STAFF NEWS & ANALYSIS
Geithner Says Global Recession Losing Force
By - June 02, 2009

Treasury Secretary Timothy Geithner said Monday that the global recession seemed to be losing force but that it will be critical for the United States and China to institute major economic reforms to put the world on a more sustained footing. Geithner said that a successful transition to a more balanced and stable global economy will require substantial changes to economic policy and financial regulation around the world and especially in the world's largest and third largest economies. … Geithner had told reporters on his way to Beijing that he wanted to foster the same kind of working relationship with China that the United States has enjoyed for decades with major European economic powers. – AP

Dominant Social Theme: Big powers must lead the way.

Free-Market Analysis: Secretary Timothy Geithner is over in China proclaiming that things are getting better. But in order for them to get better still, there must be "substantial changes to economic policy and financial regulation around the world." We wonder what he means by this. It likely has to do with giving increased regulatory powers to the International Monetary Fund, as was agreed to recently by the G20.

Now we understand that when a US Treasury Secretary says something, it is news and ought to be reported as such. But there is far more to Geithner's meeting in China than is being reported. Unfortunately, to understand it, you have to read between the lines. Here's some more from the AP:

Geithner said the necessary reforms will include getting the U.S. budget deficit under control once the recovery is firmly in place, something he said the Obama administration was committed to doing. He said China will need to strengthen its social safety net in such areas as pensions and health care so that the Chinese will feel more confident about spending more. That is viewed as critical if China is going to transform from an export-driven economy into one driven more by domestic consumption, a change that Geithner said was essential to assuring balanced world growth in the years ahead. "Our common challenge is to recognize that a more balanced and sustainable global recovery will require changes in the composition of growth in our two economies," Geithner said. Geithner sought to reassure the Chinese on the issue of getting control of the exploding U.S. budget deficit, which is projected to hit a record $1.84 trillion this year, a fourfold increase from last year's record, reflecting the massive spending to stimulate the economy and stabilize the banking system. China is America's biggest creditor, holding $768 billion in Treasury securities.

See, it begins to come clear. What is at stake probably is twofold: Western monetary stability and China's economic stability. In fact, we have covered this topic previously, from China's point of view. China's ruling party has been racing for the last several decades to satisfy the basic material needs of some 1.3 billion people. The party has done so by identifying Western consumerist countries. The largest such is America, and China has facilitated American consumerism by purchasing up to at least US$1 trillion of its debt. But now comes the recession – and the inability of the American consumer to act as a catch-all for Chinese production. China must turn inwards for further growth.

How will this occur? According to AP, "Geithner said China will need to strengthen its social safety net in such areas as pensions and health care so that the Chinese will feel more confident about spending more." This is some statement. China is still a communist country and even the wealth of its richest citizens is doubtless subject to recall. There is no constitution and certainly no sense that citizens are truly independent of the state. They take what the state gives them, including health care and retirement benefits. To the degree that individuals do not have these things, the Chinese government has chosen not to supply them.

To have an American Treasury Secretary travel to China to urge the Chinese government to provide more benefits to its citizens is truly ironic. America's culture used to be based on individualism and self-responsibility. But there is not apparently any sense under this administration that American citizens are endowed with their rights by anything other than the state. The thrust of the Obama administration, such as it is, seems purely economic. Their first and last order of business is to sustain a central banking money monopoly that allows the international financial system to survive. In this case, the administration is willing to stand side-by-side with a communist state in order to reorganize the world's financial engine. There is no sense here that the economic crisis will be solved by individual entrepreneurship (human action) – only by nudging the massive ship of the state toward further monetary expansion.

In our opinion this is a desperate strategy. China is a fairly shaky state and there at least 300-400 million impoverished people who scratch a living off the land and want something more. In fact, they remain disaffected and angry. It is this population that the Chinese leaders fear and are racing to palliate with urban employment. In order to turn its consumerism inward, China will have to rev up its money production even more.

From our point of view, there is a good chance that China's massively leveraged banks will collapse under the strain. Geithner has traveled to China to plead with his new good friends to re-inflate the global bubble. Knowing the way he operates, he has probably even indicated that China's US$1 trillion or so in Treasuries will be stabilized if the US can export successfully to an increasingly successful and widespread middle class. The world's further prosperity depends on the Chinese now – or that is what we are led to believe, reading between the lines of this AP story.

A new global order, indeed. China, a failed state only a quarter century ago, is now to provide the consumer demand that is intended to leverage the world's prosperity. The trouble is that China's mal-investment is already quite advanced after 20-plus years of monetary stimulation. There is no country in the world throughout history (in our humble opinion) that ever achieved a 10 percent per year growth rate without central banking "juice" – and the resultant bubble economy. Does the US administration believe China's growth can continue endlessly? How much does Obama understand about business cycles? There is plenty of information on the Internet.

Yes, China is now, apparently, the lynchpin of the world. China, more than America, is to provide the consumerist re-flation that the world definitely needs if central banking is to survive as a viable monetary strategy. Unlike the Americans, the Chinese are solvent, and one task will be to undo the Chinese culture of savings and prudence. It cannot be otherwise because paper money needs a receptacle. Central bankers seek solvency and demand, and China has both. Without China, there is nowhere for the money to go – not to Western Europe, not to America.

After Thoughts

This is truly a top down approach to economics. Can a handful of individuals make all the right decisions all the time? Monetary inflation has brought the world near to ruin in the past few years and this desperate bet on China is likely to end in tears. It is worth noting as well that the Chinese themselves, as well as the Chinese national authorities, are among the biggest gold purchasers in the world. As the West looks to China to reinvigorate its paper-currency, China itself looks to honest money, gold and silver.

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