Geithner Turns Up the Heat on China
January 22, 2009
**Update: As of 11:30am ET, Geithner is confirmed as Treasury Secretary
In his confirmation hearing with the Senate Finance Committee, Treasury Secretary Nominee Tim Geithner said that a “strong dollar is in America’s National Interest.” As potential Treasury Secretary, we expected Geithner to adopt the stance of his predecessors, which is to pay lip service to the strong dollar policy. Over the past few years, the consequences of the US government’s fiscal and monetary actions is a weak and not strong dollar. For any country that is slowing or in recession, a weaker currency is more helpful than a strong one.
So there is no real meat to Geithner’s comments especially as the Federal Reserve embarks on their “credit easing” policies. It would also have been a mistake for Geithner to say anything otherwise about the dollar at his hearing because rocking the boat could risk his confirmation.
Geither Turns Up the Heat on China
More significantly, he also suggested that the Obama Administration will may be saying goodbye to the buddy versus bully approach to China. He believes that Obama will “aggressively try to change Yuan policy” and that China will no longer get a free pass in trade violations. Geithner went one step further by saying that Obama believes that China is “manipulating” its currency and therefore the new President wants currency realignment. This represents a dramatic departure from the Bush Administration’s strategy. Former President Bush and former Treasury Secretary Paulson have allowed China to appreciate the Yuan on their own terms and to a large degree it has worked because over the past 3 years, the Yuan has risen more than 15 percent. It is still undervalued by at least 10 percent but China is not one to buckle down to political pressure even if it comes from Obama. This is a bad time to ask for Yuan stregnth because growth in China has slowed materially. If the US brands China as an official currency manipulator it will be interesting to see what type of backlash or economic war comes out of it.
Posted in chinese yuan, forex blog
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January 22nd, 2009 at 4:05 pm
As usual, you and Boris are prescient in your analyses. China has no national interest in securing obedience to dictat. This is a long-standing characteristic of the reformed empire and the past 200 years if nightmare do not encourage a change in response to a Treasury Secretary who arrogantly - as a member of the financial elite - paid no attention to his own tax reforms and refused to pay the balance until induced by promise of material reward in the form of career enhancement.
Each Administration displays its own particular hubris.
January 22nd, 2009 at 5:05 pm
Geithner should be more wary. With China’s reserves and economic strength (positive budget balance and current acct balance), the US (huge negative budget balance and current acct balance) is the weaker of the two in a financial battle. if china stops buying US debt, the price of the bailout will increase dramatically as 10 yr rates rise to generate demand. the US has had a few failed auctions recently. the US is on the brink of insolvency-
a) mark to market securities losses of $10T
b) FDIC inadequately capitalized for likely losses
c) Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, U.S. banks and brokers are expected to incur $1.1 trillion
if China suddenly sold a part of their $2T in $ reserves, the $ would surely plummet.
no matter Paulsons many mistakes, his politic approach to China was wise.
January 22nd, 2009 at 6:32 pm
I totally agree Paul - Is this a Rookie Mistake?
January 22nd, 2009 at 6:41 pm
You don’t think the Obama Admin. will try to get “tough” by some kind of protectionist trade policies do you?
January 22nd, 2009 at 10:14 pm
The last thing China wants is to get rid of its dollar reserves. Although, we will see these reserves thaw as China tackles the flight of capital out of China and serious economic slowdown. The dollar, on the other hand, has begun its bull market, no matter how often it is declared dead or the US insolvent.
January 23rd, 2009 at 5:48 am
Even if the Obama administration doesn’t make any specific actions, the hard talk could bring the Yuan a little bit down.
January 25th, 2009 at 2:52 am
what can you expect from someone who was arrogant about his tax problem. we have already been through nannygate. We need someone that is serious and Geithner is not it. We will not get out of this without some pain and if we try to do this without pain and print money well ask the Germans how that worked out. I have and they have told me. nice job on fx360
January 25th, 2009 at 11:23 pm
A student can tell you he adopts a straight A policy, but if he skips class everyday, he is not going to get his As. Similarly, the U.S treasury can tell the whole world that they have a strong dollar policy, but if they don’t really do it, the U.S dollar is still going to tank.
January 26th, 2009 at 5:13 pm
Great point Lim!