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Obama Meets His Matches

Will the bond markets and China trip up the president?

4:00 PM, Jun 5, 2009 • By IRWIN M. STELZER
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So Obama will have to make two deals, one with the Fed, and one with the Chinese. That means developing a credible program of deficit reduction once the economy is in recovery mode, and satisfying the Fed that he really, really means it. There are only two ways the president and the congress can do that: cut spending, or raise taxes. Obama, a man of "stratospheric self-confidence", to borrow Andrew Roberts' description of Franklin Roosevelt and Winston Churchill in his wonderful "Masters and Commanders", is deeply committed to what he considers to be a necessary transformation of the entire economy: government health care insurance for all; billions spent on clean energy and other anti-climate change measures; university education for all. My guess is that his first choice will be to increase taxes, perhaps in the form of a national sales tax aimed primarily at "the rich" by exempting low earners. If that doesn't produce enough revenues, ongoing inflation-producing deficits will trouble him less than abandoning his dream of joining Abraham Lincoln and Roosevelt as "transformational" presidents. I have yet to meet a CEO who believes that the administration has a credible exit strategy from its deficit-producing fiscal policy, and that includes several sympathetic to the president.

As for China, a mutually beneficial deal is in the works. America will reduce its deficit somewhat, pressure international institutions to assign a larger voice to China (a matter of power and "face"), and back off a bit on all that human rights talk and on support for Taiwan. China will continue to buy and hold American IOUs, not demand the creation of an alternative international reserve currency, make some cooperative noises about cooperating in efforts to control climate change, and allow some up-drift in its currency to reduce its exports to the US and relieve Obama of some of the protectionist pressure that has already generated a ban on the importation of small cars from China by General Motors.

Imperfect, but at least a recognition by China and America that future economic growth and stability depends on this G-2 reaching a mutual accommodation.
