THE ELEPHANT IN THE ROOM

Economists expect a late year economic recovery, but their conviction appears failing. Forecasters predict more than 630,000 jobs will be lost in April ? an annual pace that exceeds 7.5 million overall. Meltdowns at GM and Chrysler portend more hemorrhaging and depression-like conditions in the Midwest.

Team Obama is quick to claim employment is a lagging indicator, but the economy actually started bleeding jobs in December 2007, three quarters before GDP began contracting. This is no Eisenhower recession, caused by too much inventory. Rather, this meltdown was caused by structural imbalances in the global economy that no stimulus spending can fix.

Timothy Geithner inspires like Mickey Rooney in ?Boys Town.? He mouths platitudes of his elders but offers no insights into the unique character of the slump. He talks endlessly about stronger international cooperation and the need for a ?balanced? economic recovery. He reminds us that the Bush prosperity relied too much on debt, but never explains why the U.S. economy needs either gargantuan budget deficits or massive consumer borrowing to have enough demand to keep Americans working.

Dysfunctions on Wall Street notwithstanding, China and several other developing countries produce far more than they consume and enjoy huge trade surpluses, thanks to artificially undervalued currencies, export subsidies and import restrictions. Those require the Americans to consume far more than they produce and for the United States to amass huge trade deficits and foreign debt, or global demand falls short of supply and unemployment skyrockets.

Once Americans were no longer able to live beyond their means, the global economy collapsed. In return, Obama has volunteered the federal government as the borrower of last resort. Now China complains Washington borrows too much. That?s like a drug pusher complaining about client addiction. Yet Obama appeases Beijing by offering to share stewardship of the global economy with this renegade mercantilist.

China?s purchases of U.S. Treasuries and threat to quit buying are the elephant in the room. But those purchases are made necessary only by China?s huge hoard of dollars that is contrived by Beijing?s massive sale of yuan for dollars on foreign exchange markets to keep its yuan cheap, exports flowing, and jobs moving from Indiana to Shanghai.

The Peoples Bank buys U.S. Treasuries because it does not have any better use for the dollars it obtains manipulating the yuan to boost exports. If it quit using those dollars to buy Treasuries, it would simply have to put those in the vault and remove them from circulation. The Federal Reserve would have to replace those dollars in circulation by purchasing the very same Treasury securities Beijing now buys. The Fed would collect the interest instead of the Peoples Bank. That?s not so bad.

To dig out of the Great Recession, Washington needs to challenge China on trade and currency manipulation, but Obama and Geithner must recognize that Beijing only has the leverage Washington gives it. Fixing the trade with China would do more to boost demand for U.S. growth and employment better than any stimulus spending could ever deliver.

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Peter Morici, the former Chief Economist at the U.S. International Trade Commission, is now a professor at the Robert H. Smith School of Business, University of Maryland, College Park, MD 20742-1815, 703-549-4338, pmorici@rhsmith.umd.edu, www.smith.umd.edu.