China's Stimulus vs. America's Bailout

Add this to the list of about-faces in the past year: Last summer, China was looking for ways to put the brakes on its searing economy. Now its government is spending a fortune to speed things up.

China recently announced a massive $586 billion stimulus package aimed at reviving its slowing economy. Remember, we're talking about China, so by "slowing," I mean something like 9% GDP growth, down from the blistering 12% expansion of recent years. 

I know what you're thinking: 9% GDP growth is … bad? For China, it could be. NYU professor Nouriel Roubini estimates China needs to grow at 9%-10% per year just to accommodate the 24 million or so people entering its workforce in that time frame. He also suggests that GDP growth of 5%-6% would qualify as a recession. While we're trying to blunt negative GDP numbers, China's trying to stave off a growth rate we can't fathom. Showoffs.

Bailout? That's our game!
Of course, we know a thing or two about bailouts and stimulus packages here in America, too. Heck, we pioneered the field.

So how does China's stimulus package stack up against our $700 billion bailout? I know, the $700 billion wasn't a stimulus distributed throughout the nation; it was more of a rescue effort focused on a relatively small group of financials, like Wells Fargo (NYSE: WFC  ) , Bank of America (NYSE: BAC  ) , and JPMorgan Chase (NYSE: JPM  ) . Even so, it's worthwhile to compare the packages, just to show how two different countries are dealing with their respective economic slumps.  

Based on 2007 data, here's how the two countries' stimulus measures compare against a few key macro numbers:

Metric

China

United States

Stimulus

$586 billion

$700 billion

GDP

$3.3 trillion

$13.8 trillion

Stimulus/GDP

17.8%

5.1%

National Debt/GDP

18.4%

60.8%

Trade Surplus (Deficit)/GDP

8%

(5.2%)

Of course, those 2007 numbers get augmented a bit when you include the economic hullabaloo of the past year. National debt now stands at around $10.6 trillion, giving us a current debt/GDP figure of more than 75%. Our budget deficit is also expected to flirt with $2 trillion in 2009, whereas China has been running a massive budget surplus.

Arithmetic wins again
That's the fundamental difference between China's stimulus package and our bailouts: China can afford them, but we can't. It has the ammunition to provide a little Keynesianism boost once in a while; we have to borrow bullets to fight the war. That's a big difference.

Even more worrisome is what China might use to fund its stimulus package. Perhaps its half-trillion-dollar hoard of U.S. Treasury securities? Or maybe its massive stash of Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) agency securities? As our economy continues to wallow, it might make more sense for China to invest in roads and bridges than mortgage-backed securities in America. That's where things get interesting for us here at home.

Even if China doesn't go on a selling spree, a mere decrease in its accumulation of U.S. securities could ultimately mean trouble, primarily in the form of higher interest rates (all else being equal), making it more difficult to fund our own bailouts. When our financial system is in shambles, with what's left of General Motors (NYSE: GM  ) and Ford (NYSE: F  ) hanging on for dear life, no one wants to imagine an even bigger headache -- one caused not by our own blunders, but by the rest of the world's ills.

It could happen
In all fairness, a "run on the bank" on American securities might hurt China as much as anyone else. But the thought alone should make you quiver: Not unlike the overleveraged financial companies pinned up against a wall in recent months, the U.S. relies on the kindness of strangers to fund its insane dependence on debt. As Wall Street learned in the past two months, things go downhill quickly once those strangers shift their priorities from lending to hoarding.

That's what scares me about China's recent stimulus package. It's not that it shows how the economic crisis is spreading around the globe; we already knew that. But as global economies begin to waver, they may place less importance on plowing hard-earned surpluses into the U.S., and focus more on their domestic dilemmas.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Bank of America and JPMorgan Chase are Motley Fool Income Investor recommendations. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (23)

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  • Report this Comment On November 12, 2008, at 4:30 PM, XMFSinchiruna wrote:

    Excellent, excellent analysis! I couldn't agree more.

  • Report this Comment On November 14, 2008, at 5:40 AM, fish4uinmd wrote:

    Kudos to Mr. Housel for two excellent articles in as many days. Every member of Congress should read both of them before handing out more of OUR hard earned dollars.

  • Report this Comment On November 16, 2008, at 5:43 PM, Diegojames wrote:

    This analysis shows we need the BANG for the BUCK(DOLLAR).

    SPEND $ ON INFASTRUCTURE ASSISTED BY BOND SALES TO THE US PUBLIC.

    LET DETROIT- FORD, GM, CHRYSLER, UNION, AND SUPPLIERS GROVEL FOR THEMSELVES. THEY HAVE SHOT THEMSELVES IN THE FOOT AND KNEES FOR DECADES.

    NEW INFASTRUCTURE CREATES JOBS AND MONEY IS SPENT IN THE ECONOMY SUPPLYCHAIN.

    BAILOUT PLAYS A "FLUSHING SONG" ON MONEY DOWN THE OLD DRAIN IN DETROIT. BESIDES SPIN OFF THE DEFENSE DIVISIONS OF THESE COMPANIES COMBINE THEM AND FINANCE THIS WITH NEW "D" FENCE BONDS AT

    NFL FOOTBALL GAMES WITH BEER... THERE YOU GO SELL THEM AS BEER BONDS....

    CALIFORNIA CAN BUILD CARS WITH MAGNA INTERNATIONAL( NYSE:MGA).

    DIEGOjAMES

    PORTER RANCH , CALIFORNIA

  • Report this Comment On May 14, 2010, at 4:25 PM, JerryMirro wrote:

    Your article is really very interesting. This is the information, I’ve been looking for… Thanks

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  • Report this Comment On November 25, 2010, at 6:56 AM, jarichon wrote:

    China will loose this war with USA.

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  • Report this Comment On September 18, 2011, at 9:13 AM, mar4ela wrote:

    China is the most powerful country now.

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