Hamilton Returns from Wall Street

Hamilton had been gone most of the afternoon.

When he returned, Franklin looked up from his chair and asked, “Well, Alexander, what has Mr. Druckenmiller taught you?”

Jay added, “And what, precisely, troubles him?”

Hamilton did not answer at once.

“At first,” he said, “I thought we would speak of markets. We spoke instead of government.”

He moved toward the window.

“Druckenmiller has spent fifty years watching prices reveal truths that governments would prefer not to hear. His argument is simple: the market for the debt of the United States is beginning to say something important about the conduct of the United States itself.

“The long-term interest rate paid by this government may be the most important price in the world. It contains the collective judgment of millions of lenders concerning inflation, growth, debt, confidence, and the future value of the promises made by the nation.

“And Washington does not like what that price is beginning to say.”

Franklin smiled faintly. “Governments seldom enjoy being told the truth by people they cannot dismiss.”

“Precisely,” Hamilton replied.

“The United States is running deficits approaching six percent of its entire economy at a time of strong employment and substantial prosperity. The national debt has crossed forty trillion dollars. Interest payments alone now exceed what the nation spends upon its defense. These are figures once associated with war or depression.

“This is not the arithmetic of emergency.

“It is the arithmetic of habit.

“And habits of borrowing are more dangerous than crises of borrowing, because crises frighten men into action. Habits persuade them that nothing need ever change.”

Druckenmiller’s deeper concern, Hamilton explained, was that government might attempt to weaken the very mechanism by which mounting debt eventually imposes discipline.

“When lenders grow uneasy, they demand higher interest. Mortgages become more expensive. Businesses pay more for capital. Government itself must devote increasing revenues merely to service what it has already borrowed. The consequences of fiscal policy, long hidden in columns of figures, suddenly become visible.

“That pain is not a defect in the system.

“It is the warning system.

“And Druckenmiller fears that the Treasury is beginning to interfere with the warning.”

Jay asked, “By attempting to hold down long-term rates?”

“Yes. And that is where the matter becomes larger than finance.

“A government cannot repeal arithmetic. It may conceal it, postpone it, rearrange it, borrow against the future, or reassure the public that tomorrow will somehow pay for today.

“But the bill remains.”

Franklin leaned forward. “Why does the market matter so greatly?”

“Because it may be the only institution remaining with the power to say no.

“Congress will not easily impose pain upon voters. Presidents prefer benefits whose costs arrive after their administrations have departed. Both parties enlarge commitments. Neither wishes to explain that promises made under one demographic and economic order may not survive indefinitely under another.

“Commissions may warn. Economists may testify. Budget offices may publish tables. Nothing happens.

“But when the long bond rises sharply, Washington listens.

“The market converts abstraction into consequence.

“It sends the invoice.”

Hamilton paused.

“There is a pattern here which extends far beyond finance, and it troubles me greatly.

“Again and again, societies receive warnings before catastrophe. Before the attacks of September 2001, American intelligence was filled with indications that danger was approaching. There were reports of suspicious flight training, known enemies entering the country, and repeated intelligence pointing toward an imminent attack. The information existed. What did not exist was sufficient urgency to assemble the pieces before events assembled them for us.

“The same thing occurred before the destruction of the Challenger. Engineers warned that the shuttle’s seals might fail in unusual cold. Before the financial collapse of 2008, deteriorating mortgages and extraordinary leverage accumulated in plain sight. Before Fukushima, analyses had warned that a sufficiently large tsunami could overwhelm the defenses of the nuclear plant.

“In every case, the warning was incomplete enough to postpone action and clear enough afterward to make delay appear almost incomprehensible.

“This is one of mankind’s recurring failures.

“We demand certainty before accepting the cost of prevention. But once certainty arrives, prevention is usually no longer possible.”

Jay regarded him closely. “You think the bond market may be such a warning?”

“I do.

“Not a prophecy of imminent collapse. That distinction is essential. Not every warning announces catastrophe, and statesmen who react hysterically to every danger soon lose the ability to govern.

“But warnings are valuable precisely because they arrive before certainty.

“If we insist upon waiting until the danger can no longer be disputed, we have often waited until our freedom of action has disappeared.”

Hamilton turned back toward them.

“The same principle applies to another matter we have lately discussed—artificial intelligence. The laboratories themselves are beginning to warn of systems whose power they cannot fully predict or control. Yet the temptation is familiar: wait until some unmistakable disaster occurs, then hold hearings, appoint commissions, impose restraints, and ask why no one acted earlier.

“A cyberattack. A biological danger. A system operating beyond the intentions of those who created it. Only then will what now appears speculative suddenly seem obvious.

“Governments prefer reacting to disasters because disasters supply political permission. Prudence must act before that permission exists.”

He returned to the question of debt.

“Every artificially suppressed basis point reduces the apparent urgency of reform. It permits another year of delay, another election, another promise, another obligation.

“And delay is not neutral.

“If reform begins early, it may be gradual. Entitlements can be adjusted over decades. Those most dependent upon them can be protected. Those with greater means can bear more. Younger generations can be given time to prepare.

“But governments rarely choose gradual reform while markets remain patient.

“They wait.

“And when markets finally lose patience, gradual reform may no longer be available.”

Franklin’s expression changed.

“That sounds less like finance than tragedy.”

“It is,” Hamilton replied.

“There are two ways a nation may reform promises it cannot sustain. It may alter them deliberately, through law, over time, and with some concern for justice.

“Or necessity may alter them suddenly.

“In the first case, elected government chooses among painful alternatives.

“In the second, lenders choose the timetable.”

He paused.

“Druckenmiller made a point I shall remember. Those who say entitlements will never be reduced misunderstand the question. The question is not necessarily whether adjustment will occur.

“It is who will decide it.

“If we refuse to govern ourselves, circumstances will govern us.”

Jay asked whether a nation as wealthy as the United States could not sustain extraordinary debt for many years.

“Of course it can,” Hamilton answered. “That is precisely what makes complacency so dangerous.

“A rich nation can postpone reckoning much longer than a poor one. America possesses productive citizens, vast capital markets, the world’s principal reserve currency, and two centuries of accumulated financial trust.

“But credit is not freedom from restraint.

“Credit is accumulated trust.

“And accumulated trust can be spent.”

Hamilton’s voice hardened.

“I labored to establish the public credit of the United States because a nation without credit would possess neither security nor independence. But the ability to borrow is not permission to borrow without limit.

“Credit accumulated over generations should not be consumed merely to spare the present generation from making choices.”

Franklin looked at him. “And what would you have the government do?”

Hamilton answered immediately.

“First, listen.

“Do not silence the warning because the warning is inconvenient.

“Let the market speak.

“If the thirty-year bond demands five and one-half percent, do not call the rate a crisis. Call it information.

“Then address the cause. Reduce the primary deficit. Reform commitments gradually while gradual reform remains possible. Protect those who genuinely require protection. Restore the connection between promises and the means of paying for them.

“And stop pretending that prosperity repeals arithmetic.”

The room became quiet.

“The bond market is not the enemy of the republic,” Hamilton said.

“It is the messenger.

“History is filled with disasters preceded by warnings that men possessed but chose not to understand. The danger lies not merely in failing to see. Often we see perfectly well.

“We fail to act because acting early is costly, uncertain, and unpopular.

“Then catastrophe arrives, uncertainty disappears, and everyone asks why the warning was ignored.

“The debt is not yet the crisis.

“The refusal to confront it is.

“The greatest danger is not that America has borrowed too much. It is that Americans have begun to believe there will never come a day when they must choose between what they have promised and what they can afford.

“That day always comes.

“Wisdom consists in hearing the warning while there is still time to choose.

“Folly waits until the warning has become the event.”