Usually I am not interested too much in politics articles, but this one is truly entertaining…
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THE BIG WEN-OBAMA TRADE
Shortly before shutting down, News of the World hacked Wen Jiabao and Barrack Obama telephone lines. Following is the transcript of a recent conversation.
Wen: I can’t slow the economy enough to contain inflation. It seems everything I do results in strong growth and higher inflation. I absolutely need to reign inflation in.
Obama: Lucky you! I can’t boost my economy enough to bring unemployment down. It seems everything I or Bernanke do results in slower growth and higher unemployment. I desperately need to bring unemployment down.
Wen: And your deficit, if I may. I can’t buy US Treasuries anymore. They earn negative returns with your inflation rate, imagine with mine! Plus, your accounting methods allow you to show debt to GDP at 65% but I know all these tricks. Your gross debt to GDP ratio will reach 110% in 2015 as per the IMF. But your unfunded liabilities in the Social Security and Medicare programs would bring gross debt to over 500% of GDP if accounted properly. Man, this is way worse than Greece. I’m buying gold my friend, definitely buying more gold!
Obama: My sources tell me you have your own debt problems à la Enron! Anyhow, China’s currency manipulation is hurting us here. Why don’t you boost the yuan? That would reduce your inflation problem and help my growth problem at the same time. Simple enough, devalue my currency!
Wen: Perhaps you should have a chat with Mr. Geithner. He’s not saying we manipulate the currency.
Obama: Geithner’s a goner, leaving the ship at the worst of times. Nonetheless, the currency issue is serious and I urge you to do something about it. Devaluation is generally a good way out but these European PIIGS just won’t let me devalue against the Euro. China can do it for me.
Wen: Please don’t urge me. In China, “urge” rhymes with “purge”. And, please, stop complaining. I have my own pigs problems. Pork prices shot up 57% since last year, inflating the CPI just when veggies prices were finally coming down. Can you imagine having to raise interest rates because pig prices are rising? Only in China!
But the Party is resourceful. We just released pork reserves to ease prices. You do it with oil, we do with everything. We got large reserves on most things, as you very well know…
But I have no reserve saying that I think you’re cooked, you, your Party and your economy, in reverse order. You are fiscally stuck after spending like drunken sailors, only to end up in the same slow leaden boat. Bernanke tried other boats, QE1 and QE2, and went nowhere. QE3? Who would wanna bet his bottom yuan on that? Pushing on strings only to get deeper into the hole. Man, I’m buying more gold!
Obama: But what can I do? I have 25 million Americans out of work, that’s nearly 20% of the workforce; 45 million people on food stamps, that’s 14% of the population; one household in four has a mortgage underwater and that’s getting worse daily as house prices keep declining; states and local governments are cutting employment to balance their budget; the big banks are making so much money on Ben’s curve, they have no desire to lend or even hire; we spent over $1 trillion in all kinds of programs nobody seems to have heard about; Bernanke has rates on the floor and uses any and all possible words to push the markets higher to create some illusory wealth effect. But nothing works. (Sigh)
I listen to economists daily now. (Sigh) Good thing they only have two hands! Spenders or debt cutters, they both seem to make sense. Krugman says that I should spend more, if that’s possible, but Reinhart claims that it’s the debt level hurting the economy. Cutting the debt requires spending cuts that even Bernanke warns against.
We increased spending and debt like there were no tomorrow while fighting wars no voters care about. That did not work at all, au contraire. Logically, I should try the other alternative and attack the debt level aggressively. What would you do, Jabow? How do you pronounce your name?
Wen: Economists, like democracy, are a nuisance, especially in critical times when decisions need to be made. The time and energy you spend trying to reconcile Congressmen and Senators, and your own people through your free media, it’s unbelievable how inefficient this is. We prefer engineers, more pragmatic, better structured, less philosophical. We analyze, discuss, decide and implement. We control everything. We steer, they veer.
Obama: I wish I could do that. Things are so simple in China. What would you do if you were in my shoes?
Wen: Barrack, you need to organize your thoughts, think simply and logically. Less tactics, more strategy. Stop reacting, act! What is the ultimate objective? Get people back to work. When people work, they produce, they earn and they spend. And they have less *****ing time.
Obama: But economists say …
Wen: Forget Reinhart and all the other academics; this is the real world, not the time to experiment. This is 2011, not 2013! The obvious reality is that you have a big demand problem and it will surely not be resolved by the unemployed and underwater citizens. That’s at least 25% of Americans.
Cutting spending at this time would hurt the few still employed. It would clearly be counterproductive and politically and economically suicidal. Look at the states: their tax receipts are down so they cut spending, they cut services. Services are labor. So they cut labor who then cut spending which reduces tax receipts and so on and so forth.
And I’m not even mentioning their Amazon problem.
Obama: What Amazon problem?
Wen: (Sigh). Barrack, many states are not collecting sales taxes from Amazon sales because state and federal legislators exempted e-commerce from taxes in the 1990s. That provides Amazon with an unfair price advantage and deprives many states like California from millions in tax revenues. The case is so obvious, yet nobody does anything. Not even Lou Dobbs!
Obama: Dobbs. I wish I could offshore him.
Wen: Stay focused Barrack. Now, look at the stats: private employment is rising but governments keep laying workers off. States and local government employment has declined 305,000 in the last year. Think about that. This must be reversed.
First decision, no employment cuts for 2 years. Agree to longer term cuts, there will always be time to renege on that. In fact, you need to immediately boost spending on truly labor intensive projects. Help states and cities so they stop cutting. Help them balance their budgets. Give them – not corporations – more support funds if they hire. They will hire. Launch government projects that need immediate hiring. Be creative! We build cities in Neverland for Mao’s sake. Do another census if nothing else.
Private employment must also accelerate. Your companies are investing and hiring abroad. Why? Lower costs, lower taxes. You can’t reduce labor costs but you can reduce corporate tax rates. Japan and the US have the highest corporate tax rates and they both have endemic growth problems. Think about that! Japan is finally cutting its tax rates aggressively, leaving you far behind. Canada, your next door neighbor, has an effective tax rate 25% below yours and keeps cutting it. Mexico and Brazil tax rates are 12% lower. This is simple math. Even commies understand that.
Obama: But Jab… First, I’m a democrat. Second, my deficit would explode and bond vigilantes would jack rates up. The dollar would crater. Worse, everybody would hate me.
Wen: You’re the President of the USA, first and foremost; second, the bond market might jack long term rates up but the Fed shall keep short-term rates low enough. Ben should stop worrying about inflation. For heavens’ sake, you have a major demand problem! Get real!
The lower dollar, isn’t that what you need?
Third, companies with cash abroad will repatriate it if they get a tax incentive, pay taxes on it and reinvest the rest. Set a tough but temporary, say 3 or 5 years, tax surcharge on the wealthiest to appease the left. The rich sure owe you one. You were right earlier when you said that you spent like there were no tomorrow. In 2009, there were no tomorrow! You did not resurrect the economy but you and Ben sure primed the stock market. It doubled since 2009. The rich must now do their part.
Obama: Attaboy!
Wen: After the elections, eliminate mortgage interest deductibility. Where did that come from? Makes no sense to me, the state is subsidizing its citizens indebtedness. Think about that! Phase it out over 10 years but get rid of that.
Then, institute a federal VAT. Best tax there is since it taxes consumption, not income. Less inequality issues. Much simpler. Look at how Canada did it. They were in deep sh…stuff not long ago. Heck, now, Canadian employment is booming and their finances are in strong shape. Just north of you. Barrack, there is more than Afghanistan, Iraq and Israel on the map.
By the way, get out of the wars you’re in. That will save money, time and energy. Wars have cost you $1.3 trillion in the last 10 years. That’s 10% of your national debt.
Obama: Easy to say. What about US leadership?
Wen: Confucius said to never follow pigs, the odds of where they lead you are not good. You’re already a fiscal pig but nobody wants to admit it. That won’t last, ask Berlusconi. He’s about to get a real bang-bang. PIIGS-like countries can’t lead, remember that. Forget leadership for now, not a priority.
Obama: But the foreign stuff is where I have done best so far.
Wars are passé, out! Nobody has the means to be at war but China and, did you notice, we stay out of it.
If I were you, I would do something bold: cut defense spending radically, announce no more American boots on foreign ground, and really focus on domestic demand and restore your balance sheet. People will like that. Your Facebook page will explode. Never mind the world and that leadership crap. Anyway, we both know that China is the true leader now.
Obama: Impressive! You know America better than most Americans. I have an idea!
Wen: Really?
Obama: You know our problems so well, you know the way out and you know how to steer people your way. Why don’t you take charge here for a year or so? In China, you’re almost a lame duck (oh! Sorry!) anyway. Here, you could make history, we could make history! Think about that! We turn this ship around, I get 4 more years, you with me, and we dominate the world. Yes! We can!
Wen: Here’s a better one: we just swap countries. I rule the USA, implement my ideas and solutions and boost growth within a year. Meanwhile, you run China, implement your ideas and solutions. That will naturally slow the economy within 3 months.
Obama: Sounds like another trade deficit.
Wen: One condition: do not use your “Yes, we can!” thing with Chinese people. They would surely do something with it.
(Note: The accuracy of the above conversation cannot be guaranteed)
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