BE CAREFUL WHAT YOU WISH FOR

5/29/09

Preppy Timmy Geithner heads to China tomorrow. His main goal, according to today’s (Friday, 5/29/09) Wall Street Journal, is to express gratitude for the Chinese stimulus package, a package on which the Obama administration has heaped the most sincere form of gratitude, that Mr. Geithner seems to think has done so much to “revitalize” the world economy. Though the Journal did not, and would not, report this, another part of his mission is to beg the Chinese to continue to buy our debt even as it loses value as we hyper-inflate our economy, debase our currency, and watch our interest rise as a consequence.

Another of Mr. Geithner’s goals, according to the Journal, is “to press Beijing to take drastic measures to run China’s economy into one that depends heavily on sales to domestic consumers and less on sales to the U.S. and other foreign markets…” He plans to do so by “encouraging Beijing to offer more generous health care, retirement, welfare, educational, and other benefits in order to persuade the average Chinese citizen that spending now doesn’t mean starving later.”

A realist, whom some would call a cynic, would conclude that Mr. Geithner and his fellow Obamacrats are trying to transform the Chinese from the hard working, thoughtful, prudent, thrifty people that they are into the wastrel spendthrifts of the type that comprises a large and growing share of the U.S. population. This approach to life and personal finance has not worked so well for us; perhaps this is just a case of misery loving company.

There is a more immediate problem with Mr. Geithner’s entreaties to the Chinese to reorient their economy more toward domestic consumption. To understand this problem, one must understand how the world economy works: We buy stuff (very little of which we actually need) from the Chinese (and other nations, primarily developing nations, but China is the focus here). They lend us our money back to us. We buy more of their stuff. They lend more of our money back to us. We buy more of their stuff. And so the daisy chain continues until the Chinese find another outlet for their stuff. This reduces the American role in the U.S. economy to buying stuff (i.e., consuming) and figuring out how to get other people to pay for our brazen, obscene consumption (i.e., finance). (This description excludes our exports of agricultural and capital goods, still very important roles for the U.S. in the world economy, but the dollar amounts involved in such exports remain small, and continue to shrink, relative to the types of goods involved in the aforementioned daisy chain.)

So what if the Chinese, along with India, Brazil, and other developing countries, do develop a middle class capable of absorbing a far larger share of those nations’ output, thus reorienting their economies more toward domestic consumption? They thus will have found another outlet for their stuff. What is to become of the United States then? One would guess that our only remaining role would be as an exporter of agricultural goods and raw materials. Thus we would assume the role of a third world nation while the former third world nations would assume the role of industrial and, eventually, financial powers. Nice thinking, Timmy.

The really scary aspect of such a scenario is that it will unfold regardless of what the Obamacrats, or any politicians, want or think is desirable. It is the natural order of things: productive, thrifty countries prosper while coasting, spendthrift nations decline. While Timmy and the Obamacrats may hasten this already quick evolution, the tides of history are going to sweep over us no matter what we do unless we change our behavior. Don’t bet on the latter.