Mere Monopoly Money
By Robert Romano
President Obama yesterday declared at his much-ballyhooed Fiscal “Responsibility” Summit that “We've got a lot of hard choices to make.” And staring at a $10.7 trillion national debt and at least a $1.2 trillion budget deficit just for 2009 in the eye, he is right.
Unfortunately, he is not making the right choices. Instead he is relying on mere Monopoly money to keep a battered system afloat, much of it provided from overseas.
On Sunday, wrapping up her trip to China, Secretary of State Hillary Clinton went as far as to publicly urge that country to continue purchasing U.S. debt via Treasuries. In doing so, she revealed a grave weakness of U.S. economic, monetary, fiscal and foreign policy: the United States cannot maintain its annual rate of government spending without borrowing massive sums of money from nations overseas.
To achieve those ends, Secretary Clinton practically threatened the Chinese: "Because our economies are so intertwined the Chinese know that in order to start exporting again to its biggest market, the United States had to take some very drastic measures with this stimulus package... We have to incur more debt. It would not be in China's interest if we were unable to get our economy moving again… The U.S. needs the investment in Treasury bonds to shore up its economy to continue to buy Chinese products." In sum, she is partially correct: the status quo of rampant debt incursion by the U.S. is dependent entirely upon the willingness of foreign creditors to finance it.
But, to go as far as to suggest that the reason for the foreign infusion of credit is simply to finance the trade deficit is a stretch too far. The reason the U.S. must borrow money from the Chinese, Japanese, the Saudis, etc. is because government spending far outpaces revenues. And it far outpaces the trade deficit with China, which for 2008 was almost $267 billion, according to the U.S. Census Bureau. The budget deficit for 2008, on the other hand, was $455 billion as measured in October—to say nothing of the over $8 trillion in commitments, appropriations, borrowing, and printing the Congress, Federal Reserve, and Treasury have engaged in bail out the U.S. financial system, which are not accounted for in the budget deficit. The budget deficit as measured through appropriations and revenue also does not account for the printing of additional money and discount-lending done by the Federal Reserve. Since August, the monetary base has doubled.
Suffice to say, the U.S. does not need the Chinese to lend the government money because the U.S. government is a chief purchaser of Chinese goods. American consumers can purchase the goods they want from wherever they choose. The availability of those goods from overseas is not the reason the nation is falling into bankruptcy. The real reason is because the year-to-year operations of the federal government—which include infusing credit into the housing market, higher education, and also financing the massive entitlements of Social Security and Medicare of some $54 trillion through 2085—are all unsustainable in their present forms.
In short, the U.S. government is consuming far more than it can productively generate in the form of revenue. And so it borrows. On a massive scale. But it is obviously not enough.
Mrs. Clinton is practically begging the Chinese for more money. Simultaneously, she reveals a deep-seeded fear on the part of U.S. policymakers right to the very top of the Administration. As the global economy deteriorates, the nation's foreign creditors are simply not going to have as much money to lend. A contraction by the U.S. under these circumstances is inevitable.
However, instead of preparing the nation for the worst, policymakers insist upon proceeding further into the breach by spending more in the form of the “stimulus”, borrowing more, and yes, printing more—because there will not be enough to borrow to sustain this level of spending. The U.S., in order to sustain the unsustainable, will be forced to further expand the monetary base. The Chinese know this. As noted by Luo Ping, a director-general at the China Banking Regulatory Commission, “[W]e know the dollar is going to depreciate…” China is the largest holder of U.S. Treasuries and, thus, the national debt. The Chinese know that inflation is right around the corner, although they currently see no alternative to purchasing the Treasuries. That does not mean that will not change in the near or mid terms.
And the U.S. must be prepared.
The timing of bringing the U.S. off of its debt addiction may be politically inconvenient for the Administration—and it may fly in the face of its government expansion ideology that pervades thinking there—but that does not mean it is any less necessary. President Obama's fiscal responsibility summit of yesterday sent an important message, but not the one the Administration had hoped.
It was a joke; laughable in the face of the Administration's $787 billion “stimulus” spending bill just passed, the $2.8 trillion financial “stability” plan to infuse yet more credit in the crumbling U.S. financial system, and now this week, the $410 billion omnibus spending bill now being proposed. And, that's not even counting interest.
This infusion of Monopoly money will not work, and the predictable result will be unbridled inflation, which coupled with a lagging recession, could unseat the U.S. as the world's foremost economic superpower.
Robert Romano is the Editor of ALG News Bureau.