Imagine that U.S. gross domestic product is growing at an annual rate of 4% when suddenly it drops to 2% because important trading partners are hit by a severe recession. An alarmed president pushes through Congress a $2 trillion fiscal stimulus package, while a frantic Federal Reserve dramatically expands credit and increases the money supply by a whopping 25%. Would a decline in the growth rate from 4% to 2% justify such extreme policy measures?
Most economists would say “no way” because heavy stimulation of a generally healthy economy could lead to an inflationary doomsday. Yet the Chinese Communist Party has implemented an equivalent level of stimulation in combating what it insists is a very mild economic downturn. Something isn’t right with this Chinese picture.
Beijing contends that China’s growth rate never fell into negative territory despite the fact that its exports plummeted by 20% to 25% last fall and winter and have not recovered. The only real pain China suffered, government officials maintain, was a mild decline in growth, from an average of 9% to 12% in 2005-2008 to 7.1% in the first half of 2009. Not to worry, the officials say.
Nevertheless, the regime hurriedly implemented a $586 billion fiscal stimulus package, the equivalent of an astonishing 13% of GDP. It also ordered state-owned banks to flood the country with liquidity. If the official data are to be believed, the result has been only a mild uptick in growth back to the country’s 9% to 12% trend line.
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