Geithner on China's Currency Manipulation

Tim Geithner's testimony about China's currency manipulation is the top story in the world today, judging by the NYT's front page. And he did indeed say three times in his written responses to the Senate Finance Committee that "President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency."

The general reaction in the blogosphere has been, dude, I thought you liked a strong currency. And this isn't manipulation anyway. And does this mean we're asking them to sell their dollars now? Etc. But looked at in the context of the full set of responses, I see this answer a bit differently.

The overwhelming impression one gets from reading the full 102 pages is that Geithner never wants to answer a question directly, always wants to leave open the possibility that he might agree with the senator asking the question, and is generally taking a don't-spook-the-horses approach to the committee. Remember that his answers are key in determining whether his nomination will get voted through by the committee, and in fact that's their only real purpose.

Looked at in that light, it's on the face of it a bit weird that he's taking such a strong view on China when he's so good at taking no view at all on, say, Cuba. But think about it for a second: Which committee member, if any, would actually object to Geithner's statement that China is manipulating its currency? Politically speaking, as far as the finance committee is concerned, the upside to such a statement is significant, while the downside is limited.

Still, didn't Geithner know that the Chinese would read his comments, and not just the senators? Of course. But if you're going to say something which, at the margin, risks weakening the dollar and raising Treasury's borrowing costs, what better time to do so than a day when the dollar is very strong and Treasury's borrowing costs are almost zero? Yes, the low interest rates on Treasury bonds will make it much easier to finance the upcoming stimulus package. But Treasury also has a broader interest in pricking the Treasury bubble and getting credit flowing elsewhere.

What's more, Geithner was careful to take this position only after Barack Obama had personally laid it out first. This is also true of Geithner's other substantive statement: "President Obama has said that he wants to reform the IMF to increase developing country representation." Geithner clearly -- and understandably -- doesn't feel comfortable taking public positions on issues which Obama hasn't already nailed down before he's even been confirmed. But when Obama has nailed down a position, the least Geithner can do is reiterate it: Neither the Senate nor China can really blame Geithner for Obama's previously-announced policies.

So, like Dan Drezner, I'm not sure the China part of Geithner's testimony was really such a big deal. But I'm clearly in the minority here.

Comments

[market ace:]

This just proves once again the Geithner can't see the forest for the trees. It is obvious that the US $ is way over valued only because some debt and derivatives are unwinding. Trying to blame the Chinese for everything while Wall Street creates a financial mess under his nose and "watchful eye" is the real problem and the senate should reject this tax dodging Paulson clone.

Jan 23 11:57 AM

[Firat Ünlü:]

It was a stupid thing to say with regard to achieving dealing with the Chinese, but was surely a needed in order to appease backers in Washington.

Jan 23 07:50 PM

[Lonestar1:]

Every politician wants to look as if he is creating more jobs. Bashing on China's currency is the cheapest, and unfortunately the most popular way to create that image.

The reality is yuan revaluation destroys jobs in both countries. Not many people understand that.

Jan 23 10:13 PM

[Lonestar1:]

When Bernanke was asked by a Congressman how to explain to common folks the rationality of using tax payer's money to bailout banks.

Ben goes, no bailout, no lending. No lending, economy will deteriorate and jobs will disappear.

The Congressman goes, "so, no bailout, no jobs". Ben, "Yes".
-----------------
Now, bailout, no lending. More bailout, still no lending.
Jobs? We need China to revalue...

Jan 23 10:24 PM

[John Polomny:]

This putz, the one who forgot to pay his taxes, is out insulting the Chinese that just happen to be our major creditor. We are doomed! Whats next reinstitution of Smoot-Hawley?

Jan 24 02:17 AM

[Even Walser:]

It is about time! I cannot for the life of me understand all the deference to China. It is about time we realized that they need us way more than we need then. Their currency is dangerously undervalued and has been so for far too long. The effects of China's currency manipulation is now being felt through the credit crisis. Lets us not forget that had China not needed to purchase huge sums of dollar denominated assets in order to artificially keep the Yuan low against the dollar interest rates in the US would have risen long ago bring an end to the financial bubble that grew.

I understand many of the other arguments put forward on this blog re: China and the need for them to continue purchasing treasuries. I don't not completely buy the argument that they will not. To be honest I would rather our government prints the money than borrows it from a potential future adversary. The bottom line is China needs the US consumer to continue to purchase Chinese made goods in order for them to achieve growth targets. In order to keep their goods competitive in a global economy they must continue to purchase US treasuries or revalue and compete on a level playing field. Considering the Chinese attempts to rig the system I don't see why we would not take advantage of their position by running large deficits financed by them or inflate our way out of the recession. Either way as far as I see it we are in the strongest position and it is about time we started acting like it.

Jan 24 02:39 AM

[tdillian:]

I agree with the comments... what a stupid and ignorant statement from Geither.. of course what can one expect from someone who blames TurboTax for fudging his taxes..

Jan 24 10:44 AM

[DaveW:]

Rattling sabres with the major backer of our treasuries? He must have used the lesser known software, TurboDiplomacy on this one.... This is not going to end well.

Jan 24 11:12 AM

[Hefaistos:]

The logic is obvious: Geithner says what he says for the following reason: If the Chinese don’t cooperate and let the yuan devalue, a portion of any US stimulus is lost to higher imports. And Congress would be less than happy to see US tax dollars supporting CHINESE jobs.
China is badly export-dependent. Now they face faltering growth and domestic unrest as a result. They have enough unemployment and reserve capacity to increase exports.

Jan 24 11:55 AM

[Hefaistos:]

Typo: "...let the yuan REvalue..."

Jan 24 11:58 AM

[Lonestar1:]

have you thought about the possibility social unrest here as well?


On Jan 24 11:55 AM hefaistos wrote:

>
> The logic is obvious: Geithner says what he says for the following
> reason: If the Chinese don’t cooperate and let the yuan devalue,
> a portion of any US stimulus is lost to higher imports. And Congress
> would be less than happy to see US tax dollars supporting CHINESE
> jobs.
> China is badly export-dependent. Now they face faltering growth and
> domestic unrest as a result. They have enough unemployment and reserve
> capacity to increase exports.

Jan 24 12:09 PM

[Lonestar1:]

The financial bubble really began in 2005 when China started the first revaluation scheme. At that point, while many, including now famous Merrill Lynch Chief Economist David Rosenberg talked about recession, the market rose to another level, and suddenly became an animal unrecognizablly wild.

Revaluation is a destabilizing force there and here. Through pegging to $, China essentially submitting its monetary policy to the Fed. In essence, it is ONE currency, but TWO countries, and TWO separate labor forces. Supposedly, the division of labor, BANKING here and MANUFACTURING there, should work well despite the separation. The problem is the manufacturing capacity in China is too large, almost unlimited, that the US extended financial pyramid to the sky in order to contain or reflect that capacity. The crumbling of both are catastrophic.

Jan 24 12:34 PM

[Conan the B...:]

If you want the Stock Market to self destruct, Calling for the USD to depreciate is the way to do it.

Thank goodness Geithner is not the Treasury Secretary or what he said would have: Dropped the Market like a Rock, slam dunked Treasuries and appreciated Gold in one fell swoop.

James Baker did the same thing in 1987, I believe.

Jan 24 01:19 PM

[marketwatchr:]

China....The IRS needs to worry...This guy does not believe in paying taxes. OH...He forgot, how serious do you think China takes this guy !

Jan 24 05:42 PM

[Bullshit:]

He dodged tax. Now he is the IRS ? America is a great theatre. Every day you have a drama to see.

Jan 24 06:18 PM

[seneca:]

Your basic comment on the instability induced by revaluation is well-taken but otherwise the macroeconomic management of China's economy is lacking in insight. As many have concluded, China has funded the US deficit, the war in Iraq, etc.

The key point is that China has funded (not intentionally) the US entitlement programs in part, at the expense of their own social programs (healthcare, transportation, etc). THIS HAS RESULTED IN POTENTIAL SOCIAL UNREST. Correction of these historic errors will clearly benefit the Chinese people, and this process has begun.

However, the problem now is one of execution -- how to convert the dollar holdings (whose present value is constantly diminishing) into other currencies so that they can buy in yen or euro -- ie capital goods and technology from Japan and Germany (because the US is more restrictive in general on these exports).


On Jan 24 12:34 PM lonestar1 wrote:

> The financial bubble really began in 2005 when China started the
> first revaluation scheme. At that point, while many, including now
> famous Merrill Lynch Chief Economist David Rosenberg talked about
> recession, the market rose to another level, and suddenly became
> an animal unrecognizablly wild.
>
> Revaluation is a destabilizing force there and here. Through pegging
> to $, China essentially submitting its monetary policy to the Fed.
> In essence, it is ONE currency, but TWO countries, and TWO separate
> labor forces. Supposedly, the division of labor, BANKING here and
> MANUFACTURING there, should work well despite the separation. The
> problem is the manufacturing capacity in China is too large, almost
> unlimited, that the US extended financial pyramid to the sky in order
> to contain or reflect that capacity. The crumbling of both are catastrophic.

Jan 25 11:19 AM

[seneca:]

'If you want.." What do define as self-destructing? 45% off historic highs of just over a year ago is not self-destructing? The collapse of C, AIG, ML, and the US banking system is not enough for you? What parallel universe are you residing in?


On Jan 24 01:19 PM paultaut wrote:

> If you want the Stock Market to self destruct, Calling for the USD
> to depreciate is the way to do it.
>
> Thank goodness Geithner is not the Treasury Secretary or what he
> said would have: Dropped the Market like a Rock, slam dunked Treasuries
> and appreciated Gold in one fell swoop.
>
> James Baker did the same thing in 1987, I believe.

Jan 25 11:21 AM

[Conan the B...:]

Seneca: I missed this comment of yours, foretunately after seeing your abrasive comment on Mr. Pettis's article, I decided to see if Author Bashing was your standard M.O. and guess what I found? It Is.

In 1987, on the Sunday before Black Monday, James Baker -The Secretary of the Treasury- in an interview said that a weak dollar was in the best interests of the USA. The Day after, the DOW fell by more than 20%.

But then, you since don't appear to have any inkling of what happened in the Past. I really don't care one way or another what you think.

From my perspective, I consider that a one day drop from 8,000 to 6300 qualifies as Self Destruction.

Do some reading before spouting inanities, "Parallel Universe" my aching ....

Feb 15 05:19 AM