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My wife begins by offering a disclaimer. She is, she
tells me, not a watcher of The View but tunes in only for the first five
minutes. I, as a disclaimer, never watch the program nor do I consider myself
much more than common couch critic of what television has to offer. The
reason she brings this up to me over cocktails one night hinges on China. Why,
she asks me, does Whoopi Goldberg seem so fixated on the country?
Evidently, they begin the program with some chitchat about the
candidates. Whoopi keeps asking, even as she is interrupted by someone my
wife simply calls “the Hasselbeck”, do the candidates not tell us
what their stance is on China? Unlike Rosie, who upon being baited by
“the Hasselbeck” would engage in verbal exchange, Whoopi maturely
waits until the interruption has passed, acting like someone who, according
to my wife, tolerates a friend’s yelping Chihuahua.
So what is it about China? Mr. Bush knows the answer. He received it
on a recent visit with Ghana’s president John
Agyekum Kufuor. Our president was rebuffed by the African leader, albeit
gently but firmly when he suggested a military presence in Africa would be
good for the continent. This type of intrusion, Mr. Kufuor suggested would
disrupt the global village that Ghana and Africa so desperately want to
become a part of as the continent continues to grow and develop.
The suggestion by Mr. Bush was a veiled attempt at
confronting the growing influence that China has on Africa. Mr. Kufuor
addressed the topic after the two met recently on Mr. Bush’s first trip
to the continent: “China is not coming as a colonial master. I can
assure you that our nations are not succumbing to dictates and imposition,
not from China or elsewhere. If there is something Africa wants to buy and it
is economical, no matter wherever it is, that is where Africa will buy it
from."
This is an excellent example of an adverse feedback
loop. Even as they agreed to agree on several topics, including how the
country was spending US (taxpayer) aid to the developing nation, Mr. Kufuor
simply stated that his country would gravitate towards the better deal,
regardless of who the seller might be.
If not that, then perhaps Ms. Goldberg’s
concern lies with Chinese increasing involvement in our own economic affairs.
Concerns over national security prompted the multi-agency federal panel, the
Committee on Foreign Investment in the United States or CFIUS to deny a
Chinese company from gaining a stake in 3Com. In 2007, CFIUS inspected just
below 8% of the applicants attempting to merge or invest in US-based companies.
The anti-hacking software that 3Com sells to the
military is not as important as the financial stake China has taken in the US
financial services industry. The strength of our financial markets is vital
to the country’s investments here and abroad. When you consider how
much the Chinese lose every month they hold our debt – almost triple
what we spend fighting the wars in Iraq and Afghanistan each month –
based in dollars, you have to wonder how long they intend to allow it to
happen.
Even as Mr. Bush was suggesting that American
companies would be better suited to the needs that Africa was developing, he
is allowing the Chinese access to a similar type of influence here in the US.
The Chinese have discovered that they do not need a military presence in an
emerging marketplace. With the Chinese now in possession of the largest
economic footprint in the world (17.9% of the GDP), no one is speaking about
how this tenuous debtor/borrower relationship will continue into the next
decade. It is barely even being discussed.
Will we be global or not? Will our economy allow
itself to be consumed by those that control our debt? And what if they
decided to cash it in? No one wants to entertain the possibilities and I am
even a little squeamish about bringing the topic up. We still believe we need each other. At
least until the Chinese pull off their grand entrance onto the world stage
with the August Olympics, any speculation about China’s intentions is
carefully being avoided by both countries.
Another
adverse feedback loop. The information is clearly distorting the situation.
We need the Chinese far more than they need us and should we slip much
further in the global marketplace, we will not be able to react with much
more than rhetoric. CFIUS knows that by simply spinning off the division, as
3Com wanted to do, it would have alleviated most of the investigator’s
concerns. If it is not this, then what is Whoopi concerned about?
Whoopi Goldberg has
concerns over how the candidates are approaching the topic of China. Her
insistence at why the Chinese influence on America is so little discussed
among those running for the highest office in the land concerns me as well.
In part two of our look at the adverse feedback loop, we wonder, is Ms.
Goldberg concerned about whether the Chinese have the ability to translate
Fed-speak and if so, are they worried?
When Federal Reserve Bank of St. Louis President William Poole
explained monetary policy in a speech at Marquette University recently, he
said, “"I have a much simpler way of describing monetary policy.
If you print money in your basement, it's called counterfeiting. If we print
money it's called monetary policy. And that's literally true, we have the
power to print money - that's what we do."
When former
professor of economics at Columbia University and newest Federal Reserve
governor Frederic S. Mishkin suggested that falling housing prices have an
effect on consumer spending and that results in an economic slowdown, he was
also suggesting a way to address financial instability. It must be acted upon
with “timely, decisive and flexible” monetary policy.
Mishkin also
points to what he calls a disruption of financial information. He asserts
that money flows cannot go where they are needed because “the financial
system prevents it from channeling funds efficiently to productive
uses”. So what does a country that helped finance a $256 billion trade
deficit, up 9% from the prior year, think of this?
As to
timeliness: did the Fed wait too long to begin to exercise monetary policy? A
macroeconomy is influenced by liquidity and credit spreads and to a lesser
degree, the information that Mr. Mishkin mentioned. The Fed has very little
left in its arsenal to soften the financial shock a faltering economy can
experience aside from the use of rate cuts.
The two in
January helped but did, at least in hindsight seemed o have been directed not
at the economy in general but at investors on Wall Street. Even market
watchers are scratching their collective heads at the prolonged resilience of
equities. Many claim that much of the bad news is already priced in and, most
reluctantly admit that more bad news is to be expected.
On Main
Street, bankers have not only turned their backs on qualified borrowers, in
many instances, the mortgage rate actually rose as the Fed cut its short-term
overnight rates. The stimulus package is not going to create savers or
spenders. It will go towards getting-by.
The
decisiveness in Mr. Mishkin’s world is another term for good risk management.
The best form of this type of management comes from a good assessment of the
problem. Reacting is not what you assume would be in the economy’s best
interest. Used correctly, decisiveness acts like insurance.
Mishkin’s
final economic triage comes with the ability of the Fed to be flexible with
policy decisions. This seems doubly difficult if the flow of information is
disrupted. By this point in time, you would have expected Fed policy to begin
to solidify around a central policy. The one question continues to pop up:
can the Fed be all things to an economy that is not only stretched to the
breaking point here at home but losing ground and economic credibility on the
global stage as well and do it all at once?
Focusing on
price stability and controlling inflation are all admirable policy
initiatives. As Mr. Mishkin has said, a “systematic approach to risk
management requires policymakers to be preemptive in responding to the
macroeconomic implications of incoming financial market information, and decisive
actions may be required to reduce the likelihood of an adverse feedback
loop.”
Next time you
listen to the candidates, listen for their thoughts on risk management.
Listen for their skills at correcting what has been a long slide into a
smaller role on the world stage. Listen for leadership skills that understand
that stumping locally is about governing internationally. Mr. Bush
acquiesced, cut taxes, encouraged consumerism and promoted spending and this
allowed China to gain more economic ground both here and around the
world.
Perhaps, if
the candidates did offer any answer about what to do concerning China, they
would risk revealing their own adverse feedback loop. James Fallows of the
Atlantic Monthly magazine called it "The $1.4 Trillion Question."
Whoopi just wants to know, “what about China?”
Paul Petillo
www.BlueCollarDollar.com
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