- The Washington Times - Sunday, September 27, 2009


In one of today’s richest ironies, America’s fiscal health - such as it is - hinges on the generosity of the Chinese Communist Party. Annoying Beijing’s mandarins could prompt them to skip our Treasury auctions. If China stops lending the Treasury money to underwrite Uncle Sam’s spendaholism, the Federal Reserve will need to print even more dollars to nudge the day of reckoning back over the horizon.

The Chinese have urged Washington to stop spending and printing so much money, lest inflation turn China’s $800.5 billion in Treasuries into a giant misfortune cookie. Chinese officials have grown increasingly vocal - and decreasingly diplomatic - in asking the U.S. government to start practicing fiscal discipline.

“If [the Fed keeps] printing money to buy bonds, it will lead to inflation, and after a year or two the dollar will fall hard,” predicts Chen Siwei, former vice chairman of the Standing Committee of the Chinese National People’s Congress and now its green-energy guru. “Most of our foreign reserves are in U.S. bonds, and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies.” Ambrose Evans-Pritchard of London’s Daily Telegraph reported Sept. 6 on Mr. Siwei’s remarks at the European House-Ambrosetti’s economic forum in Cernobbio, on Italy’s breathtaking Lake Como.

“Gold is definitely an alternative, but when we buy, the price goes up,” Mr. Siwei continued. “We have to do it carefully so as not to stimulate the markets.”

In other words, like a panda bear in a jewelry shop, China is tiptoeing away from the dollar and into gold and doing so quietly enough not to rattle commodity and currency traders. This month, China also bought $50 billion in special drawing rights, the International Monetary Fund’s brand-new Esperanto currency, which blends euros, pounds, yen and dollars.

“The U.S. spends tomorrow’s money today,” Mr. Siwei added bluntly. “We Chinese spend today’s money tomorrow. That’s why we have this financial crisis.”

Mr. Siwei is right. The Bush-Obama administration’s fiscal incontinence is staggering, unprecedented and potentially lethal. Fiscal 2010’s budget deficit likely will reach $1.4 trillion. Far worse, the Heritage Foundation’s Brian M. Riedl estimates, President Obama will generate $13 trillion in fresh deficits by 2019, swelling publicly held national debt to $20 trillion, or 99 percent of gross domestic product.

Mr. Obama should shift into reverse. He should use his formidable persuasive skills to secure an immediate spending moratorium, slash the budget across the board by, say, 20 percent, and set future expenditures at or below inflation. If he cannot do this, America will have little choice but to keep the Chinese communists cheerful and eager to buy U.S. bonds.

Yet rather than pursue the fiscal conservatism counseled by Mr. Siwei and other sober Chinese - or just keep Beijing calm and cooperative - Mr. Obama did something supremely idiotic: On Sept. 11, he launched a trade war with Beijing.

For the next three years, Chinese tires will face a 35 percent import duty. This is like slashing your banker’s steel radials just before handing him your home-mortgage application. Fiscal recklessness aside, this is dreadful trade policy.

First, no surprise, the target of protectionism retaliated. China immediately commenced anti-dumping actions against U.S. chickens and auto parts. Americans in those industries soon will suffer.

So, too, Cooper and Goodyear tire companies. These U.S. companies manufacture tires in China and will pay a 35 percent tariff on each one they ship home.

Finally, poor Americans will lose as low-cost Chinese tires, about 17 percent of the U.S. market, suddenly dwindle. “I think within the next 60 days, you’ll see some pretty significant price increases,” Del-Nat Tire Corp. President Jim Mayfield predicted in Sept. 14’s Wall Street Journal. He said he thinks “entry level” tire costs will zoom 20 percent to 30 percent.

In yet another irony, Mr. Obama promised to be the multilateral, consensus-building antidote to the venomous George W. Bush and his purportedly go-it-alone, my-way-or-the-highway diplomacy. Today, Barack Obama looks like quite the unilateralist.

Deroy Murdock is a columnist with Scripps Howard News Service and a media fellow with Stanford University’s Hoover Institution.

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