As another G20 meeting rolls around,
this time on home soil, the time comes once again for the economically
curious but politically unconnected to wonder what is really happening behind
closed doors. But while admiring the pageantry, chuckling at the awkward
group photos, and parsing the joint communiqués like newly found Dead
Sea scrolls, the overwhelming majority of observers will miss the meeting's
dominant theme: hypocrisy.
Everyone agrees that the principal
agenda item in Pittsburgh will be the need to rein in the 'global imbalances'
that created the late economic crisis. Everyone also agrees that these
imbalances involve too much spending and borrowing by Americans and too
little of both by the Chinese and other developing nations. In his remarks
this week at the United Nations, President Obama used his peerless rhetorical
skill to frame the issues clearly and plainly. Noting that a return to
pre-crisis economics is impossible, the president assured the world that his
administration will pursue policies to increase savings and decrease spending
at home and challenged his Chinese counterparts to enact measures with the
opposite effect in their own country.
While this is roughly what needs
to happen, President Obama is actually doing everything in his power to
prevent it. In point of fact, every policy move undertaken by his
administration has exacerbated the very imbalances he supposedly wants to
curtail. To so seamlessly profess one goal while simultaneously undermining
it is an impressive piece of political theater. Unfortunately, this
particular drama is likely to have an unhappy ending – and the ticket
price will be staggering.
What exactly are the federal
fiscal stimuli other than deliberate, but clumsy, efforts to get people,
companies, and governments to spend money they don't have? Programs like tax
credits for new homebuyers or 'cash for clunkers' are intended to encourage
consumers to spend money that they otherwise might have saved. Grants to
municipalities allow them to hire workers and spend money locally that they
otherwise would have forgone.
Federal intervention in the
mortgage and credit card debt markets, where they are now nearly the sole
buyer, has been specifically undertaken to keep interest rates low and
financial firms solvent – so that Americans can keep buying homes and
using their credit cards. While the Fed will continue to hand out free money
to any and all borrowers for an "extended period," the abysmally
low interest on deposits that such a policy creates disincentivizes personal
savings even further.
In 2009, despite the tilted
playing field, the American people have heroically managed to increase their
savings (although clearly not as much as they would have in a free market).
But President Obama's runaway deficit spending is undermining their efforts. The
simple truth is that government debt is our debt. So if a family manages, at
some cost to their lifestyle, to squirrel away an extra $1,000 in saving this
year, but the government adds $20,000 in new debt per household (each
family's approximate share of the $1.8 trillion fiscal 2009 deficit), that
family ends up owing $19,000 more than they did at the beginning of the year!
So much for our end of the
bargain. How about on the other side of the Pacific? Will the Chinese restore
balance by increasing their spending? How can they while they are lending us
all their money? Remember, any money the Chinese spend is money they cannot
loan to us. So, if China really wanted to spur domestic consumption, the best
way to do so would be to stop buying our debt. Even better, they could sell
Treasuries they already own and distribute the proceeds to their citizens to
spend.
However, the Obama administration
is heavily lobbying the Chinese to get them to step up to the plate and buy record
amounts of new Treasury debt. Obama cannot have it both ways. He cannot claim
he wants the Chinese to spend more, but then beg the Chinese government to
take money away from Chinese consumers and loan it to the United States
Treasury.
In the end, Obama will get
precisely what he publicly claims to desire but privately dreads. The Chinese
government will come to its senses and stop buying Treasuries. This will
cause the U.S. dollar to collapse, but it will also allow Chinese citizens to
fully enjoy the fruits of their labor.
Once the Chinese begin consuming
more of their own products, those products will no longer be available to
Americans. Once they start spending more of their incomes on themselves,
those funds will no longer be available for us to borrow. Unfortunately, that
is when our real economic crisis will begin. The worst part is that the
longer these imbalances are allowed to continue, the larger they grow and the
more painful the ultimate adjustment process becomes.
But for now, it's all pomp,
circumstance and hypocrisy in Pittsburgh. Why yes, Madam Finance Minister,
I'd love another of those crab cakes!
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach,
CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
Also
by Peter Schiff
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