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Commentary: Why Obama should be upbeat -- and worried

  • Story Highlights
  • David Smick: Obama, Bernanke should quiet down and let stimulus work
  • He says they should focus on a threat that could overwhelm the U.S. economy
  • Smick says nations are engaged in devaluing currency and fighting over trade
  • He says the U.S. is needed to step in and avoid catastrophic global decline
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By David M. Smick
Special to CNN
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David Smick is a global financial strategist and the author, most recently, of "The World Is Curved: Hidden Dangers to the Global Economy." He heads the Washington-based. market advisory firm Johnson Smick International and is founder and editor of the quarterly magazine The International Economy.

David Smick says the Obama administration must play a key role in resolving the global economic crisis.

David Smick says the Obama administration must play a key role in resolving the global economic crisis.

WASHINGTON (CNN) -- With all due respect, President Obama and Federal Reserve Chairman Bernanke, to put it bluntly, should shut up.

To their credit, they have deployed unprecedented amounts of fiscal and monetary stimulus.

Bernanke's stimulus, in particular, has the potential to be extraordinarily effective once our national psyche brightens and the economy begins to improve.

Now it's time to sit back and let that stimulus work. Bill Clinton said as much last week, telling ABC News that he applauds Obama's effort to "educate the American people about the dimensions and scope of this economic crisis," but adding, "I just would like him to end by saying that he is hopeful and completely convinced we're gonna come through this."

Constantly suggesting, "If the stimulus doesn't work, there's more to come," only destroys confidence. Investors and consumers are encouraged to hold off, to see if a better deal materializes down the road.

Instead, our leadership needs to address the rising global economic threat. America is not an island. A tsunami of potentially overwhelming power is building overseas. If it is allowed to swamp our shores, President Obama's extraordinarily expensive stimulus and bank bailout plans could be swept away like castles of sand.

Because world trade and commodity markets (including oil) have collapsed, the economies of export-dependent nations are in free fall. As the emerging markets in Asia, Russia, Eastern Europe, and Latin America plunge, they are pulling Europe along with them into the worst decline in 50 years.

European officials have been in denial, underpricing their banks' toxic asset problem at a mere $1.5 trillion. Estimates from private analysts far exceed the European Central Banks' publicly acknowledged financial exposure with some reaching as high as $7 trillion, both to emerging markets and to the weaker members of the euro zone itself.

On that basis, the exposure of Europe's banks collectively exceeds a dangerous 300 percent of Europe's gross domestic product.

This is a problem for the United States because the world is financially interconnected. As with the contagion effect from the collapse of Lehman Bros., failure of a major European bank could doom a U.S. financial system already on life support.

As a result of financial collapse, we are seeing before us the rise of something particularly ominous -- a coming new world of soaring trade tensions, fights over bank loan repayments and beggar-thy-neighbor attempts at currency manipulation. This is a world from which America can't quickly withdraw, and ignoring it could lead to catastrophic consequences.

Let's begin with the Russians, whose economy is flat-lining. Owing a lot of money to the German banks, Moscow has just run over Frankfurt with the equivalent of a Panzer tank.

First the Russians devalued the ruble. Then they slapped on import duties against German automobiles and other items. On top of this, they erected a number of other non-tariff impediments to incoming German goods and services. Then they suggested a rescheduling of debt payments to German banks.

The scene isn't much prettier in Eastern Europe and the Baltics, where, because of struggling economies, currencies have severely weakened. Repayment to the Western European banks won't happen any time soon because the loans, in most cases, must be paid back in the stronger euro. Not surprisingly, protectionist sentiment throughout Eastern Europe is soaring.

It would be reassuring to think that other parts of the world with sounder economies had decoupled from the U.S.-European problem and could serve as a global growth engine. Don't bet on it.

The U.S. and Europe are major importers, so exports since September from countries such as Japan, Taiwan, South Korea and China have dropped like a stone. Even in once healthy Brazil, industrial production is plummeting.

In China, imports last month collapsed by more than 40 percent, along with domestic construction. This likely means Beijing's fiscal stimulus isn't working. Some analysts expect zero growth in China in the coming months.

All of this economic destruction is creating a perilous global race to devalue currencies for trade purposes against the dollar (a weaker currency makes the price of exported goods more attractive). Chinese officials will soon be tempted to depreciate the yuan against the dollar.

European politicians, unable to fashion a unified fiscal response to the crisis, will embrace a sharp fall in the euro's value against the dollar and yuan as perhaps the only source of relief.

With the entire world yearning for a weaker currency against the dollar, economic and trade tensions are about to accelerate. A stronger dollar would mean America's manufacturers would be at a disadvantage in marketing products overseas. Don't be surprised if the U.S Congress responds with rabid protectionism.

This is the ugly environment Barack Obama will face at the upcoming April G20 Summit in London, perhaps the most important global economic gathering since Bretton Woods in 1944. The world is desperate for American leadership. What's needed is a new global financial doctrine that addresses the issues of global saving and consumption, currency arrangements, financial regulation and trade.

For more than a decade, the world has operated under an economic model in which most of the world under-consumed while becoming dangerously dependent on exporting to a gluttonous, debt-ridden American consumer. Now the world needs a new model.

In building that model, the Obama administration needs a division of labor: while Treasury Secretary Tim Geithner works to fix the domestic banks, the president's former rival, Hilllary Clinton, because she is known by heads of states and is highly respected, helps to save the world's economy.

At the upcoming meetings, the president needs to be less our national lawyer -- our issue-mediator-in-chief -- and more of a global Steve Jobs-like policy entrepreneur. If he rises to the challenge, Obama could shape history. If it's business as usual, the United States could find itself marginalized in a world, economically speaking, gone mad.

The opinions expressed in this commentary are solely those of David Smick.

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