Is Anyone in Washington Listening?
Russian Prime Minister Vladimir Putin meeting Chinese Premier Wen Jinbao in October 2008 (Photo by: Xinhua). Both governments are worried about the value of their dollar-denominated assets holding up during Washington's upcoming spending binge
The Western media have said plenty about Russian Prime Minister Vladimir Putin's remarks at Davos, Switzerland last January 28. Some observers claimed that Putin chose to blame capitalism for today's economic woes. Others, such as former U.S. President Bill Clinton, believe Putin offered an "endorsement of private enterprise" instead of more government intervention to bail out the sagging global economy.
Putin, however, was not attacking capitalism, but the haphazard series of Western government bailouts and interventions that have made it very hard to predict when global financial markets will stabilize. It is not clear to foreigners which American financial companies like Bank of America and Citigroup will be nationalized as "too big to fail" and which ones will be allowed to slide into bankruptcy, as did Bear Stearns and Lehman Brothers.
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"Putin? Putin?" Fox News conservative commentator Glenn Beck couldn't believe that Vladimir Putin is now giving the U.S. advice on avoiding excessive state control in the economy. Neither could former President Bill Clinton.
Furthermore, at the Davos World Economic Forum Russian and Chinese leaders tried to send their Western counterparts a very important message: "You can borrow and print as much money as you like. Just don't expect us to hang on to your currencies in our hundreds of billions in cash reserves when you choose to inflate away their value. Don't expect us to keep subsidizing irresponsible spending and trillions in unfunded obligations in the decades to come by continuing to buy your debt."
This is a message that American Democrats certainly did not want to hear, especially as they nearly unanimously supported President Obama's $787 billion stimulus bill which he signed last week. It is the message that sent Secretary of State Hillary Clinton over to Beijing last week to publically plead with Chinese leaders to continue buying U.S. Treasuries. In fairness, most American Republicans probably don't like the idea of taking advice from Vladimir Putin or the Chinese either. Conservative talk radio hosts like Fox News commentator Glenn Beck are horrified at the thought that "Red China" -- and now even America's former Cold War adversary, Russia -- hold $2 trillion and hundreds of billions (respectively) of U.S. debt and assets.
To put these abstract numbers in perspective, Oregon residents were recently reminded in a newspaper article published by The Oregonian and headlined on The Drudge Report website that a Kremlin bailout plan for Russian steelmaker Evraz may save hundreds of American jobs at an Evraz-owned steel mill in Portland. For Washington's old Cold Warriors who would prefer a policy of confrontation towards Putin's Russia or China, this is hardly a pleasant though to contemplate.
Nonetheless, economic interdependence is not a one way street for Russia, China or any other country. Millions of Chinese factory workers depend on the continued willingness of American consumers to buy their goods at Wal-Mart stores across the U.S. If there were another American Depression, severe unrest could erupt among the millions of unemployed Chinese who recently relocated to China's cities from its rural villages. This is one reason why the Chinese keep preventing their currency from appreciating against the dollar, in spite of accusations by U.S. Treasury Secretary Timothy Geithner and others in Washington that China unfairly manipulates the yuan to keep its exports artificially cheap.
China's central bank continues to hold $2 trillion in dollar denominated reserves that are now losing value thanks to the fact that the U.S. Treasury is busy printing so much money-- a policy that is becoming increasingly unpopular with ordinary Chinese, and not just with their officially Communist government. No wonder Luo Ping, Director General of the China Regulatory Banking Commission declared during a recent visit to New York, "We hate you guys...once you start issuing $1-2 trillion [in new debt], we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do." As the UK Financial Times noted, the fact that Ping said this with a smile on his face doesn't do much to ease the irony that representatives of a Chinese Communist government today are the unlikely allies of fiscal conservatives in the U.S.
Meanwhile, Russian companies like Gazprom -- as Russian metals tycoon Oleg Deripaska observed in a December 2008 Wall Street Journal, interview -- accumulated hundreds of billions in debt to Western banks during the Russian economic boom of the past eight years, even as the Kremlin amassed $500 billion in dollar and euro reserves in a rainy day fund. Deripaska, who is well-connected in the Kremlin, described this state of affairs as the Russian economy being "turned inside out". Nearly half of these reserves now have been spent by the Russian Central Bank, in order to prevent a repeat of the ruinous 1998 devaluation of the ruble. Thus, the West and Russia now share the potential for mutually assured financial destruction.
A recent article published in the UK Telegraph newspaper warned that if Russian and Ukrainian companies were to default on their massive foreign debts today, it would be far more devastating to Western financial markets than in 1998. While most politicians and pundits in Washington have myopically focused on geopolitical rivalries with Moscow over access to oil and gas and military bases in Central Asia in the past several years, Russia quietly became a huge player in global financial markets. This fact was underscored by Russia's bailout of troubled Icelandic banks when that small Atlantic island nation's banking system collapsed late last year. By extension, the Russians were also bailing out the British banks and deposit holders who had invested tens of billions in Iceland.
Another example of growing non-Western influence over Western markets is the unheralded role of Chinese, Russian and Middle Eastern central banks in the collapse of Fannie Mae and Freddie Mac. A recent Vanity Fair article ("Who Killed Fannie and Freddie?") on the subject must have left that magazine's readers scratching their heads along with the former executives of the Government Sponsored Enterprises (GSEs) who were interviewed for the story, wondering exactly why over one weekend in September 2008 the U.S. Treasury Secretary decided to pulled the plug on the Congressional charters of these quasi-private corporations.
The most likely answer, and one that the U.S. media and political class would rather forget, was that Russia held $75 billion in short term U.S. GSE paper, and China held several times that amount, and both central banks had previously been under the impression that this paper was nearly equal to the U.S. Treasuries in terms of safety. If the U.S. Treasury had not made good on its longstanding implicit backing of Fannie and Freddie paper, then foreigners were going start pulling their billions out, triggering a devaluation of American debt and the U.S. dollar.
The bottom line: big-spending Washington elites ignore the recent rumblings from Moscow and Beijing at their own peril.
Charles Ganske is a former financial advisor with Merrill Lynch and the editor of Russia Blog.
The views expressed here are his own.