Pushing on a Chinese String

The US consumer borrows to spend one out of four dollars in the global economy. US consumer debt approached $1 trillion in 2008 but declined 20% since. This year banks mailed 40% less pre approved invitations for consumers to spend.

The US Treasury bailed out banks to encourage consumers to spend. The Federal Reserve and foreign governments lend money to the US Treasury to encourage banks to encourage consumers. Banks are spending money on bonuses to reward management for abysmal performance while depriving the US postal service of income from shipping credit cards to consumers.

The Treasury Secretary says that $150 billion of the $700 billion TARP money will be returned by the end of 2010 and may be spent on initiatives to create jobs, which presumably TARP has not done.

The Treasury Secretary presumes that the commercial real estate market is fairly priced with mausoleums of office space for which mortgages will continue to be paid in 2010. The financial stability of the global economy is an interesting speculation and may be outside the Secretary’s expertise and opinion whether TARP monies will be repaid.

This is not good news for textile makers in Bangladesh who require US consumers to consume with great vigor. The elimination of $200 billion from US consumer demand deprives the global economy of $1.6 trillion in spending.

If the US consumer does not spend who will? The Indians?

India’s bilateral with the US is less than $50 billion. It runs an annual trade deficit of about $90 billion, $180 billion of exports against $270 billion of imports. Oil accounts for one third of the imports which is subsidized for the masses.

Government owned oil marketing companies pay the market price for oil and sell it at a lower government set price. In exchange the OMC’s receive government IOU’s, oil marketing bonds, which are in turn sold to the Reserve Bank of India at a premium placing the RBI in the business of printing money to buy oil.

The Indian consumer is genetically apt at price discovery. McDonald's has been in India for over six years with branches throughout the country and has yet to turn a profit or repatriate a dividend. Undeterred they press on with value meals priced at $2 which cost $2.05 to deliver. But the bathrooms are the cleanest in town.

There are consumers in India able to afford global brands at international prices but they account for less than half a million of the 41 million registered tax payers and most of India’s $25 billion of non essential imports.

India was insulated from global financial adventures because money cannot come and go as it pleases, the government owns seventy percent of the highly regulated banking industry, and international trade, other than remittances from laborers building castles to the sky in the Gulf, is modest.

Even if India grows its $1.2 trillion economy by 5% in fiscal 2010, though the financial community prays for twice that, the net addition to global commerce will be less than $60 billion or a bad week at the office for Berkshire Hathaway.

There is always the Chinese.

The Bank of International Settlements (BIS) reports that the Chinese have lent $1 trillion since March of this year without concern for the capital to support lending or the creditworthiness of the borrowers.

The BIS observes that “asset quality” in China may be challenging, which is a polite way of saying that Chinese banks have a date with uncertain repayment destiny unless they lay off the risk or raise more money to cover expected losses.

In fairness to the Chinese, existing bad loans, before the fresh lending, are higher than admitted because in a military dictatorship bank managements have little discretion.

The Chinese would turn to their advisers, Goldman Sachs, for advice on which suspects would provide takeout financing before the Chinese economy is taken out.

And Goldman may point them in the direction of Sovereign Wealth Funds which traffic in $3.1 trillion. Kuwait on request invested $3 billion in Citibank earlier this year and exited with a billion dollar profit last week.

Why exit from the poster child for TARP if the recovery is just beginning as the Treasury Secretary promises?

Fair question from Sheiks who understand inflating paper is easier than the pushing the economy up a string of Chinese lending.