan, Pennsylvania, Colorado, New Mexico and Nevada, I think Obama has a lead in every one of those.

Stephen: Yeah, I haven’t looked at the polls in the last couple of days, but I wouldn’t be surprised. I mean I saw a Virginia poll that came out, because I live in Virginia, that had Obama with about a five-point lead. Look, if you’re a Republican like me, you’ve got to be troubled about that, no question about it. What I’m saying is those can turn really quickly. Also, they all turn together. In other words, if something happens where Romney gets a little bounce, he doesn’t just get a bounce in Florida. He gets a little bounce in every state. So those things can turn, but you’re right.

I mean the one I pay most attention to is Ohio. Everyone does because I just think whoever wins Ohio is going to win this election. That one, the numbers are not very good for Mitt Romney right now. I think he’s down, depending on the pools, six or seven or eight points. I mean I’m going to go back to my point that I still think that that could easily be erased with a good debate performance. Look, we’ve got two unemployment numbers, Wade, that come out before the election. I think those are going to be critical.

I mean if we don’t show improvement in jobs over the next couple months, I still will stick to my prediction I made four months ago. It’s hard for me to believe Obama can win if people are really worried about the job market. Sorry, I interrupted you. You were going to ask me why.

Wade: No, no, that’s clearly a common thing. I’m looking at jobs and I agree with you on that; but when you look at most of the major polling data on who they trust on the economy, now there’s effectively a parody.

Stephen: Yeah, and that’s really big problem for Mitt Romney. I agree with you. There was another poll this week. It was close to even but I think a slight favorite for Obama about who do you trust more on taxes. Now look, that would be like people saying they trust the Republicans more on the environment. I mean taxes are a Republican issue. But I think that a lot of that just isn’t really about taxes. It’s more about just people feeling more comfortable right now with Obama because Romney hasn’t connected with people.

Wade: Well, I’ve looked at that number, and it strikes me that that tax number flows from, frankly, the decision by Romney to not go into detail. I mean you can’t propose the policy without giving the detail. It weakens it a lot. We have a bunch of questions already. Can I start asking you some questions from listeners?

Stephen: Let’s go. Let’s get through as many as we can.

Wade: Okay. We’ve kind of touched on this, but I think we should cover this one in particular. If QE3 does not work, much like QE1 and 2, what other options will the Fed have moving forward to attempt to bolster the economy?

Stephen: I think the answer to that is they don’t have any moves. I mean, look, I think they’ve thrown everything but the kitchen sink at this, and so they may try other things. I wouldn’t be surprised if they don’t continue to buy more 30-year Treasuries, which would be a repeat of QE2. Remember, the purpose of that was to drive down the 30-year long-term bond rate.

As I said before, Ben Bernanke, the problem isn’t interest rates. Interest rates are plenty low. My goodness, you can get a 3.6% mortgage right now. So I just think that they’re kind of out of bullets, just like on fiscal policy we’re kind of out of bullets. I have a lot of Keynesian friends who say we need more stimulus. I mean more stimulus; my god, we’re borrowing $1.1 trillion a year. That’s a boatload of stimulus. So I just don’t see what I call the demand-side approach as working very well.

I do think the one thing you didn’t ask me about – maybe someone in the queue asked about this – we should get into this issue of the fiscal cliff because I think that’s a huge issue for the economy in 2013.

Wade: Well, you know what? We have that question, so let’s make sure everybody understands this. The fiscal cliff, which occurs because we don’t have any adults in Washington, so they say don’t trust us so we have to lock ourselves in this straitjacket; the fiscal cliff is this tremendous cut in social programs, military, and the lapsing of the Bush tax cuts. Is that correct?

Stephen: That is right. So basically, let’s call it three fiscal cliffs, okay. The first two fiscal cliffs are the cuts in the social programs that you described and the cuts in the military programs. They’re across the board, and they’re pretty deep. They’re pretty deep cuts. We’re talking about 5-10% cuts in programs. That is a result of the fact that we, as you put it very eloquently, Republicans and Democrats couldn’t act like adults. They couldn’t come to an agreement on the real problem, which is the spinning out of control entitlement programs. So they’re going to cut to the bone these other programs in the budget, which are actually only about 40% of the budget.

Look, I am in favor of cutting these programs, but I think when even Leon Panetta, even Barack Obama’s own defense secretary, says that this will imperil our defense, I listen to that. I think, boy, why would we do that? Why would we make cuts that put our troops in danger or that make us more in danger of another terrorist attack? So I find that to be troubling.
The other one, though, which is even more important from an economic standpoint, is the fiscal cliff when it comes to what I call “taxmageddon.” That, of course, is whether these tax rates are all going to go up next year. You know, we’re stalemated on that right now. Republicans say, and I’m a Republican and I agree with this position, that we should extend all the tax cuts at least for another year or two. Barack Obama and the Democrats say we only want to do that for people who make less than $200,000.

So the big issue out there is are we going to raise capital gains taxes, dividend taxes, and personal income tax rates in 2013 on the so-called rich. I mean here’s the answer to that question. It’s a pretty simple answer. If Barack Obama wins this election, then those rates are going to go up on people who make over $200,000. If Mitt Romney wins the election, they’re not going to go up. You know, the question is: If Obama wins and those rates go up, what effect is that going to have on the market? I think a negative one.

By the way, the capital gains rate would go from 15% to 24% because of the taxes in Obamacare, and the dividend tax would go from 15% to about 42%, almost a tripling. Look, if you own stocks and you own equities, you know that capital gains and dividends are just direct tax on stock ownership, so the value of stocks fall when those tax rates go up. It’s just a mathematical truism. Just as in 2003 when we did the tax cuts in the first place, you got a bump up in the market by about 8-10% because the market capitalized those lower rates into higher stock values.

Wade: So at the end of the day, this is a legislative issue.

Stephen: Let me just interrupt you for a second because this is an important point and I want to make sure everyone understands this. On those tax rates going up and the fiscal cliff, that’s already current law, Wade.

Wade: Right, I understand that.

Stephen: Right, a lot of people don’t understand this though. That happens unless we change the law. So this is automatic pilot, what we’re talking about. So the only way we stop it is if congress can come together and you can 60 votes in the Senate and 218 votes in the House and a president who will sign a law that stops it from happening.

Now, my prediction to you is on the spending cuts. I just don’t think it’s going to happen, Wade. I don’t think we’re going to go over that fiscal cliff. I think Republicans and Democrats will come to an agreement either in the lame duck session which is after the election or in January they’re going to turn the switch off and they’re not going to do those machete cuts in defense and domestic spending. As I said, on the tax cliff, I think that really depends on who wins the election.

Wade: We have somebody bringing up the name of your friend, Mr. Laffer. Why hasn’t inflation emerged as Arthur Laffer predicted in 2009 despite massive money supply intrusion? Is this where you say that Paul Krugman was right?

Stephen: Well, I’ve been saying that too. I’ve been predicting higher inflation, higher interest rates, since around 2009 as well. I think the explanation for that is that inflation is a result of both the amount of money that’s injected in the economy – this is going back to Economics 102 class maybe – it’s also a function of what we call the velocity of money. Velocity, for the layman, it just means how many times these dollars are turning over.

The reason we haven’t seen inflation is because, yeah, the Fed keeps injecting this money into the market and to the economy and to consumers’ hands, and guess what? Nobody is spending it. It’s almost literally like people are stuffing that money under a mattress. So my point is that if you get all this money injection into the economy but that doesn’t cause people to go out and spend it or invest it or put it into play, then you’re not going to get an inflation rate effect.

I think the danger that everybody should be worried about is once the economy starts to percolate again and pick up and the velocity of money increases, then I’ll bet you a dime to a dollar we see higher rates of inflation starting to kick in.

Wade: So sometimes analysts will make the point that the market is cheering an expected winner. Why has the market gone up concurrent with the president’s increase in the polls?

Stephen: That’s the hardest question you could have asked me, Wade. I’ve been scratching my head on that one for two weeks, and I don’t have a good answer for it. I mean it is perplexing to me actually. You know, I would have expected just the opposite. Now look, I mean I think the conventional answer is that the investors just love easy money. They love it when the Fed puts its pedal to the medal, and that’s what happened. I think that this is a temporary bump in terms of Fed action.

Also, look, I’m not a pessimist on the economy. I’m actually kind of an optimist. I’m a Republican; I think the economy does better if Romney wins. Even if Obama wins, I mean the housing market is picking up a little bit. In my area, it’s picking up a lot. We haven’t built any new housing in this country in five years, so you’re starting to see construction pick up and new home sales pick up.

You know, manufacturing is doing pretty well. We’ve got an incredible renaissance in this country going on in energy with the natural gas and oil boom that’s going on. So there are a lot of industries that are looking pretty strong right now despite Washington’s best efforts to hold it back.

Wade: Well, the builders are the highest level of optimism. New home starts at the highest since 2006. Home sales are at the highest since 2010. North Dakota passed Alaska in oil production. You know, the manufacturing renaissance, I think we’ve seen our third coal plant mothballed because of the cost of natural gas, which is a big part of the renaissance. I mean there are some extraordinarily positive things going on.

Stephen: There are. Look, I’m a huge fan of what’s going on in the energy sector. A lot has been written on this in the last six months. I did a story back in February. But even with all the hype to it, I don’t think people realize how big this really is. I mean because of these new finds in places like North Dakota and all over the country plus the new technology, hydraulic fracturing, horizontal drilling, folks, this isn’t just a little advance; I mean this is a seismic advance. It’s almost like we’ve overnight tripled the amount of energy we have. You’re right.

These low gas prices, which the gas price has gone from $12 to $3 over the course of the last couple of years, that has an incredibly big impact on our ability for our manufacturers to compete in these global markets, our auto industry, our chemical industry, our technology industries, because it means we have access to much lower priced energy than the countries we compete with. So I think it’s a big, big story that isn’t hyped enough, even despite all the hype that it gets. By the way, North Dakota and Montana, you’re right there, Wade, at ground zero where this is happening.

Wade: So they keep expanding the size of that field of course, and obviously it’s making a huge impact out here. It’s hard to believe the construction and the development and everything else. I think I should touch on a couple other questions here. In terms of the cliff, we have a question. Okay, so essentially they’re asking a question: If the cliff is on its way, are we going to have some substantial tax reform?

Stephen: Tax reform?

Wade: Yes.

Stephen: You know, there are two things I’m actually pretty bullish about regardless of who wins. I do think we’re going to get tax reform in 2013. I wrote a piece on this. People might want to go back and read a piece I wrote. I interviewed Dave Camp. He’s the head of the House Ways and Means Committee, so he writes the tax laws. He’s the new Dan Rostenkowski. He was saying to me the same thing. He said, “Even if Obama wins, I think we’re going to do this.” The reason is, Wade, that the tax system is falling apart. It is in ruins. Our tax system is an abomination. I think everybody agrees with that.

Think of all the things they’ve got to deal with next year, Wade. Let’s just go through these. They’ve got to deal with the AMT problem. They’ve got to deal with the estate tax issue. They’ve got to deal with the tax cliff. They’ve got to deal with the fact that we have the highest corporate tax rate in the world.

The system is imploding, so I think there is a good chance even if Obama is elected that we do something that broadens the tax base, brings the rate down a little bit, incentivizes savings and investment. That’s very bullish for markets, so I put the odds at over 50%. This is a hard thing to do to fix the tax system, but I think it’s going to get done.

I’m also optimistic that we’re going to get some agreement on these entitlement reforms. I mean you were right. You put it very well. These politicians are acting like a bunch of sixth-graders, but you know what? They might grow up in 2013 because there’s no other choice. Either we’ve got to cut the hell out of our military budget, our education budget, our court system, everything else, or we get serious about Social Security and Medicare. I know, Wade, since you and I met 15 years ago we’ve been talking about this, but I just think you can’t put it off much longer.

Wade: Well, isn’t it kind of like both what the Democrats and Republicans say about energy now, which is the strategies are all of the above? Isn’t it really all of the above? Isn’t it anything from means tested to extended ages to vouchers; isn’t it really some part of all of the above? I mean don’t both sides on this one have legitimate ideas?

Stephen: Yeah, I think on entitlement reforms the things that I think are pretty obvious that almost every sane person agrees on is we have to raise the retirement age for Social Security and Medicare and we have to means test them in some way. Now, the more radical pre-market reforms that you and I have talked for nearly 20 years about, you know, moving towards a system of personal accounts and IRA-type systems for Social Security. I mean I still love that idea. I think that’s a lot harder.

You know, I think that’s a lot harder to get a bipartisan agreement on, but I think the things that you mentioned, the age limit increase and the means testing so Warren Buffet isn’t getting Medicare, I think that’s coming.

Wade: Completely off topic, we just had a question come in which I meant to talk to you about this morning when we had our green room conversation. The question is China’s role in our economy moving forward. I think the more interesting point is not actually that question, although it’s going to relate to it. But I don’t know if anybody’s caught the news. There are these scraps of land between Japan and Korea and Japan and China which are contended by everybody. They’re contended because the land has zero value, but they’re really trying to establish a zone of control for under-ocean drilling.

Now, I’m certain people have noticed that, I think, as of yesterday there were 93 cities in China where there was anti-Japanese rioting. What China said either early this morning or late yesterday was that they were thinking of attacking the yen with Japanese bond sales.

Stephen: I saw that, yeah.

Wade: You forget the guy who has the savings makes the rules. Just talk about that for a second.

Stephen: Well, first of all, it’s a little bit out of my area of expertise, so I want to warn people. I bet a lot of people know more about this than I do. Okay. I think there are a couple things. One is, look, the Chinese have hated the Japanese for 50 years, right. I mean they remember what happened in World War II and they remember the brutality of the Japanese. You know, put that in this context. This has been a lingering hatred for a long time and a rivalry, and it’s coming close to a boiling point there.

But I wanted to put this in the context of how it circles around what we talked about with our debt. I want to put this in the context of how it affects the United States in a couple ways. One is you’re seeing a bit more sabre rattling from China in recent months, and I think that’s partly a result of kind of a perceived weakness in the United States. I think this is why this is not a time to be cutting our military and our national security budget because I think China is emerging as a military power.

Second of all, look, other than the Federal Reserve, China owns more US Treasury securities than any other entity in the world. So I like to think what’s happening with respect to Japan where they say we’re going to attack the yen, it’s not inconceivable that at some point they could try to do that to the United States. This is part of the reason why this debt is a cancer cell because it does make us somewhat vulnerable to a kind of attack on our currency and our bonds from these countries that we owe money to.

Now, the flip side of this though is think about this: If you own a trillion dollars of 30-year Treasuries and you make a move to drive down the value of those securities, that hurts both the debtor and the creditor.

Wade: Unless you make one transaction of a trillion dollars in a millisecond.

Stephen: Yeah, right. But you try to do that and it’s not going to work very well. So in other words, I think we’re both captive a bit to each other. The debtor to some extent owns the creditor, and the creditor to some extent owns the debtor.

Wade: Well, I think it’s a really interesting side story. We’ve got to touch on one more, alright. Then this will be our last little topic. It’s amazing to me that we have not touched on either the protests in Libya, Cairo, or any of the other Mid-East capitals. Do you want to give a high-level conversation on that?

Stephen: Well, again, this is outside of my area of expertise. Actually, I don’t want to because I just don’t feel like I know that much about it, and I don’t have any expertise to bring to the issue; so I’m going to punt on that one. You know, you’re going to have to get Bret Stephens from the Wall Street Journal who’s been writing every minute of every day on that one. Rather than sound stupid, I think I’ll punt.

Wade: Well, fair enough, fair enough. I hate to end on that one, but I think it’s fair to end.

Stephen: Let me just say one other thing then to end this up, which is this is an incredibly important election and I want to restate this point that I think it’s going to be razor close. Put it this way: Obama won 53% of the vote last time under unbelievably positive circumstances for Democrats. I mean the economy had collapsed. You had a very unpopular incumbent Republican president.

There’s no way in the world that Barack Obama is going to get over 53%. He’s got a cap at 53, and he’s probably looking at a cap of close to 51%. Even if he wins, it’s going to be very narrow. I think it could easily be one of these elections where we’re up till 2:00 a.m. and maybe later than that before we know who has won.

The other thing to think about is congress. The House is going to stay Republican. I would put the odds at about 90% no matter what happens. So even if Obama wins, you’re going to have kind of a check and balance that wasn’t there in 2009 when Obama took office. So you know, to get anything done over the next four years, even if Republicans win the table, you’re going to need some kind of bipartisan consensus going forward. The real question is will these politicians start to act like adults. I think post-2012 you’re going to see more bipartisan cooperation.

I think you’re going to start to see some of these big problems that we spent the last 45 minutes talking about getting addressed one after one after another. It could be a very productive time for the country, and I’m bullish. I’m going to end on this. I’m really bullish. I think the US economy is actually prepped for a big expansion because there’s so much money that’s waiting to be reinjected into the economy and because of the things we talked about in terms of manufacturing and energy and housing that just look very positive to me. Look, balance sheets are much better for American households and businesses than they were four years ago.

Wade: That’s a good point. Well, Stephen, as always we have really enjoyed your time. Could we sneak you in a couple more times before the election?

Stephen: Let’s do it. Yup, it’s going to be a lot of fun, and this is going to be one nail biter of an election.

Wade: Okay, last thing before people hang up: Please look at your invitation. We’d love for somebody to win a trip to Washington, D.C., so please look at it and give it your best count. You just go online. You pick the map, send the map to us, and please remember to do the tiebreaker where you guess the popular vote. So in ’04 it was 48.9 to 47.4, Bush v. Kerry. I think that Stephen just said he thinks that whatever the outcome, it’s more likely to be that than the outcome in ’08. But we look forward to getting your results, and Stephen, we’ll talk to you in a few weeks.

Stephen: Thanks. I look forward to having lunch with whoever wins that prize.

Wade: Thanks very much.