Claude Arpi: China's economic quake shakes the west

Certain analysts believe that a forthcoming economic crisis could be ten times more serious than the one triggered by the Lehman Brothers’ collapse in 2008.

The French daily Le Monde commented: “Never in the economic and financial history of the postwar, has the risk of a systematic explosion of the global economy been so high. We risk a real conflagration, if there is no last-minute wake up of the political leaders of the Western world to prevent a collision between default payment of the United States with the cascading defaults in Europe. The appalling management on both sides of the Atlantic has one thing in common: they are trying desperately to believe that we will resolve decades of fiscal laxity without difficulty. The issue is however much more serious; we need to adjust our lifestyle to our means.”

President Barack Obama was ready to offer substantial reductions of the public debt, but the powerful lobbies behind the Republicans are not interested. The Christian Science Monitor reported, “When you add up the interest payments, Social Security, Medicare, Medicaid, defense operations, active-duty military pay, and unemployment insurance, the costs in August will outweigh incoming funds for that month. Moreover, there would be nothing left for huge areas of the government including federal courts, the FBI, food stamps, Pell grants, highway projects, tax refund checks, or federal employee pay.”

The main problem for the US government, which has never faced a precedent of this amplitude, would be how to prioritise the financing of some programs above others. But who is to decide the priorities?

Christine Lagarde, the new director general of the International Monetary Fund declared that if Washington defaults, it could have unpredictable consequences such as the rise of interest rates with huge repercussions on the stock exchanges. She said it will be harmful “not only for the economy of the United States, but the world economy as a whole.” It is why the Republicans and the Democrats will probably find a solution before the August 2 deadline.

A few days ago, Bloomberg was still hopeful, “Congressional discussions about a broad budget agreement intensified after a bipartisan group of senators proposed a $3.7 trillion deficit-reduction plan.” The Financial Times however believed: “This furious activity disguises an underlying drift towards an acceptable, though hardly impressive, solution to the immediate problem — that of avoiding default”.

It is not impressive because radical changes are required in the US taxation system. The US government has heavily subsidised oil and defence industries, as well as the financial sector; for example, JP Morgan Chase made $5.4 billion of profit during the second trimester while the US economy is struggling. It is also said that oil companies provoked an avoidable rise in petrol prices to increase their profits.

The US government preferred to look the other way so that the oil companies could buy shares at a high price …thereby benefiting their rich shareholders.

In certain European countries, the situation is not so different. In Greece, rich citizens and companies pay little or no income tax; most of its economy is running on black money. Le Monde reports that a successful Greek CEO seriously declared that his society did not have to pay income tax as it had created a lot of employment. Greece, like Portugal, has a parallel economy.

The problem is that both are today part of the Eurozone and the EU countries have no choice but to support these countries, if they do not want to sink collectively. One can guess that Angela Merkel is not happy to do so.

But, who will be the loser? Xinhua, the Chinese news agency placidly analysed the possibility of the US going bankrupt, “No one wants to see the US breach its debt obligations, but everyone has to be prepared in case it happens. … any US action to repudiate its debts will benefit the US at a cost to others.”

Beijing knows perfectly well that it can’t win, “In the current situation, only by repudiating its debts can the US rapidly decrease its debt ratio and reduce its heavy debt burden, so as to have consumption recover” said Xinhua, adding, “The world’s countries will have nothing to say but acknowledge their bad luck if the US defaults on its debt. If the default causes the collapse of bond prices and the skyrocketing of commodity prices, those who suffer will be countries with foreign exchange reserves and industrial manufacturing countries.”

In other words, China! Beijing can’t do much about the US debt (and about its own money in the US coffers), though ultimately Washington may lose its clout in world affairs.

A friend pointed out to me that India does not face these ‘depreciation’ problems with lakhs of crores invested in Switzerland. But this may not last forever.

The author is a French-born writer and journalist.