From the October 18, 2009 Sunday Times (London)
October 18, 2009
by Irwin Stelzer
Americans should be hoping that the Chinese will be kinder to us than we were to the Brits after the second world war. Readers of a certain age will remember, and the younger ones who study history will have learnt, what creditor Uncle Sam did to debtor John Bull when Britain sent John Maynard Keynes to Washington to negotiate a loan from us.
Britain had spent blood and treasure to beat the Nazis, and was hoping for a gift of $3 billion, a credit line of $5 billion, and other generosity. But President Harry Truman, advised by communist spies such as Harry Dexter White, insisted on terms so onerous that the pound was supplanted by the dollar and Britain was, in the view of some, expelled from the first rank of economic powers for decades, until Margaret Thatcher decided that her government’s job was not to manage decline.
Fast forward to today, and the plunging dollar. The Obama administration may mouth support for a strong dollar, but traders know better. In the short run, the White House hopes that a combination of protectionism and a cheap dollar will reduce the flow of imports and increase the volume of exports. That will create jobs “right here in America” as the Wal-Marts of the country switch to domestic suppliers.
In the longer run, the administration knows that it will somehow have to repay the huge debts it is incurring as it attempts to stimulate the economy, throws another trillion at healthcare “reform”, and prepares to lumber the energy economy with billions, or even trillions, in new costs to satisfy the green lobby. Of course, it could take a lesson from Argentina, which defaulted on its debts eight years ago but is now heading back to the market to borrow money from lenders eager to increase their returns and afflicted with memory loss. PT Barnum, the great circus impresario, said, “There’s a sucker born every minute”, although it is not certain that he had international bankers in mind.
Default is unbecoming a great power, especially one that hopes to maintain the dollar as a reserve currency — if indeed American still does. The administration’s critics, among them the Pulitzer prize winning commentator Charles Krauthammer (read his article “Decline is a choice: the new liberalism and the end of American ascendancy” at Weeklystandard.com), believe the president wants to make America less of a hegemon and more of an ordinary nation, much like others in the international organisations of which he is so fond. That effort includes an increase in the American contribution to the International Monetary Fund’s ability to issue drawing rights, which the Russian, Chinese and other regimes hostile to America want to see replace the dollar as the currency in which the world does business.
But even the Chinese do not see the dollar’s role being so diminished in the near-or medium-term future. Instead, they see themselves in the position that America was in vis-à-vis Britain in 1946. America is deeply in debt and digging itself in deeper every day. China, America’s principal creditor, is worried that Obama and his successors will attempt to pay back the more than $1 trillion they owe in wildly depreciated dollars. So it wants to see some plan coming out of the White House that will begin to reduce the deficit and, eventually, the national debt.
No such plan exists. Obama, who styles himself a “transformational president”, intends to keep the spending taps wide open. Unfortunately the old adage that if you owe your banker a huge sum you have him where you want him is not true — not if the Chinese are your creditor. So it should be no surprise that Obama is the first president to refuse to receive the Dalai Lama, the Tibetan leader, despite the urgings of the celebrity luvvies who helped fund the president’s election campaign. Or that America no longer presses the Chinese regime on human rights. All in an effort to keep the Chinese happy, and lending.
Which brings us back to Keynes, Truman and the post-war world. Unless there is a big change in American economic policy, and soon, our version of the great British economist — White House adviser Larry Summers, Treasury secretary Tim Geithner, or Federal Reserve Board chairman Ben Bernanke, or all three — will head to Beijing to negotiate terms that will persuade the Chinese not to call in all their IOUs. The Chinese are likely to be less kind than we were and insist on terms that would sap our economic, and therefore military strength for years to come.
Exaggeration? Perhaps. But it is an endgame as plausible as default, and not much more difficult to imagine than a deficit-cutting programme emerging from a Democratic-controlled Congress.
Unless ... as has been true in the past, the great, resilient American economy offsets the mistakes of its masters by growing its way out of the problem.
“The good news is that this deep and long recession appears to be over, and with improving credit markets, the US can return to solid growth next year without worry about inflation,” Lynn Reaser, president of the National Association of Business Economists, told the group’s annual gathering last week.
Retail sales are looking rather good — up between 2% and 3% at an annual rate in the third quarter. Banks are coming to the end of a period of huge write-downs, even though billions in consumer and commercial property loans remain to be written off. Companies are sitting on piles of cash, waiting to be spent if the rise in consumer spending proves durable. Banks are again lending to developers of commercial properties, and house prices seem to be somewhere between stable and rising.
Add to renewed growth the stated willingness of the Fed to head off inflation, and we might not find ourselves in the position Britain was in after the second world war. Indeed, the Chinese might be so dependent on access to our markets to keep their economy growing, and their masses from revolting, that power will lie on our side of the bargaining table.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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