The Aussie is back at parity and the Dow Jones is at a two-year high this morning because America and China are going flat out for growth.
It’s an economic Cold War, a stimulus arms race. The United States is pitting its reserve currency and animal spirits against China’s economic discipline, pegged currency and vast workforce.
This race for growth is not the subject of any leaked embassy cables but it is the key fact of the global economy at present. It underlies the recovery of global markets to where they were before the collapse of the US financial system in September 2008 despite the implosion of Europe.
America is desperate not to be overtaken by China economically, and just as Ronald Reagan asserted US economic dominance over the USSR in 1983 with the Strategic Defence Initiative (aka Star Wars), it is now throwing the kitchen sink at what might be called a Strategic Stimulus Initiative.
This time, however, President Obama faces a very different foe. After two decades of selling to, and lending to, the United States, China is now its largest creditor and largest supplier of outsourced labour. It has been only too happy to supply America’s capitalism with the seeds of its own destruction, to quote Karl Marx. China’s leaders learnt from Russia’s mistakes.
Everyone expected the Fed to stick with its decision to print more money next year, and this morning’s monetary policy statement does just that. The reason is in the first sentence: “Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.”
The Fed then repeated the mantra that it has a dual mandate: to foster maximum employment as well as price stability.
“To promote a stronger pace of economic recovery … the committee decided today to continue expanding its holdings of securities as announced in November.”
That’s despite the fact that this week’s extension of the Bush tax cuts included some unexpected budget stimulus as well. There’s new money for infrastructure ($US50 billion in the first year), $100 billion in R&D tax credits and a doubling of the tax credit for machinery investment from 50% to 100% next year.
You’d think with all this stimulus that the recovery must be stalling. In fact it’s entirely intact. According to this morning’s data from the Commerce Department, US retail sales increased last month to their highest level since November 2007 and October sales were revised up from a 1.2% to 1.7% gain. Retail sales have increased five months in a row.
As a result, most economists are now raising their 2011 GDP forecasts from about 2.5% to 3%. Morgan Stanley is now forecasting 4% growth next year.
Meanwhile in China, not only did the authorities not raise interest rates this week in response to 5.1% inflation, but official media reports this morning suggest that bank lending targets for next year will be the same as, or higher than, this year. In other words the lifting of the bank reserve requirement announced after the inflation figures came out will make no difference to lending.
The Financial Times reports that regulatory agencies responsible for economic policy are meeting “every day” to discuss next year’s credit quotas. The range under discussion is said to be RMB7000 billion-8000 billion; the 2010 target was RMB7500 billion.
So why wouldn’t stocks and commodities rally? Europe can commit suicide if it wants — what matters is China first, America second, daylight third.
There will, of course, be a reckoning at some point as Chinese inflation and American debt eventually break down the door of the cupboard into which they have been thrown by the politicians vying for supremacy and the bankers and traders seeking the return of the bonus.
But for the moment it’s all about the growth race, and who’s got the biggest GDP.
*This article originally appeared on Business Spectator.
Paul Keating recently reiterated something I’ve read elsewhere previously: up until the Industrial Revolution, China had the worlds largest economy, simply because it had the most people. One persons ‘work worth’ was pretty much the same everywhere, because we are limited by our physical capabilities.
Once the Industrial Revolution hit, one person suddenly had his output multiplied several times over by the mechinery, in the same was a gearbox multiplies the torque of an engine. All of a sudden, the countries of Europe were able to, in a very short space of time, dominate the planet, despite their small populations.
Now that the Industrial Revolution had finally caught up to China, and in a big way, the output of a given Chinese is again on par with anyone else in the world. In time, China will again resume its natural place at the top of the economic pyramid, if it can get past the challenges of Peak Oil/Gas/Coal/Minerals/farmland, and bring down its population to more sustainable levels (the rest of the world will similarly be having to reduce population in response to those same pressures).
As PK said, dominant nations have historically tried to keep rising nations down. We need a mechanism to welcome China, because without it, we’ll resort to the usual method of maintaining our prosperity: war.
I’m glad you mentioned peak oil, gas, coal, minerals and population; they are very important issues, indeed… Things are going to change in a big way, to the extent that much of what we discuss in economic circles now will be even less relevant than it already is.
If a company dilutes the value of its shares, it asks existing shareholders before it does this, and offers them shares so they can hold the same percentage after. But it seems this doesn’t hold for a country printing more money, and its creditors…
It is sad that the people in USA have been lazy and overdependant on their govt.About 13% live on foodstamps,there is big hysteria against immigration from Latin speaking people raised by politicians for creating fear and getting votes.Never mind that the locals do not want the dirty jobs these illegals do.The farmers need them most and as of today 5% of total population is illegal and they contribute nothing to Govt by way of payroll taxes etc.All that money is saved by the employers to boost their profits.The lousy working conditions of low skilled workers legal or not is straight from early industrial revolution era.this happens because in USA Labour is not well organised and employers through their Lobbies in Congress have lot of advantage in getting favourable laws passed.The working poor pays a fair portion of their income by way of sales tax etc but rich avoid paying taxes in every way they can.Yet the Big Business collects Big Handouts from Federal Govt.They do not like to pay Taxes anyway.Thus Govt is forced to print paper money at a faster pace.This debasement of Dollars is going to wipe out the strenghth of USA and it may turn into what USSR became after its collapse, or what happened in Italy or Germany when too much money was printed.But since USA’s largest creditor nation is a ruthless country it remains to be seen how it will dictate terms to USA in proetcting her investment.Will it become a new mega country with name like UnitedCRU?