U.S. debt woes show military overreach

[lem34]

By Chris Buckley

BEIJING | Mon Aug 8, 2011 5:46am EDT

BEIJING (Reuters) - Chinese state media on Monday blamed Washington's huge military spending and global footprint for the crisis that led to the U.S. debt rating downgrade, calling for an end to the foreign "domineering" dragging down its economy.

Sharpening their rhetoric over the economic crisis that has sent markets into a tailspin, the Chinese state-run media lambasted both Europe and the United States for the dysfunctions of their democracies and their unsustainable appetite for spending.

The Xinhua news agency also warned the United States against trying to boost exports and growth by letting the dollar weaken, which would have a dramatic impact on China as about 70 percent of its massive reserves stockpile is invested in dollar assets.

One analyst, Yuan Peng, said the unusually blunt attack on the West probably reflected concern among Chinese leaders, facing pressure from popular opinion and the media, to deflect blame for any negative fall-out of the crisis on the country's holdings of U.S. assets.

"Since the collapse of the Soviet Union, the United States, as the world's sole superpower, has relied on its powerful military to meddle everywhere in international affairs, advancing hegemony, and paying no heed to whether the economy can support this," said a commentary issued by China's Xinhua news agency, which noted the heavy bills for America's wars in Iraq and Afghanistan.

"Now is the right time for the United States, trapped in economic hardship, to reflect on its domineering thinking and deeds," said Xinhua, urging Washington to "change its policies of interference abroad."

China is spending heavily on its 2.3-million-strong armed forces, returning to a double-digit increase this year. That has stirred unease among its neighbors and the United States, which has long had a presence in the Asia-Pacific region.

At about $93.5 billion for 2011, China's defense budget is still dwarfed by that of the United States. In February the Pentagon rolled out a record base budget for fiscal year 2012 of $553 billion, though the Obama administration is now looking to trim military spending.

PRESSURE OVER CHINA'S DOLLAR ASSETS

The media comments do not amount to a definitive response to the debt downgrade from China's leaders, who may tread a more careful public line, knowing their comments could stoke market alarm and a political backlash in the United States.

Officials have been mute about the blow to Washington after Standard and Poor's stripped the United States of its top-tier AAA credit rating.

However, media have decried the potential damage to China's growth and huge holdings of U.S. Treasury assets.

"It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibility and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy," said a commentary in the People's Daily newspaper, the chief mouthpiece of the ruling Communist Party.

"People have deepening misgivings about the political decisiveness of the Western nations, and this has also seriously hurt global investors' confidence in world economic recovery, exacerbating market turmoil."

The comments exposed pressures on policy-makers handling holdings of dollar assets, said Yuan Peng of the China Institutes of Contemporary International Relations, a government think tank.

"This will certainly have an adverse impact on China, because it is the biggest foreign owner of U.S. treasury debt, and this will affect the security of that debt, raise more questions about it," said Yuan, speaking of the downgrade.

"For China, this is a challenge, because it suggests our holdings of U.S. assets aren't as safe as they were, and the government also needs to explain itself to the people," said Yuan. "Nowadays, the Chinese government also faces pressure from the media and public opinion."

DEVALUATION WARNING

A separate Xinhua commentary also warned Washington against seeking to boost exports and growth by letting the dollar weaken, a move that would lower the value of Beijing's assets.

China owns the world's biggest stockpile of foreign exchange reserves at $3.2 trillion, and is also the biggest foreign buyer of U.S. Treasuries. Analysts estimate about 70 percent of its reserves are invested in dollar assets, including Treasuries, although the exact investment mix has not been disclosed.

"From this point, the U.S. has every motive to maintain a weak dollar," said an English-language commentary from Xinhua.

"Before the U.S. makes any move, please remind it: don't forget your responsibility as the issuer of reserve currency to maintain the stable value of the dollar."

A weaker dollar could impede global recovery, stoke market turmoil and lift dollar prices of commodities, it said.

Ironically, China's recent comments questioning the soundness of the U.S. economy could put fresh pressure on the dollar and in turn hurt the value of its dollar investments.

China tells it as it is. No american bullshxx here

 

[VelocuR]

Obama's speech continue to spread misinformation and lies in his recent statement as cover-up, he is indeed idiot.

A bad deal for America’s future

WASHINGTON – The painfully negotiated U.S. budget legislation that President Barack Obama signed last week combines an increase in America’s government debt ceiling with reductions in federal spending, thus averting the prospect of the first default in the 224-year history of the United States.

But the agreement has three major flaws. Two of them offset each other, but the third threatens what America needs most in the coming years: economic growth.

The first flaw is that the spending reductions are badly timed: coming as they do when the US economy is weak, they risk triggering another recession.

The measure’s second shortcoming is that the spending reductions that it mandates are modest. While the legislation does too little to address America’s problem of chronic and rising budget deficits, the damage that it inflicts on the economy in the short term is likely to be limited.

The third and most damaging flaw, however, is that the spending cuts come in the wrong places. Because the Democrats in Congress have an almost religious commitment to preserving, intact, America’s principal welfare programs for senior citizens, Social Security and Medicare, the legislation does not touch either of them. These programs’ costs will rise sharply as the 78-million-strong baby-boom generation — those born between 1946 and 1964 — retires and collects benefits, accounting for the largest increase in government spending and prospective deficits in the years ahead. And, because the Republicans in Congress have an equally strong allergy to raising any taxes, any time, under any circumstances, the bill does not rely at all on tax increases — not even for the wealthiest Americans — for the deficit reduction that it provides.

All of the spending cuts come from the “discretionary” part of the federal budget, which excludes Social Security, Medicare, the Medicaid program for the poor, and interest on the national debt.

That leaves only about one-third of total federal spending from which to cut, and much of that goes to the defence budget, which Republicans will attempt to protect in the future. So the deal concentrates deficit reduction on the “discretionary non-defence” part of the federal budget, which is only about 10 per cent of it.

This is too small a pool of money from which to achieve deficit reduction on the scale that the U.S. will need in the years ahead. Worse yet, discretionary non-defence spending includes programs that are indispensable for economic growth — and economic growth is indispensable for America’s future prosperity and global standing.

Growth is, in the first place, the best way to reduce the country’s budget deficits. The higher the growth rate, the more revenues the government will collect without raising tax rates; and higher revenues enable smaller deficits.

Moreover, economic growth is necessary to keep the promise — enormously important to individual Americans — that each generation will have the opportunity to become more prosperous than the preceding one, the popular term for which is “the American dream.” Just as important for non-Americans, only robust economic growth can ensure that the U.S. sustains its expansive role in the world, which supports the global economy and contributes to stability in Europe, East Asia and the Middle East.

As Thomas L. Friedman and I explain in our forthcoming book That Used To Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, a crucial factor in America’s economic success has been an ongoing public-private partnership, which dates back to the founding of the country, that is imperiled by the pattern of budget cuts established by the August 2 legislation.

That partnership has five components: wider opportunities for education in order to produce a workforce with cutting-edge skills; investment in infrastructure — roads, power plants and ports — that supports commerce; funds for research and development to expand the frontiers of knowledge in ways that generate new products; an immigration policy that attracts and retains talented people from beyond America’s borders; and business regulations strong enough to prevent disasters such as the near-meltdown of the financial system in 2008 but not so stringent as to stifle the risk-taking and innovation that produce growth.

The first three elements of the American formula for growth cost money, and that money is included in the “discretionary non-defence” part of the federal budget now targeted by the debt-ceiling legislation. Cutting these programs will lower American economic growth in the long term, with negative consequences both at home and abroad. Reducing the deficit by cutting funds for education, infrastructure, and research and development is akin to trying to lose weight by cutting off three fingers. Most of the weight will remain, and one’s life prospects will have worsened significantly.

Reducing deficits in order to raise the debt ceiling was the right thing to do, but the August 2 law does it in the wrong way. Unless more deficit reduction, which is inevitable, comes from curbing entitlement benefits and increasing revenues, and less from programs vital for economic growth, the result will be a poorer, weaker U.S. — and a more uncertain, if not unstable, world.

Michael Mandelbaum is professor of American Foreign Policy at The Johns Hopkins School of Advanced International Studies.

 

[TechMan]