“The hearing will come to order.”
Senator Geoff Prescott struck his gavel a second time and the news reporters and photographers spread into streams moving from the front of the room and circling toward their seats. He then looked at Milton Abrams.
“I apologize for the delay due to the archaic nature of the Senate’s roll call procedures, Mr. Chairman.” Prescott smiled, a smile that Abrams assumed he was not alone in recognizing communicated the opposite of the sincerity that Prescott intended. Abrams suspected that Prescott enjoyed as much as the others hearing his name called in the Senate chamber. “It’s not just the economy that needs modernizing.”
Prescott looked over the notes lying before him. “Where were we?” An aide stepped forward and then pointed down. “Ah, yes. I see. We’d just gotten to the issue of inflation and the theory under which your predecessor operated, in effect, claiming that price stability requires less than a hundred percent employment.”
Abrams nodded.
“But let’s clarify our terms,” Abrams said. “Until I was confirmed as Federal Reserve chairman, the phrase ‘full employment’ meant up to seven percent unemployment, and price stability meant inflation at a rate that didn’t threaten what was called full employment. What I did was to simply—”
“You made your ideas clear at your confirmation hearing and we all know you executed it.” Prescott glanced at his watch. “Can’t you advance the ball here a little bit?”
Abrams thought of Viz McBride sitting in the back row of the hearing room and remembered the size of his hand when he’d picked up a water glass in the kitchen. It was so large that his fingers met the base of his palm—and Abrams imagined it wrapped around Prescott’s throat.
“The point I intended to make, Senator, was that the figures that we’ve relied on for the last four administrations have underestimated inflation by at least fifty percent, perhaps more, and the same is true of unemployment.”
Abrams pointed his finger over his shoulder at the business press.
“The markets need not panic,” Abrams said. “Indeed, anyone who trades in the next few hours based on those comments is a fool. The world is what it is. The economy is what it is. None of that has changed in the last thirty seconds.”
Abrams noticed that three of the twelve senators smiled, seven frowned, and two were looking at their BlackBerrys and had missed the exchange altogether.
Prescott’s face flushed.
“You’re saying that the last four presidents have been
lying to the American people about the true rates of inflation and unemployment?”
Abrams ground his right knuckles into his left palm under the table. He wanted to answer by saying that they couldn’t have been lying because none of them understood enough about the economy to know what the truth really was. They lied no more than his brother-in-law’s myna bird did when it proclaimed to anyone entering the living room that the sky was falling.
“No, Senator. I think that they were misled by certain conceptual issues of measurement and definition.”
“And the point is?”
“That we need to be realistic about inflation, about real inflation. The world is watching. The fact that we lie to ourselves doesn’t mean that foreign governments on whom we rely to buy our debt aren’t telling themselves the truth.” Abrams raised his finger. “The only reason—the only reason—that the U.S. bond market hasn’t collapsed in recent years is that foreign purchasers of our debt—based on their own, independent calculations and based on readily available data—still believe that despite the true rates of inflation and unemployment we’re still a good risk.”
Abrams let them absorb that thought, then said, “In addition to inflation as normally defined, there is also what I call functional inflation. Eighteen percent interest on credit card debt and the decline in real wages during the last thirty-five years, both have the same effect as inflation, but it has not been recognized as such.”
“Say our real inflation rate is seven percent,” Prescott said, “say our real unemployment rate is fourteen percent—I’m not conceding that it is—but just say. What does that mean for our bond markets?”
“It means that if there’s a spike in worldwide commodity prices, for example, for tin, copper, and platinum, inflation will skyrocket. We won’t be able to pay our debts and the usual buyers of our treasury bonds will back away.”
“To say nothing of what would happen if oil prices increase again.”
Abrams nodded.
“And if that happens all at once?”
Abrams heard the rustle of the business reporters leaning forward in their seats to make sure that they got the quote right.
“The economy won’t recover for a generation.”
Abrams thought for a moment, then decided to put the problem in the kind of concrete terms the public would understand.
“Let’s put it this way. To the holders of treasury bonds alone, we owe an amount equal to the gross domestic product of the U.S. for a single year. That is, all of the goods and services produced for consumption inside of the country—and there are a couple of ways at looking at how to pay it off.”
Abrams spread his hands.
“Just for purposes of perspective, here’s a hypothetical. Imagine paying it off in one year. Every penny that anyone earns goes to pay the debt. That means that no one in the U.S. eats anything, burns any fuel, drives anywhere, buys anything.”
Abrams watched a smirk appear on Prescott’s face. Apparently the only hypotheticals he appreciated were the ones he himself offered.
“Imagine on the other hand that we pay it off in ten years,” Abrams continued. “In that case, American lives
will be limited to three things. Working, eating, and sleeping. And every penny that isn’t needed to pay for housing or for food, won’t go into movie tickers or cell phone bills or iPods, but will travel offshore to pay off the debt.”
Abrams watched the senators swallow and reach for their collars and dress necklines as if the truth was suffocating them.
Senator Prescott’s face flushed again.
“That’s science fiction, Mr. Chairman. Not economics. You can take any scenario and stretch it and expand it and turn it into a nightmare.”
Prescott’s pounding finger thunked against the oak dais, reverberating through the microphone in time with his sentences like a creeping monster.
“And I see no benefit in playing out in this hearing a fantasy of zombies and the world coming to an end.”