“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win” – Sun Tzu
Yesterday we took issue with the president’s handling of the government shutdown and the potential dangers it implied for a debt-ceiling impasse (see “Nerobama“). The issues were character issues, not policy or negotiation issues. Namely, the president seems to have taken the opportunity of the shutdown (and the sequester before it) to inflict needless damage on the American people in order to achieve a political end.
The political drama will play out over the next week or so (possibly longer, though I doubt it) and we will eventually come to an agreement. The government will open back up, the debt ceiling will be raised, and Obamacare will go on – though there will perhaps be some trimming of spending in the process (perhaps). An interesting thing happened yesterday though – China entered the discussion. One suspects that perhaps they have some influence. First, some backstory …
Over the years Keynesian and Monetarist economists have claimed that the key to a prosperous export sector of the economy is to intentionally weaken the currency. The rationale goes that weakening the currency improves the relative price of locally produced goods, resulting in greater demand overseas. It’s a farce, of course. Printing money doesn’t actually produce anything of value, it merely shifts wealth between parties. (Indeed, fiat currencies are the modern world’s mechanism for transfer of wealth from the poor and working class to the elite.) Despite the fact that nobody can point to examples of lasting trade benefits from currency devaluation, the elite banking class pursues it at every term (for the good of the little people).
In this backdrop, many of the world’s governments have been attempting competitive currency devaluation against each other for years (and it could get a whole lot worse). The countries that have “lost” the battle (who, I actually think “won”) have often complained of US money printing. So-called “emerging market” economies like Brazil and India (and even Australia, though it’s probably not “emerging” anymore) have complained that their currencies are “too strong” which has hurt their export sectors. That is, until this past summer.
This summer, Ben Bernanke hinted that the US might start to “taper” it’s bond purchases (i.e., slow down but not stop the printing presses). At this point, money started to flow out of emerging markets and their currencies started to suffer. In response, some of them complained that their currencies were “too weak” and took measures to stem the tide. (Mish has some great articles on the issue in Brazil, see here for instance.)
So now we have this odd conundrum. Emerging markets complained that the US was printing too much, and then complained that the US was going to stop printing too quickly. Perhaps they have figured out that when the debt supercycle finally relents, it will hurt their economies far more than ours. About this time a curious thing happened. Everybody in the financial press was fully expecting a “taper” by Bernanke at the September meeting … and then China weighed in. A Chinese central bank official warned that tapering too soon would hurt the global economy … and Bernanke didn’t taper.
Is China calling the shots?
I bring this up today because an interesting thing happened yesterday in the government shutdown standoff: China weighed in. From vice foreign minister Zhu Guangyao:
“We ask that the United States earnestly takes steps to resolve in a timely way the political issues around the debt ceiling and prevent a US debt default to ensure the safety of Chinese investments in the United States,” Mr Zhu told reporters in Beijing. “This is the United States’ responsibility,” he added.
Of course China has a vested interest in whether the US makes its debt payments – they hold about $1.3 trillion in US debt. But something else interesting happened: the president offered to accept a short term debt-ceiling fix. Naturally it’s not their preferred option, but the fact that there is an opening is new. Until now the Obama administration’s position had been no negotiation and a demand of full capitulation by Boehner (and I kind of thought they’d get it).
Is China calling the shots? Bernanke was set to taper, everybody thought he would, then China said “no” and he didn’t. The US was set to push into the debt ceiling, with the president saber-rattling about a potential default, and then China said “you’d better not” – and now there is an opening for a short-term fix.
My advice to Boehner (not that he needs or wants it): pass a one-month extension on the debt ceiling, no strings attached. The battle seems to have turned just a bit, and there’s no need to go full speed ahead with the bluster. If you want to attach strings, simply attach a “Harry Reid must come to negotiations” rider. That’s it. Don’t leave the door open for political calculation on catastrophe.