Tuesday, August 09, 2011

China outraged by U.S. "funny money" policies

"The alarm has rung," said an English-language commentary yesterday by the state-run and party-directed Xinhua news agency. "It is time for the naughty boys in Washington to stop chicken games before they cause more damages."

China is the biggest single creditor to the US government; it has $US1.2 trillion invested in US government bonds. They're US bonds, but paid for with Chinese money. No one will dispute Beijing's right to be critical on this.

"China," said the Saturday editorial by Xinhua, "has every right now to demand the US to address its structural debt problems and ensure the safety of China's dollar assets." Quite right.

The US ratings agency Standard & Poor's said it was downgrading the creditworthiness of US government bonds in part because America's "policymakers don't have the ability to put the public finances of the US on a sustainable footing".

This would make any investor angry. In this sense, China's leaders are merely joining the chorus of 72 per cent of Americans who, according to Pew Research, are critical of the US political system's handling of its debt ceiling. But there are four features of China's reaction that mark it out.

First, it's the toughest criticism the potential superpower has yet made of the existing superpower.

Second, the criticism goes beyond an expression of concern for China's money. It prescribes what the US should do with its money. In an editorial which China scholars said could only have been published with the consent of the national leadership, Xinhua said the US must cut its "gigantic military expenditure and bloated social welfare costs".

Pressing its advantage in America's moment of vulnerability, China said: "International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country."

"What we are seeing here," says Hugh White, a strategic studies expert at the Australian National University, "is a much more strident tone than anything we have seen before".

So far, all of this commentary is published in English. But there is another level of Chinese reaction that has been invisible to English speakers.

"There's a real difference between the Chinese domestic propaganda and the foreign propaganda on this," observes a sinologist from the University of Canterbury in New Zealand, Anne-Marie Brady. "The tone it's adopting towards the US in English is, 'We're telling off America.' In Chinese, it is much more crowing and gloating." The heading on the lead article in Xinhua's Mandarin version translates as, "The world will never trust America again," Brady says, "which is fairly heavy stuff."

In the famous strategic guidance he gave his comrades in the Communist Party, the father of China's modernisation, Deng Xiaoping, said: "Hide your strength, bide your time, and do what you can."

Brady says: "In the last 10 years, particularly since the financial crisis hit in 2008, there's been a shift towards the last part, 'do what you can'," in the behaviour of the Chinese leadership. "That's code for standing up for China's interests. But this is looking to be beyond that. It's quite harsh."

It's also pretty brave of China to make the boast that US government debt, which, on its new, lower assessment from Standard & Poor's, is rated AA+, is untrustworthy. Because the same agency rates Chinese government debt as A+, which is three rankings lower. And this leads to the third feature of China's criticism: its potential effect.

"It's probably pretty hard for the Chinese to resist the temptation to gloat," White says, "but from the US point of view, this would confirm US anxieties about China.

"China wants to end up on top," White suggests, "but the secret is to exercise great patience. This tells the US that China is out to get them. Nothing would galvanise the US to get its act together better than the sense that China is out to eat their lunch. Strategically, gloating is unwise."

It is no doubt easier, and much more fun, for Chinese officialdom to rejoice in America's woes than to confront the difficulties in fixing its own.



Obama was once wiser than he is now

"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a Sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. ...Increasing America’s debt weakens us domestically and internationally. Leadership means that 'the buck stops here'. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and Grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."

The above quote consists of two excerpts from a long speech delivered by Barack Obama during a Senate debate over raising the national debt limit on March 16, 2006. Along with his entire party, Senator Obama voted against the increase, which passed nonetheless with overwhelming Republican support.



What not to do in an economic crisis

In 1971, President Nixon convened his experts only to produce a plan that ruined the economic prospects of the decade

Head for Camp David. Convene meetings. Take advice from economists, your Cabinet, all the experts. Then put forward a giant new economic program, maybe including some dramatic form of shock therapy that will calm financial markets and create jobs.

That's the kind of response Americans are used to seeing in a president when the nation is suddenly confronted with bad news like last week's market turmoil and the U.S. credit downgrade by Standard & Poor's. But the results of such a response to economic alarm 40 Augusts ago suggest this isn't the way to go.

In 1971, President Richard Nixon convened his experts only to produce a protocol that ruined the economic prospects of the decade.

The urgent case that sent Nixon to Camp David that August was the dollar. At the time, the U.S. was on the gold-exchange standard, under which the price of gold was fixed at $35 an ounce and foreign governments could withdraw gold from American banks. The U.S. had long held the position it would maintain $10 billion in gold stock. Foreigners were concerned that U.S. growth was sluggish and began to take gold elsewhere. "Monetary Reserves of the U.S. Declined $505 Million in May," read a June headline.

By July, the reserve was officially below the $10 billion figure, and the price of gold on international markets rose to $42 an ounce. The U.S. needed a strong dollar, partly to pay the costs of the Vietnam War. Joblessness reached 6 percent. Politically, Nixon stood where President Barack Obama stands now: just 15 months away from elections.

Fearing a run on the dollar and accelerating inflation, Nixon summoned to Camp David his Cabinet and the wisest, most eminent people he knew, names many still revere today: Arthur Burns, Herbert Stein, Paul Volcker, George Shultz, Paul McCracken. Nixon closeted his advisers at Camp David, where they scribbled a plan together, emerging euphoric to be photographed by Life magazine.

On Sunday night television, Nixon presented his New Economic Policy, a cynical plan that helped his political prospects at substantial cost to the long-term economy. He immediately closed the gold window, ending the convertibility of dollars to gold. He imposed temporary wage and price controls. He asked Congress for a tax credit that was frontloaded for maximum impact pre-election, even as he slapped a surcharge on imports.

Many of the minds at Camp David, and at other advice sessions, opposed components of the plan. Shultz, then director of the Office of Management and Budget, fought the wage and price controls. But the economists eventually went along, telling themselves that concessions were the price of being policy makers.

The short-term results of the New Economic Policy were as splendid as hoped. The Consumer Price Index, now manacled, dutifully declined to 1.7 percent from 4.1 percent the preceding year. Unemployment didn't rise.

By July 1972, four months before voters would choose between Nixon and Democrat George McGovern, Stein, then chairman of the Council of Economic Advisers, held a press conference at which he claimed second-quarter data was "the best combination of economic numbers to be released on one day in all of history, or at least the Christian era." (Reporters politely protected him by editing this down to "the best results in a decade.") Gross domestic product for 1972 grew more than 5 percent. McGovern didn't stand a chance.

But the long-term outcome, as Stein, an admirably honest thinker, later noted, was abominable. In the post-Nixon years, unemployment started rising again. International markets recognized that without the threat of gold withdrawals to keep officials' spending in check, the Federal Reserve, Congress and the Treasury might inflate with impunity.

Inflation therefore also accelerated, as Stein noted regretfully in his memoir, "Presidential Economics." The combination of inflation and unemployment was something so novel that Americans created a new word to describe it: stagflation. The homebuyer paid for the euphoria of Camp David with the worst mortgage interest rates in the history of Christianity, or at least the postwar period: more than 18 percent in 1981.

Only when Volcker, who became Federal Reserve chairman in 1979, started acting as a sort of human gold standard could Nixon's conceit be undone. Volcker forced interest rates up over 20 percent.

There are three takeaway messages from 1971. The first is that economists are arm candy for chief executives: Their appearance beside the president may be reassuring, but it doesn't guarantee strong policy. Economics itself is often mere window-dressing for campaign programs.

The second is that reforms dictated by crisis-intervention teams make for poor long-term policy. Short-term gimmicks, stimuli for employment and automakers -- all are pretty much useless. The best thing the Obama administration can do is to stay clear of the market, avoid election-year panic, and call on Republicans to undertake measures aimed at 2030. If this is unrealistic, then that explains why presidential and congressional approval ratings sank with the market.

Such measures might include commitments to yet smaller budgets and stronger entitlement reforms, or promulgating a new Federal Reserve law that would strip out some of the discretion that Arthur Burns enjoyed, and make the institution more accountable to taxpayers. Something closer to a gold standard would signal to markets that the U.S. is less likely to inflate away its debts in the future. In short, it would show that the debt-ceiling deal earlier this month was only the beginning of a more stable U.S. with a smaller government and a more reliable currency.

Finally: no more shock therapy. The least likely place for real improvements to be written is a self-aggrandizing presidential retreat like Camp David.




The Great Society’s big Medicaid lie: "When Medicaid was first created by President Lyndon B. Johnson, it was characterized as a safety net for the poorest of the poor. In the decades since, the program has expanded dramatically beyond that purpose. Today it claims to offer coverage for 68 million people—nearly one of every four Americans is enrolled in the program. I use the word 'claims' because people under Medicaid are overwhelmingly unable to access quality care, or often any care at all."

Dating site finds conservatives more open-minded: "Match began "weighting" variables differently, according to how users behaved. For example, if conservative users were actually looking at profiles of liberals, the algorithm would learn from that and recommend more liberal users to them. Indeed, says Thombre, "the politics one is quite interesting. Conservatives are far more open to reaching out to someone with a different point of view than a liberal is." That is, when it comes to looking for love, conservatives are more open-minded than liberals."

The destructive evil of price controls: "There is a shortage of cancer drugs, due to the federal government’s price controls. Being a matter of life and death, this is a tragedy of considerable proportions. At the same time, it is completely predictable. There is no reason an intelligent person who has read even the most basic level of economics should not forever grasp the inevitability of such a result. Yet the Obama administration seeks to extend this destructive program to more drugs via Medicare D."

Flights from nowhere: "As a resident of Illinois, I'd never had any particular desire to fly from McCook, Nebraska, to Denver. But lately, I've been looking for an opportunity. Turns out the federal government is willing to pay me a handsome fee to do it. Oh, I wouldn't get the cash directly. But the Department of Transportation provides more than $2 million to subsidize that particular route, which works out to about $1,000 for every passenger. My fare, meanwhile, would be less than $150."

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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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