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Glassman is a resident fellow at the American Enterprise Institute, a Washington public policy think tank, where he specializes in issues involving economics, technology and financial markets. He is also host of TechCentralStation.com, a public affairs Web site that concentrates on matters of technology and public policy.

He writes a syndicated financial column for The Washington Post every Sunday. He is also the author of "The Secret Code of the Superior Investor" (Crown, 2002).

Below is the transcript.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Washington, D.C.: What is the worst case scenario for the economy if we invade Iraq?

James K. Glassman: Good afternoon, everyone!
Let me take the gloomiest question first. If we invade Iraq, as I now expect, the worst case would clearly be some kind of germ or chemical warfare attack on our troops; the loss of thousnds of lives; strong US retaliation; more and more civilian casualties and generalized chaos for months. There might also be attacks by Iraq and its supporters on this country. The economic consequences of being bogged down in Iraq would be awful. Almost certainly we would have serious inflation on top of a slowdown in consumer spending and business investment. We would get out of it, of course, but I would see two years or so of stagflation. Bad news.

Cologne, Germany: Do you agree with me that the division of Europe into "old and new" is a big advantage for the US, if you think of Euro Zone as the rival of the US economy? If there is plan behind it, the Bush administration seems to be very clever.

James K. Glassman: The US has nothing to do with it. Europe was already dividing into old and new before Rumsfeld said anything about it. France, Germany, and Belgium comprise roughly all there is of old Europe. The East, Italy, Spain, Portugal and the UK constitute new Europe -- with Scandinavia somewhere in between, but mainly new. France and Germany are in a sad situation economically, not to mention strategically. France is trying to keep its hegemony, but it aint going to work.

Northern Virginia: Granted, current Federal budget deficits are not that high by historical standards (although they are at all time record levels).

Nevertheless, don't you think further tax cuts would be fiscally irresponsible, especially since the cost of war and reconstruction have not been taken into account in current budget estimates?

Increased Federal borrowing will only serve to drive up interest rates; IMHO, cash out and lower mortgage payments as a result of refinancing is about the only thing keeping the economy afloat.

State and local government furloughs and layoffs certainly aren't helping confidence or the economy either.

With higher energy costs and war uncertainties, are we looking at a double dip recession?

James K. Glassman: My favorite economic website, www.dismalscientist.com, now says there is a 27 percent chance (how do that get this stuff!) of a double dip recession. I think it's closer to zero unless the Iraq expedition is a disaster.
On tax cuts: The cuts proposed by the president are very minor. Think of it this way: US GDP (output of goods and services) will total $140 trillion over the next 10 years. The cut is less than $700 billion over that period, so we're talking about 1/2 of 1 percent. The effect on interest rates will be tiny, if anything at all. And don't forget interest rates are at the their lowest levels in 40 years! I have no problem in the least trading even a full percentage point in higher rates for the kind of extra economic growth that the tax cuts will bring.
I have to say, though, that I am not an ideologue on this point. There are other things that would help the economy even more: tort reform is one and winning the war on terrorism is another. But ending the double taxation of dividends, especially, is an idea whose time has come. It was be a huge benefit to investors.

Annandale, Va.: I feel cheated. We were promised that electing a Republican Congress would make everything better -- or at least that getting rid of that dolt O'Neill would. Yet, the Dow was still down in January -- traditionally its best month. It's not that I blame Karl Rove (okay, I do, but I recognize that that is my own personal issue), it's just that we appear to be in unchartered waters (the Dow has NEVER had three straight losing years) and no improvement is in sight. Please tell me again, how do we get to Dow 36,000?

James K. Glassman: First, I think you are wrong about the Dow not having three straight losing years ever before. I tend to look at the S&P 500 for history (it's almost the same as the Dow in long-term performance), and the S&P dropped 3 yrs from 1939 to 1941 (also 1929-31). As for Republicans making things better: Well, how do you know whether they would have been even worse if Democrats were elected?
Look. The reasons for the declining stock market are pretty clear: a mistake by the Fed in keeping rates too high in 2000, the misdirection of capital in the late 1990s to a sector that suffered from over-supply (and those falling prices and non-existent prices: call it a bubble if you want) and, probably more than anything else, the terrorist attacks of Sept. 11. I also think that the recession, mild as it was, was particularly damaging to investors since they hadn't seen one in 10 years; ditto, the bear market.
As for Dow 36,000: the title of the book I wrote in 1999 with economist Kevin Hassett. I still subscribe to its theory, which is that stocks are a far better buy than bonds for long-term investors because they both return more and have risk levels about the same. We warned in the book that stocks would not go straight up and particularly flagged national security dangers and the impact of a recession after such a long period of prosperity. Hang in there.

Vienna, Va.: What is your take on the cost of war to exceed $95 billion in today's Post article? First, how can we afford it and second how is that going to strap the already bad economy?

James K. Glassman: Put the money in perspective. This is a huge economy. $95 billion is less than 1 percent of US output (our GDP is now about $10.5 trillion). Or, put another way, it is about $900 for every US family. Is that too much to rid the world of a terrible dictator who has invaded two of his neighbors, caused about $100 billion in environmental damage alone in the last war, viciously oppressed his people and threatens the United States? I think not. In fact, I think it is pretty cheap. We spent $2.9 trillion (in today's money, which back then was far more than one year's GDP) to win World War II. This is not even in the same ballpark. I think that one reason to accumulate wealth is to spend it on important, moral causes, and in my opinion, getting rid of Saddam Hussein qualifies.

Baton Rouge, La.: Is there room for a moral component in a discussion of investing in time of war?

I don't usually take the notion of "socially responsible investing" too seriously, at least as it is practiced. And I don't really know what I would hope people would do. Still, even if this war turns out to be quick and successful in every way, it's going to involve the death of a lot of human beings.

This question is a consequence of my seeing some of the "experts" on financial news shows cheerfully prattling on about how to maximize returns based on a war. I have to say, it turned my stomach. (And please don't assume I'm a knee-jerk anti-war, anti- capitalism type. I'm not.)

Comments?

James K. Glassman: yes, yes, yes. Morality counts, but morality is an individual thing. I respect investors who say that they will not put their money into, say, companies that make weapons -- though I strongly disagree with them. I think that weapons used in a just cause are exceptionally moral. I also agree with you that a discussion of the economic effects of war is, in one sense, unseemly. If we go to war, it will not be to boost the stock market or even to get our hands on more oil. It will be to get rid of a terrible, threatening regime, to free an oppressed people and to set the stage for democracy in the Middle East.
Still, Americans worry about the economic consequences of the war, and it is fair game for discussion, which is what we're doing here.

Washington, D.C.: Many prognosticators say that war with Iraq will spur a rally in the markets and that investors are just looking for some certainity at this point. How long do you think such a rally will last? How much will it boost the markets and will it help heal the ailing economy?

James K. Glassman: A few weeks ago, I wrote a column on this subject, but, to be brief: the impending war has caused a huge amount of uncertainty (as opposed to risk), and many investors (both in the stock market and in business in general) have decided to take their chips off the table. With some sort of resolution, I expect those investors will come back to stocks. If the war goes well, they will come back with a vengeance. Of course, this insight is not original. It may, in fact, ALREADY be built into stock prices. I hope not, and frankly I think that the market is not completely convinced that war will happen and that it will work out fine. With that as my assumption, then, I would expect a sharp rally, perhaps even before a war starts, but at a time when it is clear that it will. Will the rally last? That depends on the revival of the economy itself. If the war goes well, the economy should bounce back pretty quickly. But no guarantees.

Southern Maryland: I am what you stock market people call "an unsophisticated investor." I only put money into my 401K for retirement. Since October, 2001 I've lost 1/3 of my money. Each month statements come with $5 to $6,000 lost each month. At that rate I'll be selling pencils on the street when I retire, hopefully, in 6 years. I'm 56 now; how much should I have in the 401K for a comfortable retirement?

James K. Glassman: Everyone has a different personal situation, so I hesitate to give advice on retirement investing on an individual basis. However, I can say this: If you intend to retire in six years, then you should not have all -- or even a large portion -- of your portfolio in stocks. The reason is that the stock market, as you have learned, is very volatile in the short term. Between 1926 and 2002, for example, there have been 73 separate overlapping five-year periods. During 8 of those periods (or more than 10 percent of the time), stocks have lost money. Put another way, you need time to make up your losses, and if you are retiring in six years, you don't have much time. I myself am 56, though I don't plan to retire for quite a while. Still, I have about 70 percent of my asssets in stocks. For you, I would guess that 50 percent is about right. But, again, each situation is different.

Arlington, Va.: Why do supporters of deficits always look at the deficit (annual and total) in terms of GDP?

The Fed gov revenue is about 2 trillion. The deficit is 6.5 trillion. More than three times revnue. The annual deficit will be 300 - 500 billion. 10-15% of revenue.

I.E. My salary is 100K, my mortgage is 300K. I am borrowing on credit cards at an annual rate of 10-15K ....

That seems like a more realistic analysis ... who cares what % of GDP the deficit is ...

James K. Glassman: That's a good way to look at it, but let's use the right numbers. First of all, the deficit is the difference between what the government takes in and what it spends. The DEBT is the accumulated deficit. There are different figures for the debt. The best one to use is debt owed to the public, which is about $3.5 trillion. But let's use your figure, though I do not know where it comes from.
Let's say debt is $6.5 trillion. Now GDP is the equivalent of INCOME in this metaphor since GDP is output. And GDP is $10.5 trillion. So imagine a person who makes $105,000 a year in income and has a home mortgage (in fact, ALL debt) totalling $65,000. Is that too much of a burden. Of course not.
Truth is, however, that this metaphor exaggerates the importance of the national debt since nearly all the money is owed to ourselves (that is, one American to another). It is more like a husband who owes a wife money.
I like to think of the fiscal situation this way. Government needs to spend money. It has to get the money somewhere, and it has two choices and only two choices: It can extract it from citizens in the form of taxes or extract it from citizens in the form of debt. Either approach has roughly the same depressive effect on the economy.

Washington, D.C.: Say you are 30, with a job that depends on a healthy economy, about to buy a house, and investing heavily in your 401k, but not much else....advise?

James K. Glassman: Tax advantages to home ownership are so great that I advise people to start saving early to buy a house. Basically you should be on three tracks: put some money away in your 401(k) for retirement (long term), put some away in short-term bonds for the house (medium term), and keep cash around for the emergency of losing your job, God forbid (short term).

Washington, D.C.: Once the war is underway, do you think businesses will start putting money back into investment capital, research and development?

James K. Glassman: Yes, I do think that businesses will start to invest once the war is underway, as long as the US is doing well and it appears victory is in sight.

Washington, D.C.: Aren't there cheaper ways to make Iraq comply? I mean, really, $95 billion sounds really high. How many cruise missiles could we send for just a billion?

This war is an awful investment.

James K. Glassman: Forget the money. It's the cost in human lives, both ours and theirs, that is more important to worry about. There was certainly a better way to get Iraq to comply but, unfortunately, the French and the Germans blew it. I hold them responsible for this war (if there is a war). The way to get Saddam to give up his weapons was to have ALL responsible nations forming a united front against him, applying enormous pressure, making it clear that the consequences would be terrible for him if he did not back down. Under those circumstances, I think he would have backed down. But Chirac has now led us to the brink of war. There is still a chance for peace, but that Chirac will go down in history as another Chamberlain.

Vienna, Va.: No offense, but aren't you the guy who once said the stock market would level off at 35,000. I believe you wrote a piece saying this during the Clinton years. I might even have the piece out of the newspaper at home. Why are you more confident of what you are predicting now?

James K. Glassman: Interesting that you should remember the piece about the Dow going to 35,000. That was in March 1998, when the Dow was about 8500. You may have missed this but I wrote a bestseller the next year saying that it would go to 36,000 (slight revisionism). I still believe that, and I think I will be proven correct. I have written on the subject several times and don't have the space here, but go back to a column I did in the Post about a year ago or see an earlier answer.

Laurel, Md.: If you could snap your fingers and turn the forthcoming personal income tax elimination for dividends into a corporate tax elimination of dividends would you do it? And would the corporate tax elimination cost more?

James K. Glassman: If I understand the question, you are saying, why not allow companies to deduct their dividend payments to stock investors as they now deduct their interest payments to lenders? The investors would pay tax at the personal level but, in effect, any profits the company uses for dividends would not be taxed at the corporate level.
This idea has two problems. First, the administration wants to tax dividends once, not zero times. So, if a company sends a dividend check to someone who has an IRA or to a pension fund, etc., then the dividend is not taxed at all. Second, it seems to me that if dividends are tax-free to individuals, then investors will push companies very, very hard to pay them. That would be one of the best outcomes of the president's plan. Too many companies hoard and misuse cash.
Anyway, not to put too fine a point on it. Either way is better than what we have now, by several thousand miles.

Baltimore, Md.: Your quote: "It has to get the money somewhere, and it has two choices and only two choices: It can extract it from citizens in the form of taxes or extract it from citizens in the form of debt. Either approach has roughly the same depressive effect on the economy."

The difference: Philosophical. One says pay as you go; the latter (yours) says, "party on and stick it to the next generation."

I'm the next generation. I say, will you please grow up and be responsible. Geez, you boomers are relentlessly selfish.

James K. Glassman: This is an important question and it's based on a misconception. We hear from politicians all the time how terrible it is to pass on our debts to other generations. But almost every economist will tell you otherwise--for a simple reason. Future generations, if we can judge from history, will be richer than we are. That's the way it has worked in this country for 200 years. Think of this: If incomes grow 5 percent annually and inflation is 3 percent, then real growth is 2 percent. Over 35 years, real incomes double. That's a huge jump. We today provide the infrastructure, the investment base, the capital for our children (which is fine by me), but our children should pick up the bill for some of it. The real question is how wisely we deploy our capital.

Somewhere, USA: Retirement Planner: That's terrible advice for someone planning to retire in 6 years. Put everything in stocks? Could you imagine if you had put everything in stocks in 2000? Why don't you ask George Gilder how he feels after telling everyone he put all of his parents' retirement savings in Global Crossing?

Better retirement advice: take all of your money, go to Vegas, and put it all on black.

James K. Glassman: I didn't say to put everything in stocks!!!
I said to put about half in stocks and half in bonds. I don't have the transcript but that is certainly what I meant to say. I believe that someone who is in his or her 30s or 40s can put all or nearly all retirement assets into stocks but not someone that age. I cited myself as an example. I am 56 and have about 70 percent of my retirement assets in stocks, but I don't plan to retire for another 15 years or so. In six years: 50 percent or even less.

Somewhere, USA: Gee, this is helpful. I'd been on the fence about war with Iraq -- sure, get rid of the guy, I suppose, though I don't buy the president's public rationale.

But if the administration thinks it'll cost me $900, it'll really cost me more like $4,000. Frankly, I'd spend that to see Predators wipe out real terrorist who've sworn us as enemies, but not a 2-bit has-been like Hussein.

James K. Glassman: If it were only that easy!
I agree with you that Americans want to do whatever it takes to rid this country of terrorism and, as much as I admire the president in most ways, I think he is dead wrong to skimp on money for homeland defense.

College park, Md.:
James Glassman writes:
put some away in short-term bonds for the house (medium term)

For someone who has about $30-40K to allocate for the medium term, do you recommend bond funds? In general, there is much discussion about companies and stocks on talk shows and the internet, and ive found ive been able to learn alot about investing in individual stocks. But not so much about bonds. Any books/web sites/magazines which would be beneficial to someone interested in investing in bonds?
thanks.

James K. Glassman: I am writing about bonds for Sunday, so tune in. But I agree that there is very little about bonds on the Web, and most people really don't understand them. I am generally wary of bond funds, but there are some very good and I will cite a few.

Baton Rouge, La.: "Forget the money. It's the cost in human lives, both ours and theirs, that is more important to worry about."

Thank you for the above comment.

James K. Glassman: and thank YOU for your question.

Oakland, Calif.: I have always been interested in your investment advice and have bought Intel, Ford and US Tobacco based partly on your advice. Your investment advice has always been simple-minded but sensible. Your foreign policy observations appear simple-minded but vapid. Should you stick to public discussions in areas that you have greater familiarity?

James K. Glassman: Gee, I should probably keep my mouth shut on foreign policy. I completely agree that I am not an expert in the subject, but I hang around a lot of people who are. But please don't think that I present myself as some kind of guru of military strategy. People ask; I answer. It is a critical time, and we should all join the debate.

College Park, Md.:
I heard on Kudlow/Cramer that retail stocks were a good industry to be in during wartime. He cited Target as a good company to be involved in because of this. He also said that in '91 he had great returns using this strategy. Do you agree with this point? I guess the idea is that we will continue to buy everyday type of stuff, but i dont necessarily think this will make that stock take off. Is this considered a defensive position, as in the cliche "flight to safety"?

James K. Glassman: It's true that consumer stocks, including retail, did well in 1991, but one reason was that they were very depressed before hand. Today, retail stocks are a mixed bag. I would rather not try to pick sectoral winners and losers here, but would try to stay invested across the board -- and in Asia, too, as I said two weeks ago.

Washington DC: Everyone's making guesses about the impact of war in Iraq on mortgage rates. Some reason that stocks will be dpressed unil there is a resolution, and therefore mortgage rates will go down. Some believe the opposite. What do you think?

James K. Glassman: My view on mortage rates--and interest rates in general--is that, if the war is successfully prosecuted, they will rise and perhaps rise sharply. Rates are depressed today for several reasons: the Fed wants to keep the money flowing, investors are scared and so seek safety in bonds (thus raising the prices and lowering the rates), and because there is a lack of demand for lending in a soft economy. All of those circumstances will change if we attack and succeed. Rates, however, could fall further if we are unsuccessful or if this period of waiting and uncertainty drags on.

Laurel, Md.: My mutual fund company's treasury security funds have produced some double-digit returns in recent years. But the yield on U.S. debt has not been close to 10% for some time; how is that possible?

James K. Glassman: Final question:
Again, I urge you to read my column this Sunday since bonds are a difficult subject.
But it works like this--with bonds, as with stocks, you make money two ways: from the interest that the bonds pay (like dividends) and from the increase (or decrease) inthe bond's price. This second point is hard to understand, but if you own a 10-year bond that carries a coupon (rate) of 6 percent and the next year rates fall and new bonds of the same sort are paying only 4 percent, then your bond becomes more valuable. You can sell it for a profit. A bond fund, on a daily basis, adjusts its value to the movements of prices in the bond market. So at the end of the year, in your own case, you might have made 3 percent from interest and another 7 percent from price increases, or 10 percent in all. (Of course you don't get to take advantage of the price increses unless you sell the bond fund.)
Thanks to all!!!--Jim

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