SANDERS: Rescuing Obama
Annual Washington jamborees of those monuments to post-World War II international economic cooperation, the World Bank and the International Monetary Fund, dramatize by their increasing irrelevance the continuing world economic crisis. Bloated, pampered, tainted bureaucracies whose research is increasingly suspect, they offer no solutions.
Ultimately, when VIPs go home and the November election dust settles, the Obama administration could face stark, bilateral decisions on international fiscal and monetary policies as the economy continues to sputter.
For while just about everyone warns against “a currency war,” that’s exactly what has broken out. Individual governments are intervening in markets to maintain exports and minimize imports. Japan's central bank is fighting off the highest yen-to-dollar ratio in 15 years. South Korea slyly intervenes to undercut the yen. Brazil, to preserve its commodities bonanza, slaps on taxes to slow speculative inflow — its currency, the real, up 25 percent since January 2009. South Africa considers something similar with a rising rand costing foreign sales. Greece, Ireland, Spain and Portugal refinance crippling government debt at increasingly higher cost, desperately hoping to avoid leaving the euro. Partially responsible for their profligacy, export-led Germany promises a new Band-Aid, a European crisis management setup, as an appreciating euro cuts into its trade.
Despite all this frenzied activity — if momentarily frightening off speculators — intervention will not in the end be effective. A policy of “beggar your neighbor” — shifting responsibility from one national economy/currency to another — cannot cure a worldwide recession.
The biggest manipulator of all, China, makes cuddly noises about international cooperation but boosts export subsidies, buttressing its hugely undervalued, nonconvertible yuan. Its unprecedented reserves from trade surpluses — a $2.5 trillion hoard, mostly dollars — discombobulate the global economic system.
The Obama administration’s remedies have included a proposed doubling of U.S. exports over five years, trimming oil imports with subsidized alternatives, wheedling China into currency concessions, health care reorganization, new taxes and an expansionary monetary policy to pump up the domestic recovery. This program seems unlikely to succeed, certainly not in the near term. And to quote the noted British economist John Maynard Keynes, “In the long run, we will all be dead.”
The reasons are obvious: Cash-loaded U.S. companies, facing a vicious circle of lowered consumption and tightened bank credit, refuse to invest or innovate. They see Washington’s policies as both inimical to business and contributing to further insecurity. Nothing so mocks administration “green energy” policies as subsidized American companies moving production to China or closing down Gulf drilling, thereby lopping tens of thousands of jobs and increasing petroleum imports. The Fed’s “quantitative easing” (increasing money in circulation) gets very close — to quote Keynes again — to “pushing on a string,” with a still-unresolved home mortgage market breakdown to contend with.
In the postelection era, whatever domestic turns a conservative congressional majority (Republicans and right-wing Democrats) forces on the Obama administration, international issues will pose even greater tests for strategy — and risk-taking.
It is not hard to see where any new initiative might begin. About half of the $55.2 billion U.S. trade deficit in July was with China. That’s good for Wal-Mart. And China’s huge overexpansion of infrastructure is manna for raw materials exporters such as Brazil, Australia and Angola.
As huge international payment deficits ($378.5 billion in 2009) along with concern about Washington’s policies have cheapened the dollar and therefore exports, a good question is how much America could sell China even if Beijing’s currency were floated. Chinese consumption increasingly falls as a percentage of its soaring gross domestic product — despite tales of inordinate luxury from growing class and regional disparities. Hidden “non-tariff barriers” also block U.S. imports.
Soviet-style Chinese technocrats struggle to plan centrally, stuck with massive dinosaur government companies and an accelerating military expansion devouring resources. Meanwhile, Communist Party apparatchiks scuffle for so-called “fifth generation” posts next year. Major readjustment would be catastrophic, Beijing. The country’s underprivileged private sector, disproportionately responsible for two decades of remarkable progress, would wilt. Labor-intensive manufactures are already fleeing to Southeast and South Asia as wage pressure grows from rising social friction.
But without drastic Beijing moves, the Obama administration, with Congress at its heels, may not be able to stave off imposing tariffs on Chinese imports. And once protection against Beijing gets a green light, it might be hard to exempt other foreign sellers. That would turn America’s back on the World Trade Organization — which Beijing joined but did not honor — and the whole post-World War religion of free and open trade. Higher imports would increase U.S. living costs, since outsourced manufactures could not be quickly replaced by domestic production. All that might maximize the Fed’s loose money approach, leading back to the old threat of inflation combined with slog growth — the dreaded “stagflation.”
There isn’t any magical “economic” solution — neither from Smith, Marx, Keynes nor Friedman. Nor is a visionary yet sighted resembling Keynes (who in 1944 gave us the World Bank and IMF at Bretton Woods) to dream up new, effective instruments for international collaboration.
• Sol Sanders, veteran foreign correspondent and analyst, writes weekly on the convergence of international politics, business and economics. He can be reached at firstname.lastname@example.org.
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