Weekly Standard Online
October 17, 2009
by Irwin Stelzer
Americans should be hoping that the Chinese will be kinder to us than we were to the Brits after World War II. Readers of a certain age will remember, and the few younger ones who study history will have learned what creditor Uncle Sam did to debtor John Bull when Britain sent John Maynard Keynes to Washington to negotiate borrow the odd billion from us. Britain had spent blood and treasure to beat the Nazis, and was hoping or a gift of $3 billion, a credit line of $5 billion, and other generosities. As Robert Skidelsky points out in his magnificent biography of Keynes, "The Americans had never accepted that they owed Britain a moral debt" for its disproportionately large sacrifices. Instead, President Truman, advised by communist spies such as Harry Dexter White, insisted on terms so onerous that the Britain was, in some views, permanently expelled from the first rank of economic powers for decades, until Margaret Thatcher decided that her government's job was definitely not merely to manage decline.
Fast forward to today, and the plunging dollar. The Obama administration may mouth support for a strong dollar, but markets aren't easily fooled, or if fooled, are not fooled for long. They know that administration policy is relying heavily on a depreciating currency. 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, the theory is, 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 massive debts it is incurring as it attempts to stimulate the economy, throws another trillion at what it sees as an underperforming health care system, and prepares to burden the energy economy with billions, or even trillions, in new costs in the interests of satisfying the green lobby that it is doing something about greenhouse gas emissions.
Of course, the Obama team could take a lesson from Argentina, which defaulted on its debts eight years ago and nevertheless is headed back into the market, to borrow money from lenders eager to increase their returns and afflicted with memory loss. P.T. 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, since an annual sucker-birth rate of 525,600 might have to include more than leading bankers. Some regulators, perhaps.
But debt repudiation would be unbecoming a great power, much less one that hopes to maintain the dollar as a reserve currency. If indeed American any longer does. The administration's critics, among them Pulitzer Prize winning commentator Charles Krauthammer, believe the President wants to make America less of a hegemon and more of an ordinary nation, much like others in the international organizations of which Obama is so fond. That effort includes an increase in the U.S. 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 -- unless, of course, they find some way to have their own currencies become more acceptable in international trade.
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 with the red ink cascading across the nation's books, digging itself deeper into debt every day. The Chinese, America's principal creditor, are worried that Obama and his successors will attempt to pay back the more-than-trillion dollars it owes China in wildly depreciated dollars. So it is making it known that 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. The old adage that if you owe your banker a few dollars he has you under his thumb, but if you owe him 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, despite the urgings of the louche celebrities who helped fund the President's election campaign. Or that America no longer presses the Chinese regime on human rights issues.
Which brings us back to Keynes, Truman, and the post-war world. Unless there is a major change in US 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 plead for the Chinese to continue lending us money. The terms we will be offered are unlikely to be easy, and will include IMF-style controls on our fiscal policy.
Exaggeration? Perhaps, but less so if, as has been true in the past, the great, resilient American economy offsets the mistakes of its political masters by growing our 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 U.S. can return to solid growth next year without worry about inflation," Lynn Raeser, president of the National Association of Business Economists told the group's annual gathering last week. Set aside the predictable drop in auto sales after the demise of the cash-for-clunkers program removed a $4,500 per-car subsidy, and retail sales are looking rather good -- up somewhere between 2% and 3% at an annual rate in the third quarter. Banks are coming to the end of a period of massive write-downs, even though billions in consumer and commercial property loans remain to be written off. Corporations are sitting on piles of cash, waiting to be spent if the uptick 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, although the risk that the patient will have a relapse is not trivial.
Add to renewed growth the apparent willingness of the Fed to head off inflation -- Bernanke's statement to that effect stemmed the dollar's decline, whereas statements favoring a strong dollar by Summers and Geithner did not -- 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 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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