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By Simon Johnson
At his confirmation hearing in January, Tim Geithner nailed the China Question. China prevents its exchange rate from appreciating through intervention (buying foreign currency), and this allows it to sustain a large current account surplus. Geithner said, as plainly as you can expect from a senior official: this is not in accordance with international rules and should stop.
Not only is this sensible economics and correct on the rules, it is also good politics. If you want to head off the considerable inclination towards protectionism in Congress, it would help greatly for the Chinese renminbi to rise in value (e.g., review the discussion at this House hearing).
But almost as soon as Geithner spoke on this issue, there was slippage. By late February, Hillary Clinton was asking the Chinese nicely to continue holding US Treasury securities and, it now seems, punting the exchange rate issue. Above all else, China wants to be left alone on the renminbi – variously arguing that any appreciation would jeopardize jobs, derail growth, and plunge the country into chaos.
So what should we expect from Geithner’s upcoming China trip?
Not much.
China refuses to talk politely about its exchange rate and rebuffs all sensible diplomatic initiatives on this front – they have held the IMF at bay for nearly 2 years on this exact issue. The rhetoric is that their fiscal stimulus will bring down their current account surplus without need for significant exchange rate appreciation. This is smokescreen.
The reality is that the administration is afraid that China will shift out of its dollar holdings, pushing up interest rates on Treasury debt and jeopardizing their Fiscal First reflation strategy. The Chinese have played up these fears by speaking obliquely on the desirability of a non-dollar international reserve currency – this is a pipedream, but you get the point.
The administration has essentially blinked in the face of Chinese growling. This is strange for two reasons.
First, where would China move its reserve holdings? The other reserve currencies are generally considered to be the pound, the yen, and of course the euro. Which one would you definitely prefer to the dollar these days?
Second, any shift in the Chinese portfolio would also tend to depreciate the dollar – depending on what else is going on at that time – and this would likely push up inflation. However, the administration might welcome some inflation right around now, reducing real debt burdens, and helping banks’ balance sheets and their operating profits. And a depreciated dollar would raise exports, greatly facilitating our economic recovery. It would be awkward for this to be explicit US policy, but any Chinese move would provide the administration with plausible deniability.
The standard view among the very people now running US macroeconomic policy is that the large Chinese current account surplus during the boom – and the consequent build-up of foreign exchange reserves – was destabilizing, because it helped make credit conditions looser in the US. In fact, “don’t blame us, it was the global [Chinese, Japanese, oil producers’] savings glut” is almost a mantra among our policy elite.
Personally, I would not overweight this element of the global credit mania – the financial services metabubble started long before China’s surplus became significant. But I’m seriously worried about the potential protectionist backlash today, given that China is the only major country that does not play by standard international trade and finance rules. The administration thinks it can safely postpone discussing China’s exchange rate for another, sunnier day. I’m not so sure.
Still, not wanting to discuss difficult topics should make for an easy visit to China.
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This article has 16 comments:
Simon - you may be right to call it only a pipedream in a relatively orderly world of diplomatic nudges and polite negotiations but if the financial crisis was to enter a new phase based on real fears for the safety of dollar denominated paper, then push will come to shove will come to panic.
It seems that nothing is really addressed by financial policymakers until it goes beyond critical and the same could well be true of the perceived need for a new global reserve currency.
Increasingly we have to think the unthinkable.
China presently holds around $2 trillion of our debt which pales besides what we need to support our addiction going forward.
The critical question is not what China is going to do with its present holdings but what it is going to do as we move forward; from China's perspective all of the scenarios are interlocked through feedback loops.
If they help us going forward, the hole get deeper and they are more exposed to the dollar; if they buy nothing going forward, there is greater likelihood of debt monetization which would depreciate the value of their present holdings. They are facing Morton's Fork......two unattractive options.
And, of course, all of this is further complicated by their desire to keep the factories humming and shipping products to WalMart until they become more consumption driven which will requires years.
ITS THE SPENDING STUPID!!
All else pales ... The US TREASURY has spent close to $8TRIL USD so far this FY 2009 and there is another four months left to go(starts in Oct). Does anyone care about the SPEND part? Apparently not ...
Then if you compare what we spend to what we receive in tax revenues then it becomes quite clear where the hoax is. Current SPEND RATE as of May 28, 2009 is 5.92. That means for every $1 USD of tax revenues(receipts) this government receives it spends(outlays) $5.92!
This is speaks to the same governmental virus that caused the GAO-US COMPTROLLER, David Walker to quit after his 60 MINUTES rant. These PROMISES are killing our budget.
Does a BUDGET matter any more? Or has it all morphed into what CHINA, our biggest creditor, thinks? I am sure CHINA cares about America's ability to service its DEBT ... Hummmmm??? Maybe not or is that conspiracy tin foil hat stuff? HA!!
Its all there in black and red(mostly red)on the US TREASURY DAILY STATEMENT.
GOGGLE ... US TREASURY DAILY STATEMENT at the FMS ...
On May 31 07:21 AM expat in China wrote:
> China will move to short term treasuries only forcing a continuous
> roll over and use its reserves to buy commodities during stagflation.
> China would be well served to offer up its reserve losses to change
> global policy voting weight.
When push comes to show the dollar is backed by bullshit.
The other issue here is because China is being forced to restructure her economy the low Yuan is going to be much less of a priority in Beijing, which is another reason they are not so keen to stack up on increasing worthless dollar denominated bonds.
On May 31 08:31 AM morph366 wrote:
> "The Chinese have played up these fears by speaking obliquely on
> the desirability of a non-dollar international reserve currency –
> this is a pipedream"
> Simon - you may be right to call it only a pipedream in a relatively
> orderly world of diplomatic nudges and polite negotiations but if
> the financial crisis was to enter a new phase based on real fears
> for the safety of dollar denominated paper, then push will come to
> shove will come to panic.
> It seems that nothing is really addressed by financial policymakers
> until it goes beyond critical and the same could well be true of
> the perceived need for a new global reserve currency.
> Increasingly we have to think the unthinkable.
2. There are reserve currencies and there are reserve commodities. Gold was a reserve commodity in many parts of the world in many periods of history in many societies.
Oil or some other physical resource or some combination of precious metals/energy resources can serve a( incomplete but tolerably adequate)reserve function for some transition period, if enough nations and corporations so desire it.
Multiple regional reserve currencies can arise in economic/political/mil... spheres of influence.The world does not have to have a single reserve currency as a law of nature just as it does not have to have a single precious metal or a single form of energy. It is possible to conceive of three or four reserve metrics, each serving different functions.
Other arrangements we cannot presently imagine or want to imagine(at least not within the US govt and Wall St and US academia)may be concieved and proposed by other people and other Nations. When the world finds that the cost of the US dollar as a reserve currency exceeds its beefits by a large and therefore painful enough margin it will, with increasing confidence and resolve, find alternatives.
The riskiest course for the US Govt to take is to believe it can hold the world hostage to its benighted policies and preferences. The more the US Govt. sneers at the world and claims there are no alternatives to the dollar, the more determined the world(including many Americans and US domiciled golbal businesses)will become to find alternatives.
The U.S. wants a level playing field but can hardly expect the entire world to bend to its will.
The rest of the world levies a hidden import tax through the imposition of a VAT which, effectively, favors domestic production over foreign. Unpalatable as it may seem, the VAT may be coming to the U.S. to solve two problems with one stroke: the looming deficit and disappearing production.
Watch for this one people; and please, don't shoot the messenger. It's a political and business nightmare and probably suicidal to its proponents. I had the dubious pleasure of watching it happen to a disbelieving public in New Zealand.
The sales pitch for a VAT may be based on an "uncooperative China" angle, univeral health care and the benefits to the dollar.
www.washingtonpost.com...
On May 31 11:49 AM Vuke wrote:
> China thrives on its exports to the U.S. and elsewhere (paid for
> mostly in USD). Its public statements, aside from a few cautions,
> have been mostly cooperative.
>
> The U.S. wants a level playing field but can hardly expect the entire
> world to bend to its will.
>
> The rest of the world levies a hidden import tax through the imposition
> of a VAT which, effectively, favors domestic production over foreign.
> Unpalatable as it may seem, the VAT may be coming to the U.S. to
> solve two problems with one stroke: the looming deficit and disappearing
> production.
>
> Watch for this one people; and please, don't shoot the messenger.
> It's a political and business nightmare and probably suicidal to
> its proponents. I had the dubious pleasure of watching it happen
> to a disbelieving public in New Zealand.
>
> The sales pitch for a VAT may be based on an "uncooperative China"
> angle, univeral health care and the benefits to the dollar.
>
> www.washingtonpost.com...
Im my opinion the biggest threat to the US is not the Middle east or North Korea it's China waging economic war against the US population and the majority of collaborators are our own leaders in Washington.
Time to blame the Chinese now! How about;
Wall Street hubris, easy credit, lax regulations and regulators, questionable financial instruments, artificially low interest rate, political ineptitude and plain ordinary, everyday, garden variety greed.
Did these things not have anything to do with the present economic crises? Short memories amaze me!
This will be the last economic crises in which the dollar is viewed as a safe haven, thanks to the American people themselves and their inability to spend only what they earn.
Since when has MORE TAX solved the Worlds fiscal issues?
I moved out of California in 1998 to Hawaii because it was obvious the State Of California cannot survive no matter how much taxes it levies. Someone please tell me when California will ever lives within its means? Lets do a "DUH" and extrapolate that to the US GOVERNMENT.
Okay ... as the article points out there are many protesters against the VAT for food and gas in other countries ... another DUH! America is a huge importer of food and oil, so essentially the costs of the VAT will once again end up on the back of guess who? Hummmmm ... Who would that be?
Does any government pay taxes? Who pays taxes in this BIG CENTRALIZED GOVERNMENT world we live in? Any time you hear the government proposing "adding" taxes then best hide your wallet!
So how tax does the average American already pay? This would include income, property, excise, sales ... all? 54%!
Who here believes that this VAT would be paid by other countries or foreign corporations? Whenever a government slaps a tax on a producer of good or services what happens? If you want a visual aid then go look at your phone bill ... That's right the cost of those goods and services goes up and it ends up costing the end user which is you and I. All government does is redistribute wealth using laws and regulations that produce onerous taxation.
I have an idea ... Eliminate all US INCOME TAX.!! Then eliminate the US FED!
Why pay income taxes if the US GOVERNMENT never intends to pay its debts? The last year the USA had ZERO National Debt was 1835, under Andrew Jackson.
Oh yeah ... add more tax ... that has solved everything so far!
More government means more taxes ...
As a long standing member of the California Contractors Assoc for Public Works projects for over 20 years I learned one thing about government. How many times have I heard school district officials tell me that if they didn't over spend their budgets then the next year they would get less ????? I heard that all the time for 20 years!! That is the mentality of all government at all levels. That is the basis of this USA economy.
VAT is a joke ... it will not serve you and I one bit!
"Im my opinion the biggest threat to the US is not the Middle east or North Korea it's China waging economic war against the US population and the majority of collaborators are our own leaders in Washington."
The biggest threat to our survival is our own government!
Government is essentially the negation of liberty.
No really they have the biggest banks in the world?? what do you think there is no activity between the 300 million middle class?
I can open a KFC chicken place in 6 weeks! Cold beer is delivered in 5 minutes or less.
Get a passport!