Bernanke and Geithner - A Magical Conspiracy to Save the US
(which unfortunately isn't working)
|The US is again trying to force the world to bail it out of a self-inflicted economic mess. This time, with noticeably less success.|
Today, the situation is the same - excessive consumption fuelled by private and public debt. The US has way too much of both. The interest payment on public debt for this fiscal year is more than 400 billion, more than the entire gross domestic product of all other countries in the world combined (excepting the top 20). And there is no easy way now for the US to reduce its debt. If it cuts taxes to stimulate the economy, that will only increase the budget deficit and raise the borrowing requirement further. If the US reduces government spending, that will cause higher unemployment, slower economic growth and further downward pressure on the housing market.|
The latest US solution - The Magic Harry Potter way to get yourself out of debt and moderate your economic troubles - is called "Quantitative Easing" (QE) - which is simply a euphemistic expression for printing money. But for the US, QE is not only about printing money. It's about inflating itself out of debt, reflating the banks, and forcing all the painful adjustments for its own self-inflicted economic misery onto the rest of the world.
The US raises money and goes heavily into debt by selling bonds on which it must pay huge interest. For QE, the Fed simply prints money and buys back all those bonds - and then effectively tears them up. Voila - no more debt, no more interest to pay. The cash goes into the banking system and the banks are more stable.
The problem is that when a government prints money, it debases the currency and that means inflation - evidenced by rising food and commodity prices, a booming stock market and normally inflated house and property prices. If the Fed prints enough money to magically increase the country's money supply by 10%, you will very soon have 10% inflation. And that means the money is actually debased - reduced in value - by that same 10%.
It's a great short-term solution for a short-term government, and the stock market likes it because it seems that values are increasing, but it badly harms those who save cash or who own any fixed-income investments. It also hurts people on fixed incomes - like pensioners and others who cannot get a pay increase. And of course, it really hurts creditors like China who own 2 trillion or so in US-denominated debt. In fact that's one of the purposes of printing cash.
It also increases the excess liquidity in the US with no good place to invest it and, with zero interest rates, American banks borrow the money and invest it in countries where they think the currencies might appreciate - China, Brazil, Thailand, the Philippines, Europe, Japan. And that does two things - it forces up the exchange value of those other currencies, as Japan, Brazil and many others have recently discovered. And since that hot money doesn't want to sit in a bank earning nothing, it usually goes into the local stock markets and into real estate - creating huge bubbles that will one day burst and help to destroy those same economies.
This US policy of money that comes out of nowhere doesn't help the American economy or the people, but rather the global US investors who flood many countries with surplus US investor cash and who push commodity prices to new record highs. That includes not only other currencies, but the all-important markets trading in foodstuffs, in food and other commodities like cocoa, and in metals and minerals. The markets for many of these products have become chaotic and prices are at all-time highs, disrupting the natural flow of trade and manufacturing. But the Fed just won’t give up, and continues to pump more money into the banking and financial systems.
Forcing up the value of foreign currencies by the inflow of hot American money is the US way of devaluing its currency on the world markets and inflating itself out of debt by passing the pain to the rest of the world. The US has done this same thing repeatedly over the years, while accusing countries like China of keeping their currencies too low. Purely beggar thy neighbor while the pot is calling the kettle black.
And that doesn't matter at all to the US because it doesn't affect them. "It's our currency, but your problem". "It's my problem, but you must fix it". "I'm sick, but you must take the medicine". In fact, the US has always tried to bully the rest of the world (as with Japan and Germany on the Plaza Accord) to commit economic suicide so that the US could avoid the pain of economic readjustments.
It's important to understand that this business of creating free money is not done as a domestic adjustment to the US economy, but rather to force the rest of the world to make the adjustments the US refuses to make. If the US has a trade deficit, it is incumbent upon the Americans to take steps to reduce it, as would any other country do if it were spending too much. But instead the US tries to bully China, Germany and others to reduce their surpluses.
All this extra cash chasing the same goods will inevitably be inflationary, not only with respect to consumer prices but also will create a speculative bond market and asset price bubbles, and there may be no easy way to reverse the process without precipitating another devastating credit squeeze and economic collapse. Printing money will continue to weaken the dollar, since all that liquidity searches for yields outside the US. That may help the US trade deficit but may kill emerging economies which are already struggling with overvalued currencies, deindustrialisation and unemployment.
The US has been vocal in its criticism of China’s policy of maintaining a weak renminbi to keep its exports competitive, blaming this for the ballooning US trade deficit. But QE2 is no different from a devaluation, and the rest of the world, and emerging economies in particular, are being forced to help bail out the US economy yet one more time.
It is unfortunate that so much of the Western Press is owned by Right-Wing media barons whose channels include only a one-sided view (the US view) of the entire picture. In a recent article, The Economist wrote: "Higher share prices have raised household wealth by some $1.4 trillion, which will spur some spending. And the lower dollar should help trade. ..... Share prices are up by 14% .."
Well of course share prices are up. That's the first thing that happens when a government embarks on a policy of deliberately debasing its own currency. Investors are just pricing in the short-term inflation that will result. But to then suggest that 'household wealth has risen by 1.4 trillion' is nonsense. Little if any of that 'wealth' is actually owned by households - more likely by Goldman Sachs - and in any case is just maintaining value in a time of inflation.
It said further that "Other countries complain that QE is merely bringing them overvalued currencies and bubbly asset markets by pushing investors to seek higher returns elsewhere. But that may be unavoidable given their divergent growth paths."
The article's statement is true enough, but there is no line of reasoning to take one to the conclusion about 'divergent growth paths'. Certainly the hot money is already pushing up currencies and real estate and stock prices in many countries, and for sure it's 'unavoidable' since this is one of the features of the policy - forcing other countries to make the economic adjustments the US refuses to make. But to attribute this to 'divergent growth paths' is just willful blindness, and a pathethic apology for savage US economic mercantilism. The overvalued currencies and asset bubbles are a deliberate effect of the US policy, in no way related to the victim countries or their 'growth paths'. To say otherwise is flatly dishonest.
Finally, the Economist announced, "You can declare QE to be a success already," Yeah, no kidding. Our currency has already fallen by 10%, 15%, 30% against other currencies, we're already creating asset bubbles in many other countries, and we've bought back and cancelled 3 trillion of our own debt. Good week's work.
Treasury Secretary Geithner defensively told other finance ministers that the United States was not trying to devalue the dollar, saying American economic policy was aimed at shoring up the recovery, and not an attempt to deflate the dollar to help exports. While merrily using the US dollar as a tool to gain competitive advantage, Mr. Geithner said, “We will never use our currency as a tool to gain competitive advantage,” And while engaging in a policy that could only result in a much weakened US dollar, Mr. Geithner blithely told everyone the United States was committed to a strong dollar.
In Mr. Geithner's view, these damaging capital inflows into emerging markets were "a vote of confidence in their fast-growing economies", and that “I think that confidence is justified, and something that should be welcomed. It does come with pressures, and they’re going to have to manage those pressures.”
What kind of blindness lets the US government talk about "the benefits that will flow from stronger U.S. growth,” and claim that “The problem is the policies of other countries are not appropriate...." For sure this much is clear: there are huge benefits (to the US) to inflate themselves out of debt. But then, "I'm trying to destroy your economies in an attempt to rebuild my own, and all you little colonies are resisting. How "inappropriate" of you ......
Fortunately, the world doesn't agree, and a growing divide was evident from the increasingly sharp criticism at a gathering of finance ministers from the 21-member Asia-Pacific Economic Cooperation forum.
So there is one bit of good news in all the turmoil. This is the first time that the rest of the world is refusing to permit the US to bully them into accepting the pain for US sins. Geithner tried to get all countries to gang up on China and Germany, but instead those same countries have all been ganging up on the US and refusing to be bullied into playing that loser's game. This is truly a first, maybe the beginning of the end of the US economic hegemony, and not before time.
Countries like China, Brazil and Germany have warned that the unilateral move devalues an already-weak dollar, and could set off a destabilizing flow of funds into emerging economies that will inflate their own currencies and make their exports more expensive. The German finance minister called US monetary policy “clueless,” and China said American officials "owe the world an explanation" of their decision so as to calm international anxiety.
Raghuram G. Rajan, a former chief economist for the International Monetary Fund, said, “Essentially, what the Fed is doing is trying to get U.S. growth up on the backs of other countries’ growth,” said . “(The US is) forcing them to adjust by making their exports to the U.S. more expensive.” Mr. Rajan said the Fed could not ignore the overseas impact of its policies.
The financial press in Germany has been especially vocal. "The most recent step taken by the Federal Reserve is the continuation of a series of undesirable developments in the US," said the business daily Handelsblatt. "Instead of finally facing up to the excessive debt problem, accepting the uncomfortable truths and introducing painful reforms in the country, debt-financed stimulus programs remain the only strategy that Bernanke & Co. seem able to come up with."
German Finance Minister Wolfgang Schäuble has sharply criticized the US Federal Reserve's decision to pump a further $800 billion into the country's ailing economy. He says the move could create problems for the global economy. "They have already pumped an endless amount of money into the economy via taking on extremely high public debt and through a Fed policy that has already pumped a lot of money into the economy. The results are horrendous." Schäuble said that the move by Fed Chair Ben Bernanke would "create additional problems for the world."
In fact, the US is violating a pledge that all industrialized countries agreed to at the last G-20 summit in Toronto in June - to refrain from doing precisely what the US is now doing, and possibly precipitating a currency war in the process.
Increasing the money supply has opened the United States to the charge that it is doing what it has long accused China of doing: keeping its currency artificially weak, and helping to create dangerous imbalances in the world economy. Many countries with successful export economies have threatened to take measures to curb the flood of money that has pushed up currency values and raised the specter of asset bubbles.
In a recent speech, Richard Fisher, the president of the Federal Reserve Bank of Dallas, reported a conversation he had with a bond trader. Asked how he viewed the US, the trader’s reply was that it was “the best-looking horse in the glue factory”. There is no question that the US economic model is broken; housing is no longer a source of rising wealth; consumers have few savings and lots of debt; unemployment is very high; the banking sector is impaired and the government has dug a deep fiscal hole in an attempt to keep the economy moving ahead.
Unfortunately, US policy-makers have few options without undertaking a comprehensive overhaul of the economy - and nobody, least of all the new government, has the stomach (or, apparently, the understanding) for that.
It really is time to replace the US dollar as the reserve currency, and make the Americans pay in full for their own sins. There is no easy replacement at the moment, but the desperate need is more than obvious.
The US constantly and blindly lays the blame for all its problems on someone else. If we're buying too much, it's your fault for selling. If the US is uncompetitive, that can only be because everyone else is cheating. If US export prices are too high, then other countries must be 'subsidising' their exports.
The US enters every game, including trade agreements like the WTO and NAFTA, by forcing the other participants to agree to rules designed to benefit only the US. When other countries succeed in spite of this, the US immediately whines that it doesn't have a 'level playing field', cries 'foul' and tries to bully everyone into accepting a change in the rules.
And for several years now the US, and (especially) writers like Paul Krugman - the NYT's resident "Renminbi Rambo" have had some insane, pathological fixation on the Chinese RMB, claiming it to be the source of all US troubles. It is incredible, astonishing, that such blindness could continue. The US appears to be far more interested in obstructing and devastating the economies of competitors (even friendly ones like Germany and Japan) than in facing and fixing its own structural defects.
The US economy today consists of 10% of the population sitting in a dark room creating new high-tech weapons to kill more people faster. Another 40%, mostly bankers, are sitting in other dark rooms making bookkeeping entries and pretending that is the same as real production and real GNP growth. And the remaining 50% are all busy doing each others' dry cleaning.
And Americans wonder why they have a trade deficit. It's simple, really. They don't make anything anymore, at least nothing any other country wants to buy. China is irrelevant. The RMB is irrelevant. It's true, and they don't have to like it.
Advice to America: You caused your own problems. If you don't want to live with them, then fix them yourselves. The world is rebelling against taking medicine whenever the US is sick, and no countries are now willing to commit economic suicide just to help the US out of one more irresponsible fiasco.
Stop living on credit. Repay those loans. Start saving. Form some capital investment in manufacturing. Rebuild your decaying infrastructure before all your bridges and dams collapse. Invest some money in education. Stop wasting hundreds of billions on useless and unjustifiable wars.
But that seems impossible for the US. At the moment, America is too busy sticking its nose into Asia - threatening to become the "New Leader in the Asia-Pacific Region", too busy to spend the necessary time fixing all the structural defects in its own economy. Americans don't like pain, and they appear unwilling to make personal sacrifices for the good of their country. Optimism would appear to be misplaced.
The US has a huge trade deficit. If that happens to you, it's your responsibility to reduce your deficit by reducing your spending. But instead, the US wants other countries to reduce their surpluses. It's my problem, but I want you to fix it.
What would happen if China had a huge trade deficit? Do you suppose the US would agree to hamstring their economy and produce massive unemployment to reduce their surplus just to "help China"? Of ocurse not. The Americans would say, "If you have a deficit, it's because you aren't competitive and nobody wants to buy what you make. It's your problem; you fix it."
And that is the way it really is.