Geithner on Yuan: Misstep or Warning Shot? 42 comments
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You have to wonder if Timothy Geithner’s written comments, in his response to Senate Finance Committee questions regarding the yuan, were intentional or simply the result of trying to do too much too fast. Here is what he wrote to the Committee:
“Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Geithner said. “The question is how and when to broach the subject in order to do more good than harm.” Obama’s team will “forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”
I’d like to believe it’s a mistake but the more I read it, the more it feels like a deliberate warning shot at the Chinese. The manner in which he cites Obama, the reference to economists which sends the signal that they have been looking into this, and the use of the word “manipulation” all seem to amount to an outline of a coming policy initiative.
I will freely admit to being no China expert but from what reading I have done, my impression is that the Chinese are extremely touchy when it comes to the matter of the value of their currency. If that is indeed the case then hopefully the Obama team has thought this through thoroughly. It seems pretty bold to be tweaking the nose of your biggest creditor, particularly at a time when you need that creditor to float you a lot more credit.
The bigger danger may be in the signals it sends to Congress. Remember that Obama ran on an anti-trade platform and the Democratic leadership has strong protectionist tendencies. The labor unions, one of the major contributors to the party, aren’t shy about their antipathy to trade and their support for whatever it takes to improve their competitive advantage. Charlie Rangel was quick to jump on the Geithner comment and typifies the receptive audience it has in Congress.
“What they can’t work out diplomatically we can work out legislatively,” said Representative Charles Rangel of New York, who chairs the House Ways and Means Committee, which has jurisdiction over trade issues, in an interview. “The committee has been saying for years” that China has manipulated the yuan’s value, he said.
Tensions are going to get really high if this recession continues to worsen. We all know what role protectionism played in exacerbating the Great Depression. It is going to take a lot of skill to avoid that outcome this time, so incendiary remarks right now just don’t seem to be in order.
Let’s hope that Mr. Geithner or whichever aide actually drafted the response was just fatigued. We already know that Geithner is sloppy with paperwork so maybe we can use that as an excuse if this gets out of control.
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This article has 42 comments:
Gethner's comment is to please certain faction of the Congress. If China indeed let yuan appreciate 40% as some hawks demand,what would happen to the $? THE REALITY IS, $ is reversely pegged to Yuan & Yen, whcih is why it has rallied so much in the crisis and smashed all other currencies around the world.
The crisis would have a softer implication as long as China and US gets along with each other, and act together. Otherwise, we are heading to unknown unknowns.
In my opinion you read too much into it as you read the quote too often, what happens to the yuan will be decided on the ground and frankly, it could go either way.
It seems both sides will benefit by working on synergy now. There are no longer the unilateral benefits that were previously existed and the path out of the problem is together not apart. They are our biggest creditor so we are their biggest debtor. Both positions have significant strength on their own. We go together wherever it ends up.
This Chinese labor has no retirement plans, no health care, no environmental laws, no affirmative action set-asides, no safety standards, and no bargaining rights. Not to mention their currency is artificially suppressed, and their exporters get subsidies.
We aren't just protecting American jobs, we are protecting an entire way of life and standard of living. It only makes sense and is long overdue.
They are looking for a fight over trade with their biggest creditor. It would not shock me to see the PBOC sit out a few Treasury auctions. Word will get back to Mr. Geithner pretty quickly as to why he had to pay 30bp more. With any luck he'll press the issue; the relationship between the US and China isn't healthy and it wouldn't hurt the US to be forced to borrow and spend less. A greater worry is that this sort of thing, under these conditions (don't forget that China has over 1 billion citizens, 10% more men than women, and rising unemployment), can easily lead to war. It's a game of chicken on the world's biggest stage and both sides might eventually decide they're simply not going to blink at all.
I don't understand why anyone believes that governments work on behalf of the people, they don't. They do the opposite in order to increase their control. Which is why this new administration here in this country would love to force China to appreciate their currency. A healthy dose of hyperinflation would put the U.S. government in full control of everything and ensure the death of capitalism.
Capitalism is the economic foundation that allows individuals to have a heavy stake in the government process, thus ensuring freedom. Without capitalism, governmental power is held by an elite few. Thus, the huge intertia favoring socialism over capitalism globally.
On Jan 23 10:25 AM Lok Sang Ho wrote:
> Factories in China are closing in tens of thousands, and many migrant
> workers who used to work in these factories have lost their jobs
> and returned to their towns and villages. There is a popular blog
> in China that is advocating greater savings as a new lifestyle(as
> if the Chinese were not saving enough already!). Job insecurity
> will hurt China's consumption and will reduce imports. China has
> canceled orders or frozen further orders for planes from Boeing.
> I just do not see how a stronger yuan would benefit America.
Thank you for that good reference-- its not easy to know how the Chinese see all this without being able to read Chinese.
China and the US have built a system that's not necessarily good for either country: China is selling the US consumer more than he really can afford, on credit . . . the problem is that the credit really isn't all that good.
An economic expansion in China based on the solvency of the US consumer has to end badly. China needs to look to domestic demand for growth . . . a Yuan which is too cheap gives Chinese industry & American consumers all the wrong signals.
On Jan 23 09:57 AM MJJP wrote:
> I really see nothing wrong with implementing a Smoot Hawley Tariff
> which would protect a certain percentage of industry. Opening up
> our entire mfg base to the lowest bidder is suicide as we can plainly
> see. We produce nothing , our wages are in the toilet and as such
> our standard of living is dropping. Real unemployement as compared
> to the Great Depression is similar. I am not against free trade as
> long as it is fair trade. Tell those that want to enter our markets
> to clean up their act and enact clean water standards, sewage, safe
> labor standards etc. Then we'll talk.
The currency fight is an issue both sides will lose badly on eocnomic terms. You have to wonder why politicians keep pedalling this.
We aren't just protecting American jobs, we are protecting an entire way of life and standard of living. It only makes sense and is long overdue."
------------------
This is why the smart money is leaving the U.S. and Obama will probably be a Hoover, not an FDR. The American people do not want to protect their wealth through working hard and competing with China and India because too many Americans do not earn their wealth, they take it from productive citizens through the ballot box either directly or through regulation—and this includes SS and Medicare which made unrealistic promises.
The current situation with China is just the converse. The imbalance needs to resolve itself slowly in free exchange rate. Otherwise China's reverse currency bubble will eventually explode all at once.
US had made a great attempt to become the BANKER for the world, and direct an ever increasing proportion of the labor force to service the bankers. Unfortunately, the bankers are not only incompetent, they hide the loss and then ask tax payers to bail them out.
The U.S. is dependent on China to fund its debt. But China also benefits in that it funds the U.S. purchases of its goods and finds a "safe" home for its money.
Without access to Chinese goods, the U.S. would become uncompetitive on world markets. Without access to Chinese cash, the U.S. is bankrupt.
Without access to U.S. markets, China faces faces a severe economic downturn and social disorder. Without lending to the U.S., China would undermine its key market and, in weakening the dollar, undermine world trade and its own savings in the U.S.
That is a heavy set of inter-dependencies. So, let's hope the two governments can keep cool.
Over time, it will be easier for China to reduce its dependency on the U.S. than vice-versa. China can redeploy to other markets and investment areas and build domestic markets. Its' moving to do so already.
The U.S. is building its mountain of debt and thus becoming more dependent on creditors, notably China, all the time.
Therefore, at some stage, if needled enough, China will cash in the U.S.'s chips. What's holding them back is:
(1) general caution and wish to maintain (some) good will
(2) the impact globally and thus uncertainty about full knock on effects
(3) fear of domestic disorder.
The ruling class, both public and private, have made a profound mess of the U.S. while accruing unheard of privelege and wealth to themselves. Now the mess is exposed by the collapse of our ponzi banking system, which hid inefficiencies and messes everywhere including trade. While crushing the bottom 40% or so during "recoveries" past.
Leaders in this country used to be often self-made industrialists, skilled in solving real problems. Now they are skilled in parliamentary maneuvering in the "service" sector and in the gargantuan government. I don't know if they can do more than change perceptions in our house of mirrors, rearrange the deck chairs on the Titanic.
A guiding light should be the Constitution, and not what I fear they will do: Continue to ignore it or consider it only an obstacle to evade.
Second, even if China continued to "manage" their currency upwards, they would fall into "manipulator" category simply based on evidence that most surplus countries have had their currencies appreciate (the Japanese, Norwegian, Swiss). As a surplus country, Chinese currency should be moving upwards as well in par with the Norwegian at least if not the next most "manage currency" the Japanese Yen. Otherwise interest rates will not be useful in accurately assign cost to money so it goes where it needs to to solve problems.
Third, the Fed has already indicated they will step in to purchase Treasuries to keep the stated and real (Libor) rates spread where they want it. China's ability to purchase tens of billions of debt per month pale to Fed's ability to step in at 10x that level.
Unfortunately, sometimes it takes at least a gentle nudge to get people (and countries) to do what they should be doing. The best we can hope for is that the people in charge do their job right. If they screw up, we will all feel the pain.
Secondly, as the US is only one of China's export markets they may decide to lose exports to potential protectionism instead of risking losing market share in all markets due to an appreciation.
Thirdly, and most importantly, does anyone in America have an idea how a forced appreciation of the yuan would look like to Chinese people? The Chinese have somewhat of a chip on their shoulder, as the British would say, when it comes to matters involving national sovereignity, so to see their government more or less follow on US-order would lead to hefty riots against the government. Maybe someone should tell Geithner of the Chinese concept of 'losing face'.
I'll round this up with the prospect of the Chinese firing a warning shot at America by sitting out UK bond auctions. Diplomacy 101.
If he starts badmouthing other countries and sparks trade wars it's all over for a 2009 recovery and may extend the downturn well into 2010. Even an Obama stimulus can't counter a mass global protectionism wave.
The question is why the administration continues to ask for it? Here is my conclusion.
Yuan revaluation certainly has forced many factories in China to close and unemployment to rise sharply. But it won't increase employment rate in US. The politicians continue to talk about this to create an impression that they are making a huge effort to increase jobs here. Unfortunately this is only a mirage. Nevertheless, people loves mirage for its wonderfulness.
The danger is we may get what we are asking for. Does everybody notice that the Treasury yields rose continuosly this week due to Geithner, despite the bad news from banks and stock markets. Gold has rallied strongly and ready to breakout.
On Jan 23 05:52 PM greenspam wrote:
> First, the message is targeted to China's recent attempts at bringing
> back tax subsidies and talking about devaluing the yuan. This message
> says don't go there. Its not about whether strengthening the Yuan
> will benefit the US.
> Second, even if China continued to "manage" their currency upwards,
> they would fall into "manipulator" category simply based on evidence
> that most surplus countries have had their currencies appreciate
> (the Japanese, Norwegian, Swiss). As a surplus country, Chinese currency
> should be moving upwards as well in par with the Norwegian at least
> if not the next most "manage currency" the Japanese Yen. Otherwise
> interest rates will not be useful in accurately assign cost to money
> so it goes where it needs to to solve problems.
> Third, the Fed has already indicated they will step in to purchase
> Treasuries to keep the stated and real (Libor) rates spread where
> they want it. China's ability to purchase tens of billions of debt
> per month pale to Fed's ability to step in at 10x that level. <br/>
On Jan 23 10:04 PM lonestar1 wrote:
> Clearly yuan revaluation has no benefits at all to US. It actually
> hurts US.
>
> The question is why the administration continues to ask for it? Here
> is my conclusion.
>
> Yuan revaluation certainly has forced many factories in China to
> close and unemployment to rise sharply. But it won't increase employment
> rate in US. The politicians continue to talk about this to create
> an impression that they are making a huge effort to increase jobs
> here. Unfortunately this is only a mirage. Nevertheless, people loves
> mirage for its wonderfulness.
>
> The danger is we may get what we are asking for. Does everybody notice
> that the Treasury yields rose continuosly this week due to Geithner,
> despite the bad news from banks and stock markets. Gold has rallied
> strongly and ready to breakout.
>
>
>
> On Jan 23 05:52 PM greenspam wrote:
There is no reason that we can not protect our aging industries and give them a chance to come back home and/or modernize here. For me the greatest danger over the years has been the shipping abroad of our industrial base and the debasement of our currency. We have become a nation which makes little, low wages and a third world currency.
On Jan 23 09:57 AM MJJP wrote:
> I really see nothing wrong with implementing a Smoot Hawley Tariff
> which would protect a certain percentage of industry. Opening up
> our entire mfg base to the lowest bidder is suicide as we can plainly
> see. We produce nothing , our wages are in the toilet and as such
> our standard of living is dropping. Real unemployement as compared
> to the Great Depression is similar. I am not against free trade as
> long as it is fair trade. Tell those that want to enter our markets
> to clean up their act and enact clean water standards, sewage, safe
> labor standards etc. Then we'll talk.
If appreciation of the Yuan is required then buying Treasuries makes no sense. If they stop buying Treasuries then the upward appreciation of the dollar will come to a grinding halt and quickly reverse. It would also help to start to eliminate the biggest obstacle to appreciation of the Yuan, which is that the Chinese stand to lose big time on their US investments.
Perhaps the problem would go away if the US agreed to convert all the debt to YUAN denominations at the current rate which is where the borrowing occurred before agreeing a new target rate.
Or is that the US is trying to default on its debt by stealth rather than admit it just cannot pay?
China is receiving the backlash of the risk aversion process. They want to stop the appreciation of the Yuan, not increase it even more.
Telling the Chinese to appreciate their currency is "currency manipulation".
China can afford to alienate the USA, not the opposite.
Personally, I believe Geithner wants to be approved so badly that he will do whatever he believes is needed.
What Geithner said, my opinion, "I want the USD to depreciate".
Be careful of what you wish for...IMHO
I guess if you want someone experienced in manipulating financial things you pick a professional crook.
Not easy for me to say but I think thee Chinese might be more trustworthy than the President and more than a few of his cabinet members.
www.google.com/hostedn...
www.upi.com/Top_News/2.../
I differ with many on the subject of China's ability to significantly affect demand for US Treasuries, and demand for the US dollar in that I believe the pain would be relatively short lived. Too many other wealthy participants (i.e., Japan and the Saudis) would be more than happy to help mitigate the longer term effects as they depend on the US not just as a market for exports but for their defense as well. I could be wrong, and we really won't know unless it happens, but it seems to me that the economic threats of China's withdrawal as a US creditor are likely to be hollow, at least over the longer term (say, two years or so). In any event, it seems inevitable that China will not be in a position to finance the US at recent levels for much longer anyway.
The last 10 years or so have been an anomaly in terms of US/China relations, based more on short term expediency than any long term agreement as to a vision for the economic, political, and military future of Asia, or the role the US thinks is appropriate for China globally. At their best US/China relations were never as good as the US relationships with Japan or Taiwan have been at their worst in the post-war period. We're probably about to return to a more normative arrangement, which is to say a more hostile one, and attempt to decouple our respective economies. I for one believe that internal political changes are lurking in the near future for China. I wish I knew what form they might take. I also agree that the possibility of military confrontation is rising somewhat, and that the potential for mistakes and misunderstandings leading to such a confrontation is apparent. I am looking for the rhetoric to heat up, and for the perception that "constructive engagement" with China (remember the 90s?) as a means of promoting human rights and democratic reform to steadily lose traction in US public opinion, and therefore in US politics. It has, after all, effectively been a failure. Though I doubt that it was ever a real US goal in the first place, because if it had worked it would have been the first time in history that a geopolitical rivalry were resolved through economic ties and trade.
War is typically the way in which such disputes are resolved, though I by no means think it is at all likely, it does seem that the likelihood is rising. For practical reasons that have not changed since the 1950's the Korean peninsula remains a more reliable flash point than say, Taiwan.
I hope it does not go that way. . .It just seems that in volatile times like these, the misjudgments of those in power on both sides have a tendency to devolve into a spiral of events that can get out of control. Especially when at least one of the main players, North Korea, is not quite under the total control of their Chinese allies.
In short, I don't see that China really has a viable or effective economic card to play in the current situation, which leaves only the military card. It seems to me that this increases the risk of a mistake by either or both participants leading to a confrontation. Not exactly inevitable, but certainly worth watching if the current economic trends do not reverse, and the malaise instead deepens.
These are certainly strange and interesting days. I'll keep my fingers crossed that things do not fall apart so completely, but I am appalled at the rapid pace with which the global economic miracle continues to unravel. Rapid economic degeneration is usually not a recipe for political stability, especially where the prevailing political apparatus is inflexible or has difficulty adapting.
On Jan 23 10:18 AM bearfund wrote:
> Of course it's a warning shot. At that level nothing is accidental;
> it may be a mistake, but it's not an accident. The charge of "manipulation"
> is ludicrous; OF COURSE the yuan's value is manipulated: it's well-known
> to be loosely pegged to the US dollar! That's not news to anyone,
> so this word choice is clearly deliberate and intended to provoke.
> A much softer way of saying the same thing is "inflexible" or even
> just "undervalued".
>
> They are looking for a fight over trade with their biggest creditor.
> It would not shock me to see the PBOC sit out a few Treasury auctions.
> Word will get back to Mr. Geithner pretty quickly as to why he had
> to pay 30bp more. With any luck he'll press the issue; the relationship
> between the US and China isn't healthy and it wouldn't hurt the US
> to be forced to borrow and spend less. A greater worry is that this
> sort of thing, under these conditions (don't forget that China has
> over 1 billion citizens, 10% more men than women, and rising unemployment),
> can easily lead to war. It's a game of chicken on the world's biggest
> stage and both sides might eventually decide they're simply not going
> to blink at all.
Chubese currebcy appreciation will help some other Asian countries a great deal, Vietnam, Cambodia, India, Bangladesh will be happy to pick up a lot of the low end manufacturing, none of those low-pay, polluting jobs will be coming back to the US, as those politician would like you to believe.
On Jan 23 11:04 AM lonestar1 wrote:
> Can anybody explain to me how Chinese currency appreciation would
> benefit US economically in any particular area? A thorough analysis
> would show NONE. 40% appreciation WILL NOT help US to rebuild manufacturing
> sector, while $ may spiral down.
>
> The currency fight is an issue both sides will lose badly on eocnomic
> terms. You have to wonder why politicians keep pedalling this. <br/>
"I am not against free trade as long as it is fair trade."
Well, well, well. The interpretation: "Free trade" is good as long as it is under my conditions.
Word "fair" is tooooooooooo flexible. So let us stop BS right now. Free-trade is a free-trade with trade-barriers removed. Period.
Your comment touched on many geopolitical issues, which indeed provide the larger background.
The US superpower status was stronger during the cold war times because Europe, Japan as well as many other nations stood firmly behind US, in the form of the large trade deficits despite the $ depeg from Gold.
The end of the cold war encouraged the US unilateralism, which was the origin of all the problems. The US interest is now challenged by all other major players, EU, Russia, China, and to a less extent by Japan and India, as well as adversaries such as Iran etc.
I don't think US can afford to lock in a bitter fight with any one of the top three, especially with China. There is a calculation that a bitter struggle with China, espcially militarily, will force both countries down to a less status, while other powers rise. Even Iraq proves to be too much.
Financially, if China dumps all the Treasuries, one can not expect Japan and Saudi to pick them up.
On Jan 24 08:49 PM rosey99 wrote:
> Agreed. In the context of the current economic situation, and the
> recent political shift in the US, "manipulation" is indeed a carefully
> chosen word. A quick look at the recent (and often contradictory)
> posturing from North Korea is also interesting in this context:<br/>www.google.com/hostedn...
>
> www.upi.com/Top_News/2.../
>
>
> I differ with many on the subject of China's ability to significantly
> affect demand for US Treasuries, and demand for the US dollar in
> that I believe the pain would be relatively short lived. Too many
> other wealthy participants (i.e., Japan and the Saudis) would be
> more than happy to help mitigate the longer term effects as they
> depend on the US not just as a market for exports but for their defense
> as well. I could be wrong, and we really won't know unless it happens,
> but it seems to me that the economic threats of China's withdrawal
> as a US creditor are likely to be hollow, at least over the longer
> term (say, two years or so). In any event, it seems inevitable that
> China will not be in a position to finance the US at recent levels
> for much longer anyway.
> The last 10 years or so have been an anomaly in terms of US/China
> relations, based more on short term expediency than any long term
> agreement as to a vision for the economic, political, and military
> future of Asia, or the role the US thinks is appropriate for China
> globally. At their best US/China relations were never as good as
> the US relationships with Japan or Taiwan have been at their worst
> in the post-war period. We're probably about to return to a more
> normative arrangement, which is to say a more hostile one, and attempt
> to decouple our respective economies. I for one believe that internal
> political changes are lurking in the near future for China. I wish
> I knew what form they might take. I also agree that the possibility
> of military confrontation is rising somewhat, and that the potential
> for mistakes and misunderstandings leading to such a confrontation
> is apparent. I am looking for the rhetoric to heat up, and for the
> perception that "constructive engagement" with China (remember the
> 90s?) as a means of promoting human rights and democratic reform
> to steadily lose traction in US public opinion, and therefore in
> US politics. It has, after all, effectively been a failure. Though
> I doubt that it was ever a real US goal in the first place, because
> if it had worked it would have been the first time in history that
> a geopolitical rivalry were resolved through economic ties and trade.
>
> War is typically the way in which such disputes are resolved, though
> I by no means think it is at all likely, it does seem that the likelihood
> is rising. For practical reasons that have not changed since the
> 1950's the Korean peninsula remains a more reliable flash point than
> say, Taiwan.
>
> I hope it does not go that way. . .It just seems that in volatile
> times like these, the misjudgments of those in power on both sides
> have a tendency to devolve into a spiral of events that can get out
> of control. Especially when at least one of the main players, North
> Korea, is not quite under the total control of their Chinese allies.
>
>
> In short, I don't see that China really has a viable or effective
> economic card to play in the current situation, which leaves only
> the military card. It seems to me that this increases the risk of
> a mistake by either or both participants leading to a confrontation.
> Not exactly inevitable, but certainly worth watching if the current
> economic trends do not reverse, and the malaise instead deepens.
>
>
> These are certainly strange and interesting days. I'll keep my fingers
> crossed that things do not fall apart so completely, but I am appalled
> at the rapid pace with which the global economic miracle continues
> to unravel. Rapid economic degeneration is usually not a recipe for
> political stability, especially where the prevailing political apparatus
> is inflexible or has difficulty adapting.
>
> On Jan 23 10:18 AM bearfund wrote:
Given global media and market responses to Geithner's comments, it is clear the world is watching Obama's administrations potential missteps very nervously. We are in the midst of a US Treasury bubble which smart monies are already betting against. The nervousness of the market shows that the Treasuries are in a very delicate situation. Any signn that the Chinese will retaliate could cause a big sell off of the Treasuries.
I have been adding to short positions agaisnt mid and long term Treasuries expecting big rewards in one to two years, but it seems the potentials for big short-term gains on my short positions is increasing very quickly.
Good job, Tim.
the PRC govt wouldn't buy a pretzel from the US if they did not desperately need us to solve their overpopulation and jobs needed
problem....look in any hardware store in your neighborhood and see if
you can find a product or tool that is not manufactured in china.
a tenfold increase in the value of the yuan wouldn't take away their
competitive advantage....40% IS PEANUTS.
On Jan 23 10:14 AM Jubilee Year wrote:
> Unfortunately, this article is repeating a very common myth. Protectionism
> hurt the US in the 1930's because we were the world's number one
> exporter and creditor, and we had an industrial overcapacity. Obviously,
> we are no longer in that position. The lack of balanced trade has
> large negative consequences for our economy.
>
> This Chinese labor has no retirement plans, no health care, no environmental
> laws, no affirmative action set-asides, no safety standards, and
> no bargaining rights. Not to mention their currency is artificially
> suppressed, and their exporters get subsidies.
>
> We aren't just protecting American jobs, we are protecting an entire
> way of life and standard of living. It only makes sense and is long
> overdue.
With the USD lower, there will be imported inflation, Is'nt this what the Feds wants.?
On Jan 25 01:15 AM HaavBline wrote:
> We are in the midst of a US Treasury bubble
> which smart monies are already betting against. The nervousness
> of the market shows that the Treasuries are in a very delicate situation.
> Any signn that the Chinese will retaliate could cause a big sell
> off of the Treasuries.
Its worth considering that the Chinese' _best_ investment for 2008 was probably US Treasuries. Not only did they go up, while everything else cratered, they enabled the purchases of US Treasuries by the Chinese essentially helped the US finance the purchase of Chinese goods.
Longer term, that can't continue, but seen from a Chinese perspective, their Treasury purchases to date have been a huge success, financially and in terms of the macroeconomic effects.