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UPDATED: August 15, 2011 Web Exclusive
Cheeky Monetary Policy

STILL NERVOUS: A trader works on the floor of the New York Stock Exchange on August 10, 2011. US stocks plummeted over 4 percent Wednesday, more than wiping out the gains of Tuesday's rebound as European debt troubles and worries of a new U.S. recession kept investors nervous. The Dow Jones industrial average was down 519.83 points (4.62 percent) to 10,719.94 at closing, compared to its 430-point gain on Tuesday (XINHUA/AFP)

As the global stock markets tumbled recently, U.S. economist Alan Greenspan denied that the economy in the United States would re-enter recession. However, Ye Tan, a financial commentator in China said at the National Business Daily that the United States cannot solve its own debt crisis, and cannot resolve fundamental problems. Edited excerpts follow:

Alan Greenspan, former U.S. Federal Reserve chairman, did not sit still as the global stock markets tumbled last week. He denied that the U.S. economy would re-enter recession, and said in an interview that the U.S. economy is much better than that in Europe. He pointed out that U.S. bonds are a safe investment, and United States is able to pay all debt, because it can always print money, keeping the default rate at zero.

However, this points out a sad fact: the global economy cannot move on while being tied to the chariot of the U.S. dollar.

The reason why the United States dared to become a debt kingdom is because the U.S. Treasury may simply print more money. Further, the reason it dared to adopt quantitative easing monetary policy to increase world inflation, is that it wanted to ease its debt pressure at the expense of world growth.

However, the Federal Reserve cannot solve its debit crisis, because the economy has not recovered, its welfare policy cannot be axed, and the Obama administration's plan to levy tax on rich people with annual income exceeding $250,000 encountered manic resistance from Republican extremists. Although the fundamental approach to reducing deficits is to increase income and cut expenditures, the U.S. government has made only symbolic reductions, but has no way to tap new sources of income, and has no good methods to recover its economy.

The White House cannot rule out domestic problems such as unfair distribution, debt-dependent consumption and relying on Wall Street to regulate the economy. Look at American history. In 1936, President Franklin Delano Roosevelt raised the maximum progressive tax rate on the highest income earners to 79 percent during the Great Depression, and it had soared as high as 91 percent during the 1950s and 1960s. The Kennedy administration reduced this to 70 percent. By the time of Ronald Reagan's presidency, it was reduced to 28 percent. It rose to 39.6 percent in the reign of Bill Clinton, and dropped to 35 percent under the Bush administration. The gap between the poor and the rich was widened in the United States, with the middle class shrinking. Seven years before the eruption of sub-prime mortgage crisis, median income declined by 0.6 percent after adjusting for inflation.

American debt is like poisonous melamine, and has penetrated almost all institutions. The total size of the Federal Reserve's balance sheet climbed from $899.3 billion in June 2007 to $2.86 trillion in May 2011, 2.2 times higher than before the financial crisis in 2008. Benefiting from quantitative easing, the Federal Reserve has constantly bought U.S. Treasury bonds, holding as much as $1.336 trillion, or 14 percent of the federal government's total debt.

The U.S. dollar is American currency, but it is global problem; the U.S. economic recession is an American internal affair, but it is a global crisis. The whole world will get into Japanese-style long-term stagnating inflation and the next lost decade is impending.

Unlike Roosevelt, Obama has no other options other than printing more currency. He cannot rectify monetary order, confine the fat cats of Wall Street, nor implement fairness on the basis of healthy economic growth. The probability is increasing that the Pentagon will implement hidden quantitative easing monetary policy.

Under the guidance of quantitative easing, major central banks worldwide have stopped temporarily increasing interest rates. The central banks of Japan and Switzerland have begun to intervene in currency exchange rate markets so as to boost the dollar. On August 8, the Group of Seven (G7) finance ministers and central bank officials said in their statement that G7 nations are committed to taking coordinated action to ensure liquidity and to support financial market functioning, financial stability and economic growth. "These actions, together with continuing fiscal discipline efforts, will enable long-term fiscal sustainability," the statement said.

But this is an impossible task. When the statement said that the G7 will ensure market liquidity to reduce market panic, it is implied that this is supposed to relax currency policy. The "fiscal discipline" is just an illusion. It means to let every walk of life know that when panic mood recedes, the G7 will implement strict fiscal discipline.

The contradiction is that even if G7 governments implement strict fiscal discipline, the market panic would not stop in the short term. But if they adopt relaxed monetary policy, they would plant a seed of panic. Between long-term and short-term sufferings, politicians and bankers would select to continue to intoxicate themselves for the sake of votes. In fact, investors show distrust for currencies, and are worried about the mode of economic development, and the worries and distrust have never been reduced.

The relaxed currency prompted global resources to be wrongly allocated. Capital that should be distributed to highly efficient enterprises, high-tech businesses and rapidly developing firms has flown to consumers' luxury cars, resulting in vehicle manufacturers to accelerate production of fuel-consuming sport utility vehicles.

Not only that, the resultant stagnating inflation would be even harder to bear than the time when the financial crisis erupted in 2008, because at that time, finance ministries and central banks were able to ease the crisis by means of cutting interest rates, printing money, and accelerating construction of public facilities. But for the present high inflation, they have little room to adopt active fiscal policy and implement relaxed currency policy, which would exacerbate inflation. In this case, capital and currency markets would be twisted by currency, debt and public mood, and will continue to hover at the bottom.

China has paid a high cost for cheeky global monetary policy and irresponsible fiscal policy, and will have to continue to pay. This is a grim challenge for human beings' conscience and courage as well as the bottom line of consumption.

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