U.S. Does Need Infrastructure; But Trump Badly Needs Hamilton

Far more than his few brief references to restoring the Glass-Steagall Act, Donald Trump filled entire interviews during his campaign, as well as much of his victory speech, with his intention to build “new infrastructure” for the U.S. economy. Trump repeatedly urged the need to invest at least $1 trillion, and asked how to generate this, repeatedly said “I love leverage.” He invoked the current [Wall Street] mantra that “interest rates will never be so low again,” meaning that now is the time for the United States to take on a great deal of new debt to build new “airports, bridges, highways, high-speed trains…,” as he said in a September CNBC interview.

On Trump’s behalf, investor and vulture capitalist Wilbur Ross, from August on, filled out a plan for a “$1 trillion national infrastructure bank,” which is extraordinarily leveraged, and violates the principles of successful national credit and banking of Treasury Secretary Alexander Hamilton. The Trump/Ross plan is to use tax credits to induce private investment funds to capitalize the bank with $167 billion in equity; the tax credits are to equal 82% of that, so this is a “tax revenue expenditure” by the Treasury of about $140 billion up front in forming the bank. Then, those investors (the bank’s shareholders) are to borrow five times that much by issuing Treasury-guaranteed bonds, to be bought primarily by commercial banks. The interest rate for borrowing is wrongly assumed to be below 4%.

The plan substitutes mixed-management chaos for the principles of foreseeing the advanced new infrastructure the nation needs to expand production and increase productivity. It certainly “loves leverage,” and the managers of this bank would be grabbing greedily for short-term user-fee revenue to pay their massive debt service; this dooms the principle of building at the frontiers of science and technology, as President Franklin Roosevelt did.

Furthermore, the commercial banks expected to buy the bonds, unless and until reorganized under Glass-Steagall, will be in the speculative securities markets striving for high returns instead.

By contrast, Hamilton’s Bank of the United States was formed with $8 million in restructured colonial debt as equity capital; $2 million in new U.S. Treasury debt as equity capital; and $5 million in borrowed capital from a foreign loan. Thus it was leveraged less than 2:1, its debt was all long-term over a full production cycle; it paid a relatively high rate of interest rather than futilely trying to “borrow cheap”; and “the means for extinguishing the debt” over the long term were provided in the form of new taxes.

More important, Hamilton’s “public credit” plan had the overarching purpose of creating an advanced manufacturing nation, a purpose Hamilton was personally involved in and understood fully. It was not simply an “infrastructure bank.”

Trump may decide to have the Treasury simply borrow $500 billion/$1 trillion instead. But the so-called “Trump rally” in stock markets is already proving the fantasy of “record low interest rates for infrastructure.” While stock markets have gone up by $1.1 trillion over three days since Election Day, bond (credit) markets have lost $1.2 trillion in the same three days, as long-term interest rates have shot up so dramatically as to pose new dangers for weaker big banks. This is because of a Trump Administration’s known plans for large amounts of new debt for infrastructure and national defense. Federal Reserve bankers have been publicly warning that they themselves would aggressively push those rates up, as soon as any such large spending/borrowing plan arose.

The Hamiltonian solution lies on the New Silk Road. The United States’ “new infrastructure” must be built by a Hamiltonian bank, in credit collaboration with China’s national credit institutions. In a CNN commentary today (“Why Trump Should Work with China”), National University of Singapore Dean Kishore Mahbubani writes, “America needs a strong economic partner to achieve this. And the current infrastructure-building superpower is China…. Given the current condition of the global economy, a massive infrastructure collaboration project between America and China would be like an economic dream made in heaven. Both the American and Chinese peoples would benefit.”