The Other McCain

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Obama to Europe: ‘Double-Dip,’ Anyone?

Posted on | June 18, 2010 | 10 Comments

The headline is “Obama Urges Europe Not to Drop Stimulus Measures Yet,” but to understand what the president is actually trying to say, you have to read this New York Times story very carefully:

President Obama signaled on Friday that countries in Europe should not withdraw their extraordinary spending programs too quickly.
In a public letter to other leaders of the Group of 20 nations in advance of a summit in Toronto next week, Mr. Obama wrote, “Our highest priority in Toronto must be to safeguard and strengthen the recovery.” . . .
Mr. Obama also wrote, “We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession.” . . .
American officials are concerned that fiscal retrenchment by too many countries at once could imperil the global recovery.
Mr. Obama warned of the risks of a double-dip recession, which most economists consider unlikely but not impossible.
“In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avoid a slowdown in economic activity,” he wrote.

People who haven’t been paying close attention might not understand why Obama is saying all this. Obama, his advisers and the Democrats in general are firm believers in Keynesian economics, which prescribes deficit “stimulus” spending. But Germany isn’t buying that baloney. Bloomberg News explains:

While Obama endorsed restoring order to public finances in the “medium-term,” his focus on growth is at odds with that of German Chancellor Angela Merkel’s preference for budget cuts amid Europe’s debt crisis. Each strategy carries risks. Continued stimulus risks bondholder revolt over rising debt burdens, while spending cutbacks could tip the global economy back into recession.. . .
Merkel, the head of Europe’s largest economy, said June 11 she expects to have a “hard time” at the summit and that she will respond that “there is no alternative” to cutting the fiscal deficit.
Germany’s Cabinet this month backed budget cuts worth more than 80 billion euros through 2014, while French President Nicolas Sarkozy this week raised the retirement age and increased taxes.

Pay close attention to this part of the Bloomberg story:

Chinese officials said in Beijing today that they plan to use the Toronto talks to discuss responses to Europe’s sovereign debt turmoil while keeping the yuan’s value off the agenda. The yuan has been held at about 6.83 yuan to one U.S. dollar since mid-2008 to help protect China’s exporters, drawing threats of tariffs from among U.S. lawmakers.
Obama doesn’t mention China in the letter but maintains his position that China’s currency value should be determined by the market. “I also want to underscore that market-determined exchange rates are essential to global economic vitality,” he said.
Obama is facing domestic pressure from his own party to lean on China to raise the value of its currency. Lawmakers such as House Ways and Means Committee Chairman Sander Levin and New York Senator Charles Schumer, both Democrats, say a weak currency gives Chinese exporters an unfair advantage over their U.S. competitors and costs U.S. jobs.
Levin said yesterday that the value must be increased by the end of the summit. After the G-20 meeting, “if China does not act and the administration does not respond promptly thereafter, the Congress will act,” Levin said yesterday at a hearing.

The Bloomberg reporter doesn’t connect the dots here, but mention of a potential “bondholder revolt” and this trade issue with China are in fact connected.

China owns a lot of U.S. debt, and there seems to be an implicit bargain here: China will keep funding Obama’s deficit spending spree, so long as the U.S. keeps its markets open to Chinese goods. Under pressure from U.S. labor unions, however, Schumer and Levin are starting to talk like Smoot and Hawley, which would undo that bargain.

So we’ve got high unemployment with mind-boggling deficits as far as the eye can see, and the whole thing could unravel if China ever gets tired of buying U.S. debt. 

Gold just hit $1,262 an ounce. Mere coincidence, I’m sure.

Category: China, Economics, Germany

Comments

10 Responses to “Obama to Europe: ‘Double-Dip,’ Anyone?”

  1. Estragon
    June 18th, 2010 @ 7:32 pm

    The Chinese have US dollars from selling us stuff. Lots of dollars. If they do not buy US government debt, what are they going to do with those dollars? Use them for wallpaper?

    Ah, but couldn’t they just buy something ELSE? Sure, what did you have in mind that they could (a) spend $100s of billions on without (b) driving up the price artificially and (c) that is available?

    No, this is one of those unhappy marriages that would be too painful to break up for both parties.

    Obama’s long-term plan, if he has one, has to be the classic Keynesian solution to debt: inflate the currency and repay the debt with cheaper dollars. The problem, naturally, is that what illusions of recovery are out there are caused by artificially low interest rates. These must rise; there is just no way around it for long. When they do, kiss recovery goodbye.

    You see, while the Chinese (and much of the rest of the world, who all know that even as sick as the dollar is, it is still the safest harbor) have to eventually buy our debt, they can delay purchases long enough to force rates up and get a better return.

    Obama has spent us into a position between a rock and a hard place, and there will be no easy escape.

  2. Estragon
    June 18th, 2010 @ 3:32 pm

    The Chinese have US dollars from selling us stuff. Lots of dollars. If they do not buy US government debt, what are they going to do with those dollars? Use them for wallpaper?

    Ah, but couldn’t they just buy something ELSE? Sure, what did you have in mind that they could (a) spend $100s of billions on without (b) driving up the price artificially and (c) that is available?

    No, this is one of those unhappy marriages that would be too painful to break up for both parties.

    Obama’s long-term plan, if he has one, has to be the classic Keynesian solution to debt: inflate the currency and repay the debt with cheaper dollars. The problem, naturally, is that what illusions of recovery are out there are caused by artificially low interest rates. These must rise; there is just no way around it for long. When they do, kiss recovery goodbye.

    You see, while the Chinese (and much of the rest of the world, who all know that even as sick as the dollar is, it is still the safest harbor) have to eventually buy our debt, they can delay purchases long enough to force rates up and get a better return.

    Obama has spent us into a position between a rock and a hard place, and there will be no easy escape.

  3. dad29
    June 19th, 2010 @ 12:21 am

    People who haven’t been paying close attention might not understand why Obama is saying all this

    Or you could just look at the election cycle. Besides November upcoming, there IS that 2012 thing, and if the second dip hits 2Q11 and isn’t in the rearview mirror by 2Q12, ….

    Gehr ste’he?

  4. dad29
    June 18th, 2010 @ 8:21 pm

    People who haven’t been paying close attention might not understand why Obama is saying all this

    Or you could just look at the election cycle. Besides November upcoming, there IS that 2012 thing, and if the second dip hits 2Q11 and isn’t in the rearview mirror by 2Q12, ….

    Gehr ste’he?

  5. Estragon
    June 19th, 2010 @ 7:27 am

    It’s nothing really to brag about that our bonds can still sell because every other opportunity in the world sucks big time right now.

    Obama and the Euro=peons believe in “Keynesian Economics,” but there really isn’t any such thing. Keynes didn’t form a coherent and statistically verifiable theory, he set out to give some pseudo-intellectual cover to the policy prescriptions Western governments had already grown to favor – that is to say, bigger and more powerful government.

    The money which is fueling our current “recovery” comes largely from the TARP funding and the “stimulus” spending. It is money we printed in the hope of one day being able to afford. The markets mistake this for genuine capital and react accordingly. The truth will out, there is no money, and “double-dip” might seem a frivolously inadequate description by the time it is all over.

  6. Estragon
    June 19th, 2010 @ 3:27 am

    It’s nothing really to brag about that our bonds can still sell because every other opportunity in the world sucks big time right now.

    Obama and the Euro=peons believe in “Keynesian Economics,” but there really isn’t any such thing. Keynes didn’t form a coherent and statistically verifiable theory, he set out to give some pseudo-intellectual cover to the policy prescriptions Western governments had already grown to favor – that is to say, bigger and more powerful government.

    The money which is fueling our current “recovery” comes largely from the TARP funding and the “stimulus” spending. It is money we printed in the hope of one day being able to afford. The markets mistake this for genuine capital and react accordingly. The truth will out, there is no money, and “double-dip” might seem a frivolously inadequate description by the time it is all over.

  7. H. G. Fielding
    June 19th, 2010 @ 8:48 am

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved.”

    That’s a quote attributed to Ludwig von Mises on Wikipedia that I came across during the course of the Hayek thread. It seems appropriate somehow.

  8. H. G. Fielding
    June 19th, 2010 @ 4:48 am

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final total catastrophe of the currency involved.”

    That’s a quote attributed to Ludwig von Mises on Wikipedia that I came across during the course of the Hayek thread. It seems appropriate somehow.

  9. Adobe Walls
    June 19th, 2010 @ 5:24 pm

    Question: Is there at least one positive in that the real economic collapse will start in Europe thereby giving us at least some warning that it’s time to start flint napping.

  10. Adobe Walls
    June 19th, 2010 @ 1:24 pm

    Question: Is there at least one positive in that the real economic collapse will start in Europe thereby giving us at least some warning that it’s time to start flint napping.