To dig out of the "Great Recession," Washington needs to challenge China on trade and currency manipulation - but President Barack Obama and Treasury Secretary Timothy F. Geithner must recognize that Beijing only has the leverage Washington gives it.
The nation needs to realize that this is no Eisenhower recession, caused by too much inventory. Rather, this meltdown was caused by structural imbalances in the global economy that no stimulus spending can fix.
Dysfunctions on Wall Street notwithstanding, China and several other developing countries produce far more than they consume and enjoy huge trade surpluses, thanks to artificially undervalued currencies, export subsidies and import restrictions. Those require the Americans to consume far more than they produce and for the United States to amass huge trade deficits and foreign debt - otherwise, global demand falls short of supply and unemployment skyrockets.
Once Americans were no longer able to live beyond their means, the global economy collapsed, and President Barack Obama has volunteered the federal government as the borrower of last resort. Now China says Washington borrows too much. That's like a drug pusher complaining about his clients' addiction. Yet, Mr. Obama appeases Beijing by offering to share stewardship of the global economy with this renegade mercantilist.
China's purchases of U.S. Treasuries and threat to quit buying are the elephant in the room. But those purchases are made necessary only by China's huge hoard of dollars that is contrived by Beijing's massive sale of yuan for dollars on foreign exchange markets to keep the yuan cheap, exports flowing, and jobs moving from Indiana to Shanghai.
The Peoples Bank buys U.S. Treasuries because it does not have any better use for the dollars it obtains manipulating the yuan to boost exports. If it quit using those dollars to buy Treasuries, it would simply have to put those in the vault and remove them from circulation. The Federal Reserve would have to replace those dollars in circulation by purchasing the very same Treasury securities Beijing now buys. In other words, the Fed would collect the interest instead of the Peoples Bank. That's not so bad.
How to accomplish it? To persuade China to stop buying dollars to suppress the value of the yuan, the United States should tax the purchase of yuan by American importers until China relents.
Message to President Obama and Treasury Secretary Timothy F. Geithner: Fixing the trade problem with China would do more to boost demand for U.S. growth and employment than even massive stimulus spending could ever deliver.
Peter Morici is a professor at the University of Maryland's Smith School of Business and the former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.
