Monday, June 7, 2010

Bruce Krasting: Tim's Gotta Go

The following are portions of Treasury Secretary Tim Geithner’s final communiqué to the G20 and my comments. The full communiqué can be found Here.

Last year, the G-20 acted to restore growth to a world in crisis. The IMF expects global growth to exceed 4 percent in 2010 and 2011.

Tim, that is not what the IMF said. From Reuters:
"An IMF report presented at the G20 meeting earlier estimates that coherent adoption of the adjustment policies could increase global growth by as much as 2.5 percent annually over a medium-term five year period."
The head of the IMF Strauss-Kahn had this to say on growth prospects:
"I am totally comfortable" with a final communique calling for troubled euro zone countries to accelerate fiscal consolidation. They have to consolidate strongly even if it has some bad effect on growth."
So Tim, the IMF does not share your rosy views on global growth. In fact they are worried that the necessary fiscal consolidation will result in slower growth. Geithner’s statement was read by every finance minister at the meeting and around the world. They will read Tim’s words and just conclude that he is selling a story to the newspapers and has no substance to offer. So much for financial statesmanship.

The US is in its 4th quarter of solid growth.

Solid growth Tim? This is just a lie and he and the other heads of state know it. The recovery to-date has been tepid by any comparison to any recent US post recession cycle. We have unemployment at 9.7%, a 50 year high and we can’t create 50,000 jobs a month without massive fiscal and monetary stimulus. We are growing because of a very big inventory cycle and the continued stimulus measures. Were it not for those factors we would be looking at negative real organic growth. Tim is selling a bag of crap to an audience who knows better.

European authorities gave us an update on their reforms and financial programs. Our discussions were focused on our two core priorities: growth and financial reform.

On growth, we reaffirmed our strong interest in making sure we reinforce the ongoing recovery in private demand across the G-20. As we do so, we agreed on the need to undertake and credible commitments to restore fiscal sustainability over the medium term.

This stupid sentence did not go unnoticed. The focus was on the words, “medium term”. In this case what Tim was really saying was:
“We all know what we are doing is not sustainable and it may kill us if we continue, but we have to keep kicking the can down the road for at least two more years. That way my boss has at least a chance of being re-elected and I might keep my nice job”.
Tim wants the world to do what he is doing at home. Deficits in excess of 10% of GDP. Debt levels that are approaching annual GDP. Debt levels that far exceed GDP when the D.C. mortgage debts are included. He wants ZIRP to last forever, even though he knows it is killing savers. He wants an unending stimulus program for housing, cars, agriculture and every other segment of the economy. And he wants to do this when our country is in a protracted and expensive war. There is no leadership.

In the United States, we’re moving forward with important reforms of health care, education, and our financial system—together with substantial investments in innovation, basic science and research and development, and infrastructure. All these initiatives are designed to provide a stronger foundation for future economic growth.

More lies. The health care reform was a joke that was rushed through in the dark of night. The assumptions used were bogus. The whole thing is going to have to come back on the table in less than one-year it is so badly flawed. About those investment in science and research, is that why the administration gutted NASA?

What Tim and his cohorts did in the past 18 months is wrack up an additional $2 trillion in debt to keep things going. The have not done one thing that I can think of to, “provide a stronger foundation for future economic growth”. There is a great deal of empirical evidence that economies have a difficult time of sustaining any growth when debt to GDP exceeds 100%. We are functionally there today. Tim has done nothing to help us long term. If anything, his plans will mute growth for decades.

Within the G-20, we discussed how the ongoing shift toward higher saving in the United States would need to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand, together with a more flexible exchange rate policy, in China.

Tim is begging the rest of world to help him out. He wants Japan, China and Germany to help him out? Those folks are not listening and Tim knows it. He was just in China and the issue of exchange rates was not addressed. There is little prospect for “flexibility” by China anytime in the near future. He failed miserably on this issue. Japan has 200% debt to GDP and Tim thinks they are going to be the source of global growth? This country has 1/3 our population and 1/3 of our GDP. They will not assume the role that the Treasury Secretary wants.

For me, the most significant response to Timmy’s plea for more deficit spending came from the head of the ECB, J.C. Trichet:
“The impact of narrower budget gaps on growth could not be considered negative because it would improve confidence. The need for such action is clear in old industrialized economies.”
Trichet has said he will not play in Tim’s sandbox. I love that he stresses the point that confidence is now a central issue in global economies. He is admitting that without sane policies confidence will be lost and when confidence is lost the mother of all depressions will follow.

When Trichet says, “old industrial economies” he is talking about the USA. These folks choose their words carefully. They are diplomatic. When Trichet said this it was equivalent to a punch in the nose in the real world. While Tim shed no blood, this comment hurt. It was a strong rebuke. Damn near an insult. Do not look for the ECB to bailout the US or Europe for that matter. Consider also the comment from the Germany's Finance Minister, Wolfgang Schaeuble:
"I made no bones about the fact that I share the IMF's underlying philosophy only in a very limited way,"
The ECB and the Germany have spoken as one. They both have said “no” to Tim. This exchange should not be ignored. It has significant implications as to how far the Germans are prepared to go in support of the EU. My read on this is that the answer to the question, “How far should we go?” is “Not far at all”.

Fiscal consolidation should be “growth friendly”—as the IMF puts it—with the pace and composition of adjustment varying across countries.

Growth friendly” = big deficits = Death. Tim relies on words from the IMF. He is using this as a way to defend what he wants. He is hiding behind the skirts of the IMF technocrats? A very weak place to hide.

The United States is moving aggressively to fix things we got wrong and to strengthen our economic fundamentals.

Moving aggressively? What is he talking about? Fin Reg? That is also a joke. Timmy G has gone out of way to avoid addressing the problem the country faces with the mortgage agencies. These beasts now represent an off balance sheet commitment in excess of $7 trillion. They continue to write 97% LTV loans and suffer double digit defaults. They are 90% of the current mortgage market. The GSEs represent a far greater systemic risk than any other component of our economy. Yet the Treasury Secretary thinks these problems are too difficult to confront. The result will be over $400b in losses born by the public.

Tim is going to get hit in the face with a two by four on December 1st when the Fiscal Commission comes public with its recommendations on how the US can return to fiscal prudence. On that day everything that Tim has been calling for will be trashed. The Fiscal Commission was made necessary to some extent because the Treasury Secretary was too weak to lead a proper response. But the job of selling and implementing the spending cuts and tax increases that will be recommended will fall to the Treasury Secretary. There is not one chance in a hundred that he will succeed in that role. He is wedded to big debt and big government spending. He is the wrong guy to lead us in the right direction. If we are going to make it to 2015 without a major financial collapse we need some leadership.

Time's up Tim. You gotta go.

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