Chinese and U.S. deficit consequences

In conversations with the Chinese and Hong Kong banking and business community and through reading the Chinese English language press, the criticism of America’s fiscal and monetary policy is deafening. Hong Kong’s dollar and China’s RMB are tied to the U.S. dollar. The Chinese firmly believe the U.S. is using expansion of its dollar supply, euphemistically referred to as “quantitative easing” (QE II), to devalue the dollar in order to create jobs in the U.S. at the expense of emerging nations. They are also concerned the excess dollars will flow into Hong Kong, China and other countries with exchange rates tied to the dollar. This dollar inflow is expected to create commodity and real estate bubbles and generate inflation. This principal unintended consequence of QE II is agricultural inflation that will result in food shortages in the undeveloped world.
 
President Obama’s trip to Asia last week was a public relations disaster for U.S. economic leadership in the world. Obama is viewed by the Chinese and most of the finance ministers of the G-20 as a hypocrite who criticizes China for currency manipulation to fuel exports on the one hand while his administration justifies the Fed’s currency manipulation through QE II on the other.
 
The Chinese are very critical that the U.S. is using expansionary monetary policy as a substitute to deal with the government’s fiscal deficits and slow economic growth. They believe the U.S. has to address the root cause of the deficit which is unfunded government spending. They are also skeptical that unfunded government spending policy will create long-term jobs. The U.S. has to address issues of debt-financed consumer spending and government disincentives to private sector growth.
 
This criticism is especially interesting given that China is still very much a state controlled economy. Perhaps it takes a society with a history of state control to appreciate the limits of government intervention in, and manipulation of, the economy.


Armstrong Williams is on Sirius/XM Power 169, 7-8 p.m. and 4-5 a.m., Monday through Friday. Become a fan on Facebook- www.facebook.com/arightside, and follow him on Twitter at www.twitter.com/arightside.