Global Economic Crisis

When he unseated the Democratic Governor of America’s most populous state six years ago in a recall election, Republican challenger Schwarzenegger lambasted incumbent Gray Davis as a typical “tax and spend” liberal. In his thick Austrian accent, Arnold Schwarzenegger promised a new dawn of uninhibited free enterprise growth, facilitated by fiscal responsibility on the part of state government combined with a low rate of taxation. Well, another political promise bites the dust. However, Governor Schwarzenegger demonstrated uncharacteristic candor when he addressed a joint session of the California legislature and accurately outlined the brutal reality underlying California’s dire fiscal crisis.

California is financially bankrupt. The state coffers are bone dry, confronting a $24.3 billion budgetary deficit. This appalling number is likely to grow worse, as the state’s official unemployment rate, currently at 11.5%, is projected to exceed 12% by the end of the year. Already, California is experiencing its worst unemployment rate since the Great Depression. Factoring in discouraged and underemployed workers, the actual unemployment rate in California exceeds 20%. Amid this melancholy economic stew, the state’s legislature is mired in partisan political paralysis. With state government a triumph of ineptitude over responsibility, it appears that desperation is the only remaining option for America’s largest state. In this case, desperation means asking the U.S. taxpayers for a Federal bailout.

For the present, the Obama administration has been resistant to being the banker of last resort for the state of California. The reasoning is cogent in the extreme; if the U.S. government bails out California’s state government, a precedent will be created whereby every deficit-ridden state, county and municipal governmental authority in the U.S. will come crawling to Washington D.C. with hat in hand. However, political realities often override sound economic calculations. California’s powerful congressional delegation will undoubtedly impose severe pressure on President Barack Obama, forcing him to ignore the danger of precedent and add California to the already long list of corporate wards of the U.S. ship of state.

If California were an independent country, its $1.8 trillion GDP would rank as the sixth largest in the world. It is the leading center of high technology and manufacturing in the United States, and it is no exaggeration to state that California’s economic fortunes are interlinked with the remainder of the United States. Unfortunately, all the indicators for California’s economy are pointing south with abandon. The University of California at Santa Barbara recently released its highly regarded state economic forecast. According to the director of the center that publishes the UCSB forecast, economist Bill Watkins, “California’s economy continues its descent into the depth of its most serious recession since World War II…It is possible that when this is over this recession will meet the technical definition of a depression in California.”

If California is headed towards a devastating economic depression, how can America avoid a similar destination? In the meantime, political incompetence continues to reign in Sacramento, while the rating agencies brace for a major downgrade in California bonds.

With the financial and corporate sector having been proven wanting in responding to the Global Economic Crisis, it has been left to the politicians to rescue the global economy from a second Great Depression. What is now occurring in the political corridors of power in California reveals the entrenched limitations of what elected officials are capable of doing amid the unfolding economic disaster. In the final analysis, it may be that California will face the inevitability of defaulting on its debt, or as with the U.S. government bailout of the auto industry, some form of structured bankruptcy.

Could this be what the United States as a whole is in store for, once its wallet and credit are as dried up as in the forlorn state of California?

This is a disaster-laden forecast, which essentially describes a developed global economy mired in staggering contraction, while the developing world is experiencing a collective growth rate of just above 1%, which undoubtedly would have slipped into negative territory without the inclusion of China’s GDP, which received the only positive projection from the World Bank, which has upped its China GDP forecast to a growth level of just above 7%. However, China’s economic growth is almost entirely based on borrowed money; a massive stimulus program comprising nearly $600 billion to subsidize domestic demand as a counterweight to the sharp decline in Chinese exports.

In 2010, the global economy is projected to return to growth, though on a lackadaisical scale. Even in projecting growth for next year, the World Bank reduced its already weak forecast. What the data seems to reflect, on the macroeconomic level, is that global trade is in free fall, and with the severe contraction of export-driven economic growth, massive borrowing by the sovereign to fund domestic stimulus activity is about the only major economic expansion still occurring. Unfortunately, fiscal policy is only a short-term driver of growth. Even sovereign states eventually exhaust their capacity to borrow and engage in vast levels of deficit spending.

With the World Bank pointing towards more bad news for the global economy, the European Central Bank has come out with a wet blanket of its own. The ECB is warning that pump priming by governments as their primary policy response to the Global Economic Crisis must soon come to an end, or create unacceptable levels of risk to sustained economic development. In particular, the ECB is concerned about the danger of rampant inflation and uncontrolled fiscal imbalances, as national debts of major developed economies, especially within the Eurozone, comprise a growing proportion of their GDP. More alarmingly, the ECB is not alone; other central bankers and economists are also warning that economic policymakers must soon find what they refer to as an “exit strategy” from the massive fiscal deficits that are currently being accumulated with such reckless abandon.

The World Bank’s June forecast data presents economic decision-makers with a conundrum. With 2009 shaping up to be the single worst year for global economic performance since World War II, and 2010 being projected as a year of anemic growth at best, there will be immense pressure on policymakers to enact follow-up stimulus programs, with even greater levels of public borrowing. For example, Nobel Prize wining economist Paul Krugman has consistently called for a much larger stimulus package than the nearly $800 billion Obama package. The argument will be that without more deficits, the globalized recession will be prolonged, and create higher levels of unemployment. However, the fact that in this fragile economic environment some voices within the policymaking establishment are beginning to question the continuation of debt-driven public financing is a sign that there is no clear consensus on how to resolve the Global Economic Crisis.

To add to all the other bad news, economist Nouriel Roubini, the most astute observer of the global financial and economic contraction, is now warning that while a slight economic upturn is possible in early 2010, there is now a growing risk of a “double dip” recession towards the end of 2010, facilitated in large part by the fractured finances of sovereigns that have accumulated staggering levels of public debt.

Finally, even the most optimistic projections concur that global unemployment will continue to accelerate, well into 2010. With fewer wage earners and a continuing credit contraction, it is hard to see any tangible basis for a sustained economic recovery. Remove deficit spending from the equation, and we could see a second Great Depression. Maintain high levels of public borrowing, and the global credit and bond markets will impose their own will, leading to equally cataclysmic economic consequences.

The World Bank’s updated economic forecast does not present a clear roadmap for the future of the global economy. What it does provides is more evidence that the Global Economic Crisis is far from over, and that there is no clear answer to the question of how to bring this globalized disaster to an end, and restore healthy, sustained growth to a battered world economy.

Now, however, the price of oil is once again moving upward. In part, suggest analysts, this is due to a perception that the worst of the economic free fall is behind us. Whether those perceptions are valid or not (and I don’t believe they are), psychology is an important factor is establishing commodity valuation. However, I believe there are other forces at work, or which may intervene in the future, that could radically escalate the price of hydro-carbon energy irrespective of recessionary constraints on consumption. Here, briefly, are factors to consider in anticipating any future oil shock:

1. China hedging on oil. Apparently, the Chinese are shifting investments allocated from their sovereign wealth fund from U.S. Treasury bills to commodities, including oil. With a sharp drop in exports only partially redressed by a stimulus-funded drive at boosting domestic consumption, it appears that China is building up an oil reserve in anticipation that this commodity will eventually rise greatly in price, simultaneously with the future depreciation of the American dollar. Should China’s oil hoarding increase in tempo, a significant upside in the price of petroleum will become highly probable.
2. Political instability in the Persian Gulf. The political upheaval occurring in Iran in the aftermath of a presidential election widely perceived by the Iranian people to have been rigged has an unpredictable dynamic. However, most scenarios, either involving prolonged violence or the perpetuation of a radical regime committed to acquiring nuclear weapons, will likely facilitate events that will impact the supply of oil from the most energy-intensive real estate on the planet. Even the mere perception that things might go bad will be enough to drive up the price of oil. Actual events, including internal and external violence, will impose a significantly higher cost penalty.
3. A terrorist attack involving a strategic target related to the oil industry. Al-Qaeda is well aware of the vulnerability of the global economy, at a time of profound financial and economic crisis, to a targeted attack on a vital element related to the oil industry. Only one single but highly significant target would be enough to send the price of oil to a much higher level. Unfortunately, Al-Qaeda and its allies have many choices to select from a menu of targets. In terms of extraction, transportation to consumers as well as refining and storage infrastructure, there are literally thousands of targets across the globe, any one of which would prove impactful to the stability of oil prices. It would be unduly optimistic to assume that Al-Qaeda is not focussed on such an objective, or that security forces are so effective that they can protect every possible target.

The fall in oil prices from their record highs of last summer amounts to, in effect, a tangible economic stimulus program. Unlike government stimulus spending programs, the fall in oil prices required no deficits, and meant an immediate infusion of money into the pockets of private and corporate consumers. Conversely, the return to higher energy prices at a time in which the world is experiencing its worst economic crisis since the Great Depression of the 1930s would, in terms of impact, be a major tax penalty being imposed on any attempt at a sustained recovery. In essence, the entire global economy is being held hostage to the volatile pricing forces of an essential commodity. Clearly, when it comes to oil price levels, the market does indeed rule.

Russian President Dmitry Medvedev, who hosted the BRIC summit, had told journalists prior to the meeting that present policies which maintain the role of the U.S. dollar as the world’s reserve currency ” have not managed to perform their functions.” Senior economic advisors from other BRIC nations, especially China, have also expressed the viewpoint that the status of the U.S. dollar as the only global reserve currency can no longer be unchallenged. It is therefore no surprise that the BRIC summit addressed the greenback in its official communique.

“We also believe there is a strong need for a stable, predictable and more diversified international monetary system,” the BRIC leadership tersely stated. Reading between the lines, the BRICs largely blame the United States for the global financial and economic crisis and believe that the malfeasance of U.S. fiscal and regulatory policies has abrogated the previously unchallenged status of the U.S. dollar as the standard reserve currency.

The BRIC has just held its first summit, and has emerged with a pointed gun aimed at the U.S. dollar. Not that this newly formed geopolitical bloc will immediately seek to diminish the U.S. dollar, considering in the short-term they themselves would be negatively affected, China in particular, which holds nearly a trillion dollars of U.S. dollar denominated Treasury bills. However, the handwriting is on the wall. With a growing perception among key economic players across the globe that the U.S. budget deficits are raging out of control and will inevitably spark high levels of inflation, this new power bloc is already planning for the day after the supremacy of the once might American greenback has been terminated.

With an inflation rate of approximately 25% and unemployment officially in excess of 12%, the Iranian economy has been battered by external factors such as the collapse of oil prices with the onset of the global recession. This situation was undoubtedly exacerbated by the sheer ineptitude of Ahmadinejad’s attempt at managing Iran’s economy. However, as is well known, the President of Iran wields little actual power; it is the Supreme Leader, the unelected Ali Khamenei and his clique of “experts,” who rule the country. All indications demonstrate that the Khamenei clique is far more interested in maintaining their political dominance of Iran than improving the economy. The reelection of Ahmadinejad, even if done through fraud with sufficient transparency so that nobody is fooled, is a far more comforting outcome for Khamenei than risking the appointment of a reformer as president. It is also clear that improving relations with the United States is not seen as useful to the ruling theocratic clique; maintaining tensions with the “Great Satan” is advantageous to the regime as justification for maintaining strict political control over Iranian society, and continuing with Tehran’s thinly-disguised nuclear weapons program. In that sense, strengthening the hand of the bombastic, provocative Ahmadinejad is also a desirable outcome for Khamenei.

A radicalized Iranian leadership that is willing to ignore the will of its own populace can scarcely be expected to bow to international pressure to terminate its nuclear weapons program. As the perception that Iran is getting closer to developing nuclear weapons grows stronger, the possibility of military hostilities in the region cannot be ignored, whether initiated by the U.S., Israel or preemptively by Tehran. Though the ramifications of military hostilities with Iran are unpredictable in a general context, in one specific aspect it is clear what the most dramatic implications are. Even the perception that a military clash with Iran may occur, as opposed to actual hostilities, will prove disastrous to the global economy.

Any attack on Iran, whether justified or not, will provoke fierce retaliation. Iran is in one of the most strategic areas on the globe, its coastline hugging the Persian Gulf and straits of Hormuz, the most important choke point for the export of oil to the world’s leading industrialized economies. Besides curtailing its own oil exports, the Tehran regime will almost certainly interdict and disrupt the supply of oil from the Gulf, and it unfortunately has many options to facilitate this outcome. During the Iran-Iraq war in the 1980s, the Iranians attacked oil tankers belonging to nations not involved in its conflict with Iraq, at a time when it was much weaker than currently. It therefore is a matter of certitude that if Iran’s nuclear facilities are attacked, it will do all in its power to cut off the supply of oil from the Gulf region.

The impact of any rise in tension in the Persian Gulf will send the price of a barrel of oil through the stratosphere. Factor in Iranian reaction to an attack on its nuclear installations, and we could have oil prices climb to a level that seems inconceivable at present: $400-500 a barrel, perhaps even higher. Such exorbitant prices for oil will terminate any talk of economic recovery, and ensure that the world sinks into a severe depression.

And what about Ahmadinejad? Though the Iranian intellectual establishment and even factions within the clerical ruling clique would prefer a lessening of international tensions, the chosen symbol of the real centers of power in Iran represents its most hard-line agenda. In 2005, the Iranian President stated his long-term objective in very clear terms. His comments were brief, to the point, and devoid of any references to Iran’s economic problems. He simply said, “Our revolution’s main mission is to pave the way for the reappearance of the 12th Imam, the Mahdi.” The reappearance of the Mahdi presupposes an apocalypse on earth.

It is not only the credit crunch, stimulus spending, deficits and deflation that the global economy must wrestle with. The Iranian election parody will demonstrate how even domestic political events in a foreign country can have dangerous implications for the world’s economy at a time when it is already in a state of acute vulnerability. What unfolds in Tehran in the weeks and months ahead may prove more important to the evolution of the global financial and economic crisis than the public utterances of officials in Washington.

The United States is already projected to have a Federal budgetary deficit of $1.8 trillion in 2009, a figure that I believe will ultimately exceed $2 trillion, or approximately 15% of America’s GDP. As is well recognized, the U.S. will have to borrow much of that deficit from overseas, resulting in ballooning payments to foreign holders of U.S. government debt instruments. Similarly, when the U.S. imports far more than it exports, the nation must pay for the resulting trade deficit with dollars. So here we have a perfect fiscal storm; quantitative easing by the Federal Reserve, massive overseas borrowing by the Federal government to pay its basic operating expenses, and massive borrowing or printing of dollars to pay for imports not covered by the net value of America’s exports.

It appears that the trade deficit for 2009 will likely exceed $300 billion. When added to a multi-trillion dollar U.S. government deficit, a figure not even inclusive of state, county and municipal deficits, the result is a fiscal imbalance that is unsustainable. In short, the current account deficit is exploding, when one aggregates the quantum leap in interest payments the U.S. taxpayers will be compelled to make to overseas creditors in addition to financing the widening trade imbalance.

Typically, a nation that is experiencing a major gap in exports versus imports that is beyond fiscal prudence will have no recourse but to facilitate the devaluation of its currency. The rationale is quite simple; a cheaper currency means your consumers will buy fewer imported goods, while the nation’s exports become cheaper. In normal fiscal times, that might be a prudent course to follow. However, as strong market forces are already weakening the U.S. dollar, any policy response designed to further depreciate the value of America’s currency will destroy much of the value of U.S. Treasuries held by sovereign creditors, in particular China. Yet, the U.S. trade imbalance combined with other economic and financial forces will inevitably devalue the dollar, which in turn will lead to heightened tensions between the United States and its primary foreign creditors.

It just may be that April’s trade figures are a leading indicator of a pending catastrophic collapse in the value of the U.S. dollar, a fiscal calamity that will add immeasurably to the financial and economic woes of the United States and the global economy. Green shoots? More like black clouds, at least to this observer.

President Barack Obama has long been opposed to the military adventure in Iraq, on the grounds that it had dangerously distracted the United States from focusing on crushing Al-Qaeda and its allies in Afghanistan. History has already validated Obama’s assessment on what the correct priority should have been for the U.S. armed forces. The question now facing Obama and his administration is what strategy to pursue in Afghanistan. The fragments that have emerged so far seem to indicate two trends; modestly reinforce the U.S. troop presence in Afghanistan, while linking the Taliban and Al-Qaeda presence in neighboring Pakistan to the overall theater of operations.

Will President Obama’s approach on Afghanistan prove more efficacious than that of George W. Bush? The lessons of history raise doubts that deserve serious reflection. The United States has not had a stellar record in winning wars against determined insurgents fighting a fierce guerrilla war. Vietnam is a conspicuous reminder that even hundreds of thousands of American troops, backed by massive technical means and a powerful airforce, cannot guarantee victory.

There is a voice from the distant past who has something to say that is highly relevant to the military challenges facing the U.S. military in Afghanistan. The Swiss military theoretician, Antoine Henri Jomini, served as a senior staff officer in Napoleon’s army during the Peninsular War. This brutal, conflict, fought on the Iberian Peninsula, began with the occupation of Spain by the French army. The population revolted, leading to a savage conflict that gave rise to the term “guerrilla war.” The British sent a small but well disciplined professional army to aid the Spanish insurgents, under the command of the Duke of Wellington. In five years the combined army of Spanish guerrillas and British regular troops utterly defeated the French. Napoleon’s defeat in the Peninsular War, combined with his forced retreat from Russia, brought about his ultimate downfall.

When writing his seminal work, “Art of War,” Jomini applied the lessons he had learned during the Peninsular War to form general principals and doctrine on guerrilla and insurgent conflicts. The principals he laid down align with the American experience in Afghanistan with chilling relevance.

“When the people are supported by a considerable nucleus of disciplined troops, the difficulties are particularly great,” wrote Jomini. “The invader has only an army, whereas his adversaries have both an army and a people in arms, making means of resistance out of everything and with each individual conspiring against the common enemy.”

With centuries of virtually uninterrupted warfare, including a brutal Soviet occupation that the Afghans successfully resisted, a large component of the country’s male population is well trained in small arms tactics, making expert use of their land’s barren and mountainous terrain. Just as Wellington’s troops added stiffening to the ranks of the Spanish guerrilla fighters, there exists a large corps of veteran fighters, including commanders, that multiplies the effectiveness of the younger insurgents joining the ranks of the Taliban in sufficient numbers to extend the conflict indefinitely.

Jomini provides a description of what he learned about insurgencies in the Peninsular War, lessons that are applicable two centuries later in the mountains of Afghanistan:

“These obstacles become almost insurmountable when the country is difficult. Each armed inhabitant knows the smallest paths and their connections; he finds everywhere a relative or friend who aids him. The commanders also know the country and, learning immediately the slightest movement on the part of the invader, can adopt the best measures to defeat his projects. The enemy, without information of their movements and not in a condition to reconnoiter, having no resource but in his bayonets and certain of safety only in the concentration of his columns, is like a blind man. His combinations are failures. When, after the most carefully concerted movements and the most rapid and fatiguing marches he thinks he is about to accomplish his aim and deal a terrible blow, he finds no signs of the enemy but his campfires. So while, like Don Quixote, he is attacking windmills, his adversary is on his line of communications, destroys the detachments left to guard it, surprises his convoys and his depots, and carries on a war so disastrous for the invader that he must inevitably yield after a time.”

Unless President Barack Obama restores the military draft, raises an army of several hundred thousand soldiers to occupy and guard every vital installation in Afghanistan, and convinces the American people that they must sustain such a massive occupation for possibly decades, and accept substantial casualties and massively increased military expenditures, he will lack the means to challenge the insurgency in a decisive manner. As commander in chief, therefore, Obama is faced with two choices. He either maintains the status quo with slightly more troops, which will mean only prolonged stalemate. Or he can refocus U.S. objectives on the limited goal of ensuring Afghanistan never again allows its territory to be used as a base to attack the United States.

The first choice only promises a higher list of dead and maimed Americans, and frightful expenditures at a time of profound economic and financial crisis. The latter choice opens up the possibility of a negotiated resolution of the conflict, leading to the attainment of U.S. national security objectives without the permanent occupation of a land historically hostile to all foreign armies.

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In less than a year we have seen the bankruptcy of financial and industrial behemoths once thought impregnable: Lehman Brothers, Chrysler and GM. Selectively employing the mantra “too big to fail” with companies such as AIG and Citigroup, the U.S. government has sought to reassure the American public that it is acceptable for other large corporations to endure the tribulations of Chapter 11 reorganization; that bankruptcy is actually a healthy business process that will restore profitability to large companies overwhelmed by debt and the consequences of the Global Economic Crisis. Yet, amid this Orwellian business vocabulary, the most essential question is perhaps being missed. Will the United States government be forced into bankruptcy?

If your reaction is one of incredulity, with the temptation to write off such a dire mega-financial event as a fringe-group fantasy, think again. Witness what some otherwise boring yet highly respected accountants and bankers have been saying recently about the exploding indebtedness of the United States.

David M. Walker served as the Comptroller-General of the United States from 1998 to 2008. In his capacity as the chief congressional financial watchdog, Walker warned long before the onset of the current financial and economic crisis that the nation faced more than $50 trillion in unfunded obligations due to Medicare and Social Security. Rather than allocating revenue to ensure these future liabilities were fully funded, Congress and the federal government have done exactly the opposite. Not only has no funding provision been made for these two major entitlement programs; while Medicare and Social Security have been in surplus their revenue stream has been used to artificially deflate the actual government deficit. Unfortunately, this shell game will come to an end in only a few years, when both programs enter into extreme and growing deficits of their own. And the figure of $50 trillion in unfunded liabilities, separate and apart from the U.S. government’s official national debt of more than $11 trillion, is already outdated by a cascading avalanche of dire financial news.

Richard W. Fisher, President of the Dallas Federal Reserve, delivered a speech to the Commonwealth Club of California back in May, and revealed that the authentic national debt of the United States, using generally accepted accounting principals, was nearly $100 trillion! Putting this surreal as well as apocalyptic number in perspective, Fisher said, “With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four, over 25 times the average household’s income.”

It is in the context of an already fragile fiscal architecture that the Obama administration and Congress are unleashing a torrent of unprecedented debt. The rationale is that this must be done, or the economy will crater. For the sake of short-term moderation of the worst ravages of the Global Economic Crisis, an already disastrous fiscal posture is being stampeded towards unmitigated catastrophe. Yet, the political leadership still claims it is committed to fiscal responsibility and that once the economy recovers and strong economic growth is restored, the deficit will shrink as a proportion of the nation’s GDP. Does anyone still believe these political promises of a new era of fiscal discipline that surely awaits us just around the bend?

There is mounting evidence that America’s primary overseas creditors are no longer easily fooled. Their collective skepticism is mounting, as Treasury Secretary Timothy Geithner discovered recently on his beggar’s expedition to China. The policymakers in Beijing are shifting their sovereign fund investments from U.S. Treasuries to commodities as a clear indication of their growing concern about the staggering level of indebtedness of the United States. And they are not the only major global financial actors to manifest a growing level of unease at Uncle Sam’s ballooning debt.

The Co-Chief Investment Officer at Pacific Investment Management Company, otherwise known as Pimco, is Bill Gross. He is one of the most important individuals on the planet at this time of global crisis, as Pimco manages the world’s largest bond fund. It is through the bond market that sovereigns finance their national debt. This is what he had to say about the credibility of the Washington political establishment on its claimed intent to restore fiscal sanity:

“While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat.”

Undoubtedly, Mr. Gross is correct. There is no rabbit to pull out of a magician’s hat. Which leaves just three alternatives for resolving America’s fiscal imbalance: 1. Raise taxes exorbitantly and/or drastically cut government expenditures 2.Unleash hyperinflation to reduce the real value of the national debt-and destroy the value of the currency in the process 3.Default on the national debt.

Defaulting on the national debt, which in effect is a declaration of U.S. insolvency, would have tectonic ramifications for the entire global system. Financial and economic power, international relations and strategic alliances would be altered so radically, the world that would ultimately emerge would be vastly different from the one we know today. While its exact composition cannot be predicted, it is a rule of history that great powers that go bankrupt lose their great power status.

Do any members of the Washington political establishment actually reflect on the long-term implications of the untenable fiscal policies they have authorized with their votes? If there are, they are sadly too few in numbers.

Much of the world is betting on the success of China’s own stimulus spending program, which equals nearly $600 billion. However, despite the impressive aggregate size of the Chinese economy, per capita income still ranks very low, standing at 107 out of 179 nations, or about $2,000. The capacity of the economy to compensate for demand destruction in its principal export markets through comparable increases in domestic consumption does not appear to be suffcient enough to create a basis to hang the global economy on. What is more likely is that China will spend what it can, borrowing from its sovereign wealth funds and reserves, to inhibit the growth of unemployment so as to maintain social cohesion.

As for Geithner’s agenda, his number one priority remains China continuing in its role as America’s principal banker. Like large debtors everywhere, the U.S. Treasury Secretary and Obama administration actually believe they have China over a barrel. The U.S. was just a larger version of AIG or Citigroup in their framework; too big to fail, as China’s major export market. For a time, it appeared that China’s political and economic leadership reluctantly agreed. Recall the words of Luo Ping, a director-general at the China Banking Regulatory Commission, who told journalists back in February that, “Except for U.S. Treasuries, what can you hold? U.S. Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion [of Treasury bonds] we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Now, however, there are growing indications that a major reassessment is underway among China’s principal economic policymakers regarding their country’s huge investment in U.S. government debt, currently in the range of $1 trillion. A growing number of Chinese officials are on record as believing that the U.S. dollar will eventually lose its role as the world reserve currency. And while in the short-term China will continue to purchase U.S. Treasuries, its own domestic needs and financial limitations are likely to restrict those investments to a level that represents only a fraction of the vastly exploding U.S. government borrowing requirements.

Ultimately, China does not see itself as the St. Jude of America, but as a sovereign nation with an old civilization, downtrodden for the last two centuries by Western powers and Japan, but which is on the verge of emerging from the Global Economic Crisis as the preeminent world financial power. It therefore will make decisions on how it allocates its resources and financial reserves not based on America’s desperate borrowing needs to finance its profligate budget deficits, but on serving the supreme long-term national and strategic interests of the People’s Republic of China.