If there’s one country which has got its economic act right, without much fuss, it’s China.

And this includes both the rich and poor worlds.

In 2008, even as the financial crisis derailed Western economies, China quickly reflated with a massive infrastructure investment programme. Monetary relaxation, comprising measures to boost liquidity and rate cuts formed part of the strategy. Note, money didn’t have to do all the work.

Contrast this with the US where the Federal Reserve is fighting a lone battle to make sure the economy does not lapse into recession. It has no choice given the fiscal jam and the obdurate politics of the Republican Party, which stubbornly resists the fiscal stimulus the economy badly needs.

The Fed has guaranteed near zero interest rates for an extended period of years. Quantitative easing — ‘QE’— involving the Fed buying securities from the market will keep the financial system more than adequately supplied with liquidity. This not only keeps Government bond (Treasury) yields low but also narrows the yield spreads between other securities and Treasuries-in short cheap money across all yield curves and all asset classes.

‘Junk’ bonds

It has worked. Yields on corporate and mortgage bonds and their derivatives have crashed from the peaks of 2008 and 2009, when risk was being avoided at all costs. In fact, the boom has percolated to the so-called ‘junk’ bonds, which are trading at very high prices. (Yields and prices are inversely related).

Thanks to the fall in mortgage bond yields and assured low interest rates, investment in housing is in a sharp upturn, reflected in housing starts, home sales and house price indices. But the impact on other sectors is modest. And there’s quite some distance to go on the jobs front. So the rise in US stock market indices to record levels is at odds with its 2 per cent growth and near 8 per cent unemployment. Are we in another asset bubble?

This disconcerting question, raised recently in top level meetings between the US Government and the Fed, was reportedly dismissed by Bernanke in recent debates on the US economic situation. Is he repeating his pre-financial crisis mistake?

While exceptionally low interest rates played a significant part, the crash wouldn’t have happened had housing finance not become notoriously lax in its credit standards. This, it seems, is the Bernanke response, which means tighter lending norms and their strict enforcement.

Policy logjams

The free market economies of the West are unable to exit their policy logjams. Confusion abounds and common sense has become the casualty as reflected in austerity and ‘beggar thy neighbour’ policies amidst weak economies and job markets.

It’s here that China scores with its pragmatic marriage of monetary and fiscal policies. Call it ‘guided capitalism’ or whatever. Of course, the cynics will say China is no democracy and they are right.

But do we need dictatorship and autocracy for mere, timely and quality infrastructure investment and the right fiscal-monetary mix?

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