Geithner's Obeisance to Chinese Officials Reveals U.S. Weakness

By Simon Johnson

On his China visit, Secretary Geithner is immediately on the defensive. The language he is using on the Chinese policy of exchange rate undervaluation-through-intervention is the mildest available. And the commitment he is making, in terms of bringing down the US deficit – which we all favor – is an extraordinary thing to put numbers on in a foreign capital. Such commitments are of course unenforceable, but still the wording indicates – and is understood by China – great US weakness.

Not surprisingly, China seems likely to push for more. Their main idea is that some part of their US dollar holdings be transferred to a claim on the International Monetary Fund, which would shift it from being in dollars to being in Special Drawing Rights – and therefore a claim against (a) the IMF’s whole membership, and (b) presumably, the IMF’s gold reserves.

This is a bad idea.

No one asked China to build up a huge level of reserves. If one country wants to run a current account surplus that is big relative to the international economy, then someone else has to run a deficit – it’s a zero sum game because “reserves” are a claim on another country (preferably a strong one, with a convertible currency). No one has ever offered a guarantee on the real value of reserves, i.e., what China now wants.

We can agree that the US should have a higher savings rate, but if we did have more savings – or even if we ran a current account surplus of our own – China’s desire for foreign exchange reserves would still mean undervaluation for them (as along as they can sustain the intervention) and a current account deficit for some set of countries in the rest of the world.

There is nothing wrong with wanting to have foreign exchange reserves, and sometimes these are accumulated just through the natural cycle of activity (e.g., commodity producers are well advised to build up reserves in a boom, because the prices of their exports also crash with some regularity). But the way China has operated within the global system has not been responsible and it has not – an important point – been in conformance with the rules (as reflected most recently in the IMF’s Surveillance Decision, which is heavy on the legalese but quite clear on this point: no sustained undervaluation through intervention in the currency market is allowed).

China needs to acknowledge that it too has responsibility for the stability of the international system. Current account surpluses feel good for surplus countries – this has been a consistent feature of the modern global payments system – but policies that sustain big surpluses are destabilizing for that system, because they imply that someone else will run a deficit and, more than likely, eventually have to bring that deficit down through costly adjustment.

What we really need is a complete reform of the IMF – or the introduction of a new international payments body - so that countries don’t feel the need to run massive surpluses to protect themselves against external shocks.

In the meantime, we need China to allow its currency to appreciate. If they double their holdings of US dollar assets over the next couple of years (let’s say, going towards $4trn), effectively financing our budget and current account deficit, will we all end up safer or more vulnerable?

Is Mr. Geithner trying to persuade China to reflate a new version of our financial bubble?

Comments

[Ricard:]

I think it will be proven over the next couple of years, that the only country manipulating its currency is US, the US.

We're about to force upon China (and others) what we weren't able to get through shrill rhetoric and baseless threats - dollar devaluation, and its corollary, RMB appreciation.

Jun 02 04:05 AM

[y3115y:]

No animal had ever won fighting with its creditor.

Jun 02 08:53 AM

[coreopsis:]

Welcome to America.


On Jun 01 03:41 PM User 357705 wrote:

> Hmm, a town of 5k has a tax base that will support a $300m luxury?
> Are the residents of this town all billionaires?

Jun 02 10:01 AM

[coreopsis:]

Seriously, while there are legitimate criticisms of Geithner, I suspect that all this name-calling ('Timmy') is a kind of American suppressed homoeroticism. Geithner carries the flag for the economic policies of the current president, and that flag is not colored very differently from that of Paulson. The number of people in the US who are qualified and capable of doing half of Geithner's job (and getting the respect from the power structure) is perilously few, and includes none of the poseurs who rant on this site.

The Chinese are not particularly confident (for good reason) in the US economy, but they hardly blame the messenger. In fact, there is lots, lots of good feeling toward someone who, at a relatively young age, recognized the future importance of China and initiated serious study --- and they have respect for his father as well (and just what did your Dad do?)

This kind of puerile construction of a scapegoat, linked with perhaps totally too much mooning over pictures of Geithner is, well, so American. Don't solve the issues, trash the individuals instead...it's the easy way. That goes doubly for the Obama trashing.

Joe Stiglitz has pointed out the costs of the Bush Iraqi disaster which, of course, is not included in the Federal Budget (it's effectively a sidebar item with its own budget) will likely be $2 trillion or more. In one way of looking, the Chinese funded the war by buying the Treasuries that paid the military contractors and troops, etc.

Where were you when this bloody sham was being perpetrated?

On Jun 02 01:08 AM HaavBline wrote:

> Au contraire!
>
> Geithner has rare qualifications to be the Treasury secretary of
> this age.
>
> He was a 'China hand' before becoming central banker. He TAUGHT
> Madarin in college and studied Chinese in Peking University. He
> has got 'Guanxi' in China.

Jun 02 10:11 AM

[Marli:]

Sun Tzu would have been proud. You are all tragically confused and blinded by what is going on before your very eyes. This situation requires market knowledge- and the instincts of a political strategist.

China is practicing the ancient art of misdirection. With one hand they continue to buy US debt while simultaneously changing the debt structure by shifting from long-term US bonds to shorter term treasury bills. On the other hand, they simultaneously feint towards Special Drawing Rights and yuan-demoninated trade to divert suspicion from their real intentions. They publicly negotiate bi-lateral trade deals with Brazil that bypass the US dollar as the medium of exchange, while loudly talking up their concerns over US debt sustainability. This creates confusion: do they want yuan to become part of a new basket of currencies to replace the dollar, or IMF special drawing rights? Can they afford to stop buying US debt without devaluing their holdings? Don't they realize they can't survive if we don't buy their goods?

Meanwhile, China is quietly using US government debt as a cash equivalents and collateral to stockpile commodities and make huge investments in Latin America and the African continent. They are pledging their US-denominated assets in exchange for exclusive mining contracts while buying up companies and land. Instead of buying the commodities themselves on the COMEX, they're doing it on the ground, so that their buying patterns and real investments don't show up in the exchanges. Buy gold futures, and the price goes up. Convince the government of Sudan to allow your State owned-company to set up mining districts in exchange for royalties and military hardware, and you own the means of production directly without sending price signals. They're exchanging guns and bonds for wheat and gold, hedging their dollar exposure until the weightings cancel out in the event of a run on the dollar. Ask any policy analyst and they'll tell you that China is cozy with some of the most atrocious human-rights abusers in the African continent, supplying them with military equipment in exchange for a slice of their mineral resources. Chad, the Democratic Republic (ha!) of the Congo, you name it.

In Latin America, the Chinese are everywhere, negotiating oil contracts in as far down the ladder as Bolivia in exchange for aid that is paid and pledged in - you guessed it- american debt. Their public hand-wringing is a masterful diversion to buy them time. They are marching on the Black Gates of Mordor while sending Frodo into Mount Doom.

As for all of this nonsense about China 'needing' a resurgent US economy to survive, their domestic market has proven resilient, and their economy has resumed growth even as job losses mount in the US and Western Europe. Wake up, people. The game is bigger than you think. How will we know that the Chinese REAL portfolio has been hedged against the dollar? Simple. When they mysteriously stop complaining about it, and begin openly challenging the US on its 'one China' policy and start eyeing Taiwan again. They haven't forgotten.

Jun 02 10:20 AM

[History Buf...:]

Marli,

Well said, I think you have the situation nailed.

The leadership in Beijing has long term plans and long term strategies. The leadership in the US of A is usually not focused any farther out than the next election.

In a game of chess, usually the player who can see farther ahead wins the game.

Jun 02 10:33 AM

[bigzac:]

Finally, someone who gets it.

All of you people who think that what is publicly said at these conventions and summits is the truth are FOOLS. Make no mistake about it politics is the greatest game of chess ever played, and the greatest strategy ever used in chess is deception.

Do you people really think that if the Chinese were truly worried about their U.S. holdings....that they would come out and tell us this?

"All the world is a stage."

On Jun 02 10:20 AM Marli wrote:

> Sun Tzu would have been proud. You are all tragically confused and
> blinded by what is going on before your very eyes. This situation
> requires market knowledge- and the instincts of a political strategist.

In Latin America, the Chinese are everywhere, negotiating oil contracts
in as far down the ladder as Bolivia in exchange for aid that is
paid and pledged in - you guessed it- american debt. Their public
hand-wringing is a masterful diversion to buy them time. They are
marching on the Black Gates of Mordor while sending Frodo into Mount Doom.

Jun 02 10:52 AM

[wheelbarrel...:]

Maybe becasue crashing a spy plane in a foreign country could be deemed hostile or warlike? So we apologize to get our people back and avoid a war and that is somehow the same as the current leadership showing subservience to the rest of the world and begging for money.


On Jun 01 03:00 PM Just Say Whoa! wrote:

> >Well said! Whether its bowing to the Saudi King or to the Chinese,
> the US government officials are acting like they need to borrow a
> lot more money
>
> I take it you've just woken up from a long 100 year nappie?
>
> Where were you when BUSH APOLOGIZED to China because they TOOK OUR
> SPYPLANE and our Military personell hostage?????
>
> March 31, 2001: US Spy Plane Crashes in China; Chinese Strip Plane
> of Sensitive Equipment
> April 4-5, 2001: Powell Expresses ‘Regret’ Over US Spy Plane Crash
>
> April 6-7, 2001: US, China Still in Dispute Over Spy Plane Collision
> and Crew Detention
> April 8, 2001: US Refuses to Apologize for Collision of Spy Plane
> with Chinese Fighter
>
> Then...
>
> "Chinese officials approve the letter from US officials expressing
> regret over the incident, and early that morning, the crew members
> are released into American custody". [CNN, 4/2001]
>
> April 11, 2001: China Returns Crew of Downed US Spy Plane, Keeps
> Plane
>
>
>

Jun 02 10:59 AM

[wheelbarrel...:]

Agree 100%


On Jun 02 10:20 AM Marli wrote:

> Sun Tzu would have been proud. You are all tragically confused and
> blinded by what is going on before your very eyes. This situation
> requires market knowledge- and the instincts of a political strategist.
>
>
> China is practicing the ancient art of misdirection. With one hand
> they continue to buy US debt while simultaneously changing the debt
> structure by shifting from long-term US bonds to shorter term treasury
> bills. On the other hand, they simultaneously feint towards Special
> Drawing Rights and yuan-demoninated trade to divert suspicion from
> their real intentions. They publicly negotiate bi-lateral trade deals
> with Brazil that bypass the US dollar as the medium of exchange,
> while loudly talking up their concerns over US debt sustainability.
> This creates confusion: do they want yuan to become part of a new
> basket of currencies to replace the dollar, or IMF special drawing
> rights? Can they afford to stop buying US debt without devaluing
> their holdings? Don't they realize they can't survive if we don't
> buy their goods?
>
> Meanwhile, China is quietly using US government debt as a cash equivalents
> and collateral to stockpile commodities and make huge investments
> in Latin America and the African continent. They are pledging their
> US-denominated assets in exchange for exclusive mining contracts
> while buying up companies and land. Instead of buying the commodities
> themselves on the COMEX, they're doing it on the ground, so that
> their buying patterns and real investments don't show up in the exchanges.
> Buy gold futures, and the price goes up. Convince the government
> of Sudan to allow your State owned-company to set up mining districts
> in exchange for royalties and military hardware, and you own the
> means of production directly without sending price signals. They're
> exchanging guns and bonds for wheat and gold, hedging their dollar
> exposure until the weightings cancel out in the event of a run on
> the dollar. Ask any policy analyst and they'll tell you that China
> is cozy with some of the most atrocious human-rights abusers in the
> African continent, supplying them with military equipment in exchange
> for a slice of their mineral resources. Chad, the Democratic Republic
> (ha!) of the Congo, you name it.
>
> In Latin America, the Chinese are everywhere, negotiating oil contracts
> in as far down the ladder as Bolivia in exchange for aid that is
> paid and pledged in - you guessed it- american debt. Their public
> hand-wringing is a masterful diversion to buy them time. They are
> marching on the Black Gates of Mordor while sending Frodo into Mount
> Doom.
>
> As for all of this nonsense about China 'needing' a resurgent US
> economy to survive, their domestic market has proven resilient, and
> their economy has resumed growth even as job losses mount in the
> US and Western Europe. Wake up, people. The game is bigger than you
> think. How will we know that the Chinese REAL portfolio has been
> hedged against the dollar? Simple. When they mysteriously stop complaining
> about it, and begin openly challenging the US on its 'one China'
> policy and start eyeing Taiwan again. They haven't forgotten.

Jun 02 11:02 AM

[socialismSUCKS:]

We can also save and produce, instead of spending and consuming. This is our fault, not China's.


On Jun 01 01:12 PM History Buff 24/7 wrote:

> The renminbi may not be overvalued right now, but it sure as s***
> was for a long time. So the Chinese do bear some responsibility
> for their massive US currency reserves.
>
> All the talk aside, there's not much they can do about their existing
> reserves. But they can diversify all future purchases out of the
> dollar and into something else.
>
> Whether or not we go back into this game of buying their toxic products
> and selling them our toxic debt, we have a choice and they have a
> choice. We can stop buying their products (assuming they aren't
> the only country making the particular product we want at the moment)
> and they can stop taking our debt. This isn't about protectionism
> at this point, this is about national self-survival.

Jun 02 01:45 PM

[TurtleTrader72:]

Good point..But in someways China may have an interest in buying US dollars and keeping its value somewhat elavated. A lower US dollar would attract foreign investors and companies to US products and services as they would be less expensive by comparison. At the time, discourage americans from purcahsing foreign products and services keeping their business inside the US. This will also help keep jobs in the US instead sending them oversees. Not that i'm an expert on this but i beleive that these are some of the reasons China has kept its own currency artifically low for so many years.


On Jun 01 06:40 PM ed233 wrote:

> Unfortunately, I don't see it in the cards where China will increase
> their US dollar holdings as the writer would like to see happen.
> Why should China export the US debt via increasing their dollar holdings
> or debt instruments. They already know that their exporting to the
> US is going to be restricted for several years since the US consumer
> is tapped out and unemployed. From what I understand China is presently
> converting their bond holdings to treasury bills so as to put their
> portfolio in a more liquid position. As the dollar keeps dropping
> China's investment in the USA also drops. China would prefer to hold
> treasuries as opposed to bonds. It creates a greater degree of liquidity
> and it also can put pressure on the Obama administration to ramp
> back on their out of control spending. If China floods the global
> market with their dollar holdings at this present time it would definitely
> create a run on the dollar so as to bring a dollar devaluation into
> play. Have you noticed that smart money is all of a sudden abandoning
> the safety of the US dollar and are now buying up dollar currencies
> based on commodities. The US is going to have to increase interest
> rates substantially in order to stem the tide of money movement.
> There clearly is a confidence factor against the US buck that has
> to be addressed. It's not a task I would have given to the wall street
> boy Timothy. So it's going to be interesting as a new crisis is upon
> the USA. LOL Looking after your money.

Jun 02 02:18 PM

[yank:]

geithner is an idiot.


On Jun 01 09:43 AM Andrew Butter wrote:

> US isn't weak it's strong (on that score), if you owe the bank $100,000
> you got a problem, if you owe them $1 million, they got a problem.
>
>
> The only weakness is that it's harder to borrow more, well there
> is a theory that America Inc needs to stop borrowing so much, but
> China is in a bit of a fix because if America can't borrow more the
> recession will be worse and that will affect China.
>
> All Geither is doing is just what everyone does when they get into
> a pickle, go back to the bank, tell them their money is safe, so
> long as they hand over more. I've been there, it helps if you grovel.
>
>
> So Geither is grovelling, good for him, in China they call it Kowtow,
> it doesn't signal weakness it just signals who's turn it is to kiss
> who's boots. No need to take that personally, so long as you achieve
> the main objective.
>
> I thought he grovelled with great dignity.

Jun 02 02:26 PM

[robert.b.fe...:]

The guy gets confused by TURBO TAX and that qualifies him to run the entire economy? The Chinees asked him for some numbers and he began counting on his fingers. Would you care to rethink his qualifications? No wonder they laughed him off the stage.


On Jun 02 10:11 AM coreopsis wrote:

> Seriously, while there are legitimate criticisms of Geithner, I suspect
> that all this name-calling ('Timmy') is a kind of American suppressed
> homoeroticism. Geithner carries the flag for the economic policies
> of the current president, and that flag is not colored very differently
> from that of Paulson. The number of people in the US who are qualified
> and capable of doing half of Geithner's job (and getting the respect
> from the power structure) is perilously few, and includes none of
> the poseurs who rant on this site.
>
> The Chinese are not particularly confident (for good reason) in the
> US economy, but they hardly blame the messenger. In fact, there is
> lots, lots of good feeling toward someone who, at a relatively young
> age, recognized the future importance of China and initiated serious
> study --- and they have respect for his father as well (and just
> what did your Dad do?)
>
> This kind of puerile construction of a scapegoat, linked with perhaps
> totally too much mooning over pictures of Geithner is, well, so American.
> Don't solve the issues, trash the individuals instead...it's the
> easy way. That goes doubly for the Obama trashing.
>
> Joe Stiglitz has pointed out the costs of the Bush Iraqi disaster
> which, of course, is not included in the Federal Budget (it's effectively
> a sidebar item with its own budget) will likely be $2 trillion or
> more. In one way of looking, the Chinese funded the war by buying
> the Treasuries that paid the military contractors and troops, etc.
>
>
> Where were you when this bloody sham was being perpetrated?
>
> On Jun 02 01:08 AM HaavBline wrote:

Jun 02 05:41 PM

[mrresponsible:]

This article reminded me of the book titled "POWER vs FORCE.
Running around the world acting like a cowboy and an emperialist isn't very sophisticated and gets you nowhere,

Jun 02 08:03 PM

[coreopsis:]

Hey, like you were at the conference...they hardly laughed him off the stage (if you have access to the video, why don't you verify this?) --- you are another armchair prognosticator which the web produces in terrifying number. As if the Secretary of the Treasury needs to know about TurboTax. TurboTax, frankly, if for farmers who don't have accountants. Quite easy to sling your flaccid arrows at your superiors, isn't it, but they really fall quite short.

On Jun 02 05:41 PM robert.b.ferguson wrote:

> The guy gets confused by TURBO TAX and that qualifies him to run
> the entire economy? The Chinees asked him for some numbers and he
> began counting on his fingers. Would you care to rethink his qualifications?
> No wonder they laughed him off the stage.

Jun 03 10:13 AM

[robert.b.fe...:]

He is the one who said that cheating on his taxes was accidental caused by TURBO TAX. So he is either an idiot or a liar. Both maybe? After all he thinks that people like you are dumb enough to buy that.


On Jun 03 10:13 AM coreopsis wrote:

> Hey, like you were at the conference...they hardly laughed him off
> the stage (if you have access to the video, why don't you verify
> this?) --- you are another armchair prognosticator which the web
> produces in terrifying number. As if the Secretary of the Treasury
> needs to know about TurboTax. TurboTax, frankly, if for farmers
> who don't have accountants. Quite easy to sling your flaccid arrows
> at your superiors, isn't it, but they really fall quite short.<br/>
>
> On Jun 02 05:41 PM robert.b.ferguson wrote:

Jun 03 03:32 PM

[robert.b.fe...:]

Do you have an issue with Farmers? Personally I like farmers because eating is a good thing. That's why I recently opened a position in Agrifeed (FEED). The Chinees like to eat too.


On Jun 03 10:13 AM coreopsis wrote:

> Hey, like you were at the conference...they hardly laughed him off
> the stage (if you have access to the video, why don't you verify
> this?) --- you are another armchair prognosticator which the web
> produces in terrifying number. As if the Secretary of the Treasury
> needs to know about TurboTax. TurboTax, frankly, if for farmers
> who don't have accountants. Quite easy to sling your flaccid arrows
> at your superiors, isn't it, but they really fall quite short.<br/>
>
> On Jun 02 05:41 PM robert.b.ferguson wrote:

Jun 03 03:37 PM

[wheelbarrel...:]

LMAO superiors? Oh so TurboTax Timmy, head of the IRS, either didn't understand HOW to do his taxes or LIED when he did them. What a chump.


On Jun 03 10:13 AM coreopsis wrote:

> Hey, like you were at the conference...they hardly laughed him off
> the stage (if you have access to the video, why don't you verify
> this?) --- you are another armchair prognosticator which the web
> produces in terrifying number. As if the Secretary of the Treasury
> needs to know about TurboTax. TurboTax, frankly, if for farmers who
> don't have accountants. Quite easy to sling your flaccid arrows at
> your superiors, isn't it, but they really fall quite short.
>
> On Jun 02 05:41 PM robert.b.ferguson wrote:

Jun 06 09:45 AM

[jeffgroove:]

As an engineer, my experience with china is that they are okay at copying stuff. But they always change the product. They could not even produce proper fighter jets for india. The chinese like most of asia has never met an idea that they did not steal. At least the japanese know about building quality. That aside, I agree with late comedian Bill Hicks, the biggest axis of evil in america is the studpidity of the american people and clever marketing.

Jun 07 10:45 PM

[Observer45:]

Except for this "Don't they realize they can't survive if we don't buy their goods?" ........otherwise an interesting comment. The more important question is: Can the US survive if it does not buy goods from China?

Jun 10 12:55 PM