In a slap in the face heard around the globe, China's state credit agency just publicly downgraded America's credit rating, and questioned US leadership of the world's economy.
In an unprecedented rebuke, China scolded Washington for "deteriorating debt repayment capability," predicting that Washington's printing of billions in paper money (known as quantitative easing in financial argot) would "fundamentally lowering the national solvency."
How times have changed. When I was a boy my father, a New York financier, used to call dubious securities "Chinese paper." Six decades later, it's China's turn to sneer at America's financial instruments. China is the largest holder of US debt.
Monarchs have always had a hard time paying for their wars and conquests. The Spanish, French, Dutch and British Empires collapsed under the financial strain of wars and over-extended colonies. The United States now faces this imperial malady.
Since the days of ancient Egypt, the traditional recourse of cash-strapped empires has been to reduce the gold content of coins, a practice known as "clipping."
Fast forward to Washington, 2010. Today, the name for debauching a nation's currency is "quantitative easing" (QE2), but it's still the same old trick beloved by rulers of yore.
Washington is flooding financial markets with $600 billion of worthless dollars, hoping a rising tide of Monopoly money will somehow lift America out of recession. This is the second round of quantitative easing, known as QE2. And it has nothing to do with the stately British cruise liner.
The US government is stoking worldwide inflation in order to lower its outstanding debt by repaying creditors with depreciated dollars.
The rest of the world is angry at Washington, as last week's G20 economic summits in South Korea and Yokohama, Japan clearly showed.
The European Union, Japan, China, Brazil, and Russia joined to oppose Washington's second quantitative easing as a threat to global financial and trade stability. Equally significant, they rejected US efforts to lay blame for current instability on China's undervalued currency. No agreement was reached on the burning issue of exchange rates.
Washington has been blasting China for manipulating its currency to keep the value low. Embarrassingly, Germany and Brazil just accused the US of being as big a currency manipulator as China - which is quite true.
A depreciated dollar boosts US exports and hurts nations exporting to the US. Economists call it, "beggar thy neighbor," a destructive trade practice that played a key role in the 1930's world depression. Throw in rising protectionism and world trade risks freezing up.
Washington's money flood is eroding the value of the dollar, the world's premier medium of exchange. In the past two months, the US dollar has dropped over 6% against other major currencies. Frightened investors are piling into gold, now up 17% in 60 days.
The Obama administration, just "shellacked" by voters in midterm elections, and desperate to lower unemployment, is gambling more debt shock therapy will spark the economy back to life. But massive, unsustainable debt caused the US financial meltdown in 2008.
The US public debt has hit a stratospheric $14 trillion. You don't treat a poisoning victim with more poison. Spending one's way to prosperity with borrowed money is a chimera.
But panicky politicians are ready to try any sort of economic snake oil remedy to save their skins. Before 2007, America was living high on phony financial froth. Those days are over but no one dares tell voters.
Besides destabilizing world exchange rates and trade, Washington's money flood is pouring into emerging markets as American investors seek higher returns than the miserable .03% or so available at home.
During the 1980's, fragile Asian economies were battered as investment from the US flooded in, then out. This process is happening again, boosting currencies of many nations, making their exports uncompetitive. Investments barriers are going up from China to Brazil.
President Barack Obama inherited a horrible mess from the Bush administration. However, his wrongheaded economic response is undermining the world's economic order. A nation's currency is more a symbol of its strength and good name than its flag.
In fact, last week's rolling economic summits in South Korea and Japan may well mark the beginning of the end of the dominance of the US dollar, which has ruled world finance and trade since 1945. The primary source of America's power comes from its economic and financial strength. Money has far more clout than aircraft carriers or airborne divisions.
The dollar still remains king, but the era of its international supremacy appears to be ending. As the dollar weakens, so will America's world power. The blame for this lies squarely with America's politicians and Wall Street's oligarchs.
There was an uncommon flash of common sense in Washington last week. A special bipartisan presidential panel on reducing the national deficit proposed $4 trillion in federal spending cuts.
All political sacred cows were targeted. The biggest: the $700 billion military budget. A third of US worldwide military bases would close. There would be cuts to social security, mortgage deductions, delays in retirement age, an end to politicians' local pet projects. Taxes would rise.
The howling has already begun. Unfortunately, such unpopular, drastic spending cuts seem highly unlikely, particularly in the new US Congress where Republicans and Democrats will be deadlocked. America would need an economic dictator to implement the panel's full plan.
China has one - ironically, the Communist Party. America, still fatally addicted to war and debt, has only political and fiscal paralysis.
(C) Eric S. Margolis 2010
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