Welcome to America and China’s stimulus arms race: Kohler

The Aussie is back at parity and the Dow Jones is at a two-year high this morning because America and China are going flat out for growth.

It’s an economic Cold War, a stimulus arms race. The United States is pitting its reserve currency and animal spirits against China’s economic discipline, pegged currency and vast workforce.

This race for growth is not the subject of any leaked Embassy cables but it is the key fact of the global economy at present. It underlies the recovery of global markets to where they were before the collapse of the US financial system in September 2008 despite the implosion of Europe.

America is desperate not to be overtaken by China economically, and just as Ronald Reagan asserted US economic dominance over the USSR in 1983 with the Strategic Defence Initiative (AKA Star Wars), it is now throwing the kitchen sink at what might be called a Strategic Stimulus Initiative.

This time, however, President Obama faces a very different foe. After two decades of selling to, and lending to, the United States, China is now its largest creditor and largest supplier of outsourced labour. It has been only too happy to supply America’s capitalism with the seeds of its own destruction, to quote Karl Marx. China’s leaders learnt from Russia’s mistakes.

Everyone expected the Fed to stick with its decision to print more money next year, and this morning’s monetary policy statement does just that. The reason is in the first sentence: “Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment.”

The Fed then repeated the mantra that it has a dual mandate: to foster maximum employment as well as price stability.

“To promote a stronger pace of economic recovery… the Committee decided today to continue expanding its holdings of securities as announced in November.”

That’s despite the fact that this week’s extension of the Bush tax cuts included some unexpected budget stimulus as well. There’s new money for infrastructure ($US50 billion in the first year), $100 billion in R&D tax credits and a doubling of the tax credit for machinery investment from 50 to 100% next year.

You’d think with all this stimulus that the recovery must be stalling. In fact it’s entirely intact. According to this morning’s data from the Commerce Department, US retail sales increased last month to their highest level since November 2007 and October sales were revised up from a 1.2 to 1.7% gain. Retail sales have increased five months in a row.

As a result, most economists are now raising their 2011 GDP forecasts from around 2.5% to 3%. Morgan Stanley is now forecasting 4% growth next year.

Meanwhile in China, not only did the authorities not raise interest rates this week in response to 5.1% inflation, but official media reports this morning suggest that bank lending targets for next year will be the same as, or higher than, this year. In other words the lifting of the bank reserve requirement announced after the inflation figures came out will make no difference to lending.

The Financial Times reports that regulatory agencies responsible for economic policy are meeting “every day” to discuss next year’s credit quotas. The range under discussion is said to be RMB7000-8000 billion; the 2010 target was RMB7500 billion.

So why wouldn’t stocks and commodities rally? Europe can commit suicide if it wants – what matters is China first, America second, daylight third.

There will, of course, be a reckoning at some point as Chinese inflation and American debt eventually break down the door of the cupboard into which they have been thrown by the politicians vying for supremacy and the bankers and traders seeking the return of the bonus.

But for the moment it’s all about the growth race, and who’s got the biggest GDP.

This article first appeared on Business Spectator.