Obama is displaying... zeal in his ... war against the financial crisis - and his weapon of choice is the money-printing machine. The rules the new American president is breaking are those which govern the economy. Nobody is being killed. But the strategy comes at a price - and that price might be America's position as a global power.
Will the USA continue to be a strong diplomatic partner for Germany, Austria, and Switzerland? Only to the extent that it can be a strong economic partner. But America may be damaging its own economic abilities:
Larry Summers ... is Obama's senior-most economic advisor, and ... he is a man of conviction. The financial crisis may be large, but Summers' self-confidence is even larger. More importantly, President Barack Obama follows him like a dog does its master.
The crisis, Summers intoned last week at a conference of Deutsche Bank's Alfred Herrhausen Society in Washington, was caused by too much confidence, too much credit and too many debts. It was hard not to nod along in agreement.
But then Summers added that the way to bring about an end to the crisis was -- more confidence, more credit and more debt. And the nodding stopped. Experts and non-experts alike were perplexed. Even in an interview following the presentation, Summers was unable to supply an adequate explanation for how a crisis caused by frivolous lending was going to be solved through yet more frivolity.
Summers has no misgivings, and doesn't recognize those held by others. The fact that German Chancellor Angela Merkel recently gave a speech in which she was critical of the US economic stimulus program did not impress Summers. In our conversation, he said he thought Merkel's position was a tactical one. "She only says that out of domestic concerns," he said and rolled his eyes in disapproval.
Americans have now thrown their support behind the debt president Obama. The mistakes of the Obama administration are still not recognized as such. They are seen as the truth.
Germany and the other European nations would like to have an economically strong USA as an international partner. But if America is inflicting damage on its own economy, Europe will back away from cooperation and joint ventures. Economist Steingart identifies five economic errors which need to be corrected. The first mistake is believing that the current financial situation isn't really that bad:
Mistake number one: It's not as bad as it seems. The US amassed much more debt during World War II, it is often said. That, though, is not true. According to conservative forecasts, Obama's policies could end up being three times as expensive as US expenditures during World War II. If one calculates using today's prices, America spent $3 trillion for the war. Obama's budgetary calculations for the decade between 2010 and 2020 assume additional debt of $9 trillion.
The next mistake is creating more debt and failing to trim the bloated budget of the federal government:
Second: It is generally assumed that the money is part of an effort to resuscitate the crisis-plagued economy and is thus serving a good purpose. The truth of the matter is that the bulk of the borrowed money will be used to finance the normal US budget. American borrowing in 2009 comprises about half of Obama's budget. The country is living beyond its means - and it still would have been even if it weren't for the economic crisis.
An additional error lies in the structural need for debt: without massively revising the way America funds both its government activities and private-sector needs:
The third error: Many believe that when the crisis ends, borrowing will automatically fall. The truth is that it could climb afterwards. The graying of American society creates a new fiscal policy challenge for the country that so far hasn't been reflected in any budget plan. According to calculations by the International Monetary Fund, Washington would need to spend several times more than it is now just to service current pension entitlements and the free, state-funded medical care provided to senior citizens. In addition, Obama has promised to introduce healthcare coverage.
Even when we factor in that the total number of uninsured is far less than usually claimed, it represents a massive burden to the economy - a burden which will actually reduce the amount of capital available to invest into the healthcare sector.
All of this is being financed through ever-riskier debt schemes; as the credibility of the US has fallen since Obama's inauguration, other nations are less willing to lend to America:
Fourth: The world believes that the US is borrowing money from capital markets. It is often said that the Chinese and the Japanese will buy government bonds. But the truth of the matter is that trust in the gravitas and reliability of the United States has suffered to such a great degree that fewer and fewer foreigners are purchasing its government bonds. That's why the Federal Reserve is now buying securities that it has printed itself. The Fed's balance sheet has more than doubled since 2007, making the US central bank one of the world's fastest-growing companies. The purpose of this company, though, is to create money out of thin air.
Finally, the debt crisis is now triggering an inflation crisis:
Fallacy No. 5: The additional money is harmless because the economy is starting to pull together again and there is no threat of inflation. The truth is that the quiet on the inflation front is deceptive. The hot money is accumulating in people's savings accounts and in the balance sheets of banks that aren't keen to lend money at the moment. The supply of money has increased by 45 percent in the last three years and there has not been a corresponding rise in hard assets or production. That imbalance will eventually make itself felt in the form of inflation.
These five above-listed mistakes are making themselves felt on the international currency markets:
The dollar, which has already lost ... value against the euro ... , would then devaluate and its reputation would be further diminished. The world's reserve currency could be pushed through the floor by the shockwaves. At that point, those waves would also wash over the rest of the world. Then people would have to look back and say that the means the US used to fight the economic crisis in fact paved the way for a currency crisis.
What will the European leaders do in the face of Obama's economic follies? German Chancellor Angela Merkel has already issued some mild warnings to Obama, but German economists, and the public in other nations like Austria and Switzerland, are asking for firmer tactics:
Germany still hasn't provided its response to the Obama administration's fiscal policy excesses. Perhaps its time for Merkel to take her cue ... The German response to the excesses [should be] refusal and obstinacy ... organiz[ing] a European resistance front the reache[s] from Moscow to Paris.
America may soon face a Europe which is organized against its economic policies. The USA will need change its course if it is to re-earn the respect of our allies.
