America after the meltdown: foreign policy and the next president.

Author:Freeman, W., Jr.

The next U.S. president will need to rebuild international confidence in America, argues one of the country's most distinguished career diplomats in this October 12 speech to the National Council on Teacher Retirement. Persuading foreign creditors to continue lending us money is only one of many foreign policy challenges that call for new policies as well as strengthened diplomatic capacity.--Ed.

Given the economic state of the Union and its impact on you as financial professionals, I expect most of you think it's a bit weird to be starting your program this way--by considering the national security and foreign policy challenges our next president will face. President McCain or President Obama will have to cope with the knock-on effects of the worst financial panic since the Great Depression. What time is this going to leave for foreign relations? The answer is that it better leave a lot. We aren't going to make it safely out of the various messes we are in without more than a little help from foreign friends.

The fact is that we have been living on foreign credit rollovers. The bailout we have just authorized is not self-financing. It is yet another rollover dependent on foreign creditors. For it to work, foreigners must choose to buy the debt we are issuing rather than invest their money elsewhere. At the moment, T-bills are the only refuges anyone can think of other than gold, so there doesn't seem to be much of a problem. But will they respect us and want more T-bills in the morning?

No one abroad now has any confidence in President Bush or the leaders of either party in our Congress. Together, our executive and legislative branches have cut taxes and offered ordinary Americans inner peace through impulse purchasing and the avoidance of personal sacrifice. They have colluded in the largest increase in government spending in living memory and mired us in two bloody interventions in the Islamic world that we do not know how to end. Nothing they have done to date suggests any recognition of the need to replace denial and self-indulgence with realism and fiscal discipline. Nor does anything that either presidential candidate has said about the panic of 2008 acknowledge these needs.

In three months, most members of Congress will still be there but Calamitous George will be gone, having bequeathed to his successor the task of reintroducing pay-as-you-go government to our country. The first problem the incoming administration will confront is a rapidly mounting budget deficit with a built-in fiscal time bomb of unsustainable tax cuts that are due to expire in 2010. The next president will have only a few weeks to present a budget for that fiscal year, which the outgoing administration has declined to do. As part of this, he will have to insist that the House and Senate agree with him on a credible workout plan for the American economy--a very painful requirement that both candidates fear to discuss.

Persuading Foreign Creditors

Whatever he says or doesn't say on the campaign trail, the next president will have to persuade foreigners that we have finally decided to make the hard choices we have been avoiding and to set priorities for deep cuts in spending and increases in revenue. Without this assurance, they are most unlikely to continue to lend us the money we need to make the difficult transition to responsible fiscal practices while restoring economic growth.

That transition will touch more than domestic policy. There is no reason to expect foreign central banks to continue to finance U.S. wars of choice, unless we can make a far better case than we have done that these wars are not counterproductive, that they will not go on forever, and that we have figured out how and when to end them. There will be no so-called "long war" fought with other peoples' money. The financial crisis therefore adds urgency to the need to rethink our approach to our relations with the Islamic world and our purposes in spilling so much blood in Muslim societies.

We have done a great deal of damage to our international political, military, and now our economic prestige and reputation for financial probity. In foreign relations, the next president will start from well behind. He will need a strong mind, firm convictions, charm, and a silver tongue to regain foreign respect for our country and trust in its institutions, including its currency. To recover economically, we need help. To get it, we must have the confidence of investors in China and the Arab world as well as in Europe, Japan, and...

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